Startup Street: Accel's Barath Shankar Subramanian's Outlook On Startup Ecosystem
Startup Street | #Accel's Barath Shankar Subramanian on the current startup ecosystem, profitability timelines and the company's investing outlook. #BQLive
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00:00 Hello viewers, welcome to BQ prime.
00:01 This is Rishabh Bhatnagar and you're watching Startup Street.
00:04 Today we have with us Bharat Shankar Subramaniam.
00:07 He's a partner at Axel,
00:10 which is one of the very, very large VC funds out there.
00:13 Axel is backed among very big global tech names,
00:18 Meta, Slack, Dropbox,
00:21 many of you might've heard of all of them.
00:23 In India, they've backed Swiggy,
00:25 they've backed Urban Company, BrowserStack,
00:27 among, I don't know, plenty, plenty others.
00:30 So Bharat today is focused a bit on consumer healthcare
00:35 and on the SaaS side of things.
00:37 But today he's here to have a conversation
00:39 about Axel in India,
00:41 and also a general chat about the Indian startup ecosystem.
00:44 So Bharat, welcome to BQ prime.
00:46 Thanks so much.
00:47 - Thanks, thanks Rishabh.
00:50 Pleasure to be here.
00:51 - All right, lovely.
00:53 So just to start us off for our viewers, Bharat,
00:56 could you describe a bit about
00:59 what your current portfolio looks like in India?
01:01 And also, okay, let's just start us off.
01:05 - Sorry?
01:09 - If you could just start us off
01:12 by telling a bit about your current portfolio,
01:14 what it's looking like currently, what shape is it in?
01:17 - Right.
01:19 So in India, we've now been active for over 15 years.
01:23 We've done over 250 investments till date
01:27 across seven funds.
01:30 So we're currently investing out of our seventh fund.
01:33 This includes investments across sectors like consumer,
01:37 B2B marketplaces, SaaS, FinTech, healthcare.
01:41 And more recently, we are doing double clicks
01:44 on some of these sectors going deep.
01:46 So I'm spending time on a sector,
01:50 segment that we call Industry 5.0, for example.
01:53 We've done a bunch of investments in this space.
01:56 Some of them would be companies like Zetwork,
01:58 InfraMarket, Captain Fresh, Bizongo,
02:01 Detect, Rippick, amongst others.
02:04 Right?
02:05 - Right.
02:06 - And then a couple of years back,
02:08 we launched a program called Atoms.
02:11 So this is a program to support entrepreneurs
02:14 of building at a very early stage.
02:16 So historically, our focus has been
02:18 early stage first.
02:20 We always aim to be that first institutional partner
02:23 to anybody looking at building companies out of India.
02:27 And Atoms sort of further builds on that,
02:30 where essentially we bring in a community-led approach,
02:35 which is access to mentors, advisors, industry experts.
02:40 And we've done 20 plus investments
02:45 through the Atoms program.
02:46 - Right.
02:48 Very interesting there, Bharat.
02:50 My next question would be a bit on
02:53 what are some of the conversations
02:56 that you as an investor are having with founders?
03:01 Let's break it into two parts.
03:03 Founders that still haven't found a product market fit
03:07 that are still very early stage in that sense.
03:09 And second, founders that are generating some sort of cash,
03:14 but profitability is not in sight.
03:16 So what sort of conversations are you having
03:19 given the current environment there is?
03:21 - Right.
03:23 See, for the pre-BMF companies, right?
03:26 Like I spoke about Atoms, it's a perfect fit.
03:30 And we've done this even before we launched Atoms, right?
03:35 A lot of the companies that we invested
03:38 that have gone on to now become large companies,
03:40 they were two, three member teams,
03:45 probably an idea on paper, very little early traction.
03:48 So not even like a product fully built out.
03:51 In those cases, it's really spending time with the founders,
03:55 understanding the vision for what they're building
03:58 and really drawing a path along with them to say,
04:01 how do you sort of get to those milestones, right?
04:04 So how do you get that first customer?
04:07 How do you then figure out a replicable way
04:09 to get to the next 10 customers, right?
04:11 Is there some repeatability in that process, right?
04:15 And then once you get to that 10 customers,
04:17 can you now scale it to 100 customers, right?
04:19 So what does that product look like?
04:21 In the initial phases,
04:22 it's gonna be a lot of customization,
04:23 listening to customers, tweaking it, right?
04:26 But once you get to a certain scale,
04:29 then what you wanna anchor on is the repeatability part,
04:31 right?
04:32 You don't want to customize it too much.
04:33 You wanna see if it's able to sort of scale
04:35 in that shape or form, right?
04:38 So that's usually the conversation.
04:40 And depending on which industry they're building in,
04:42 there's sectoral nuances to how we do that.
04:45 On the second question around,
04:49 where there is product market fit
04:51 and where there is burn,
04:53 and there it's really a question to,
04:57 what does profitability at end state look like, right?
05:00 So typically it'll come down to two things.
05:02 So one is, what are the margins in that business
05:05 and what's the cashflow cycles gonna look like, right?
05:07 So those are really the two things that matter.
05:09 And then how do you get to either of those
05:14 or both of those at steady state, right?
05:16 How much capital is it gonna take?
05:18 What will that journey look like?
05:20 What are some of the known risks
05:22 and what might be some of the unknown risks
05:24 in getting there in that journey?
05:27 - Right.
05:29 Given the current sort of funding environment,
05:33 I wouldn't call it a winter,
05:34 but still given the sort of tighter access to capital,
05:38 do you think there is a definite shortening
05:41 of these timelines in terms of A, finding PMF
05:44 and then B, heading towards profitability?
05:47 Are you, have these timelines shortened
05:50 because access has become sort of tighter?
05:53 - Yeah, I think if you look at what's happening, right?
05:58 So the cost of capital has like gone up significantly
06:02 in the last two, three years, right?
06:04 So, and this is here to stay.
06:06 So, which means anybody starting out here
06:09 has to fundamentally look at building a strong
06:12 and resilient business,
06:13 which probably has a shorter path to profitability
06:15 than it was say a decade back when access to,
06:18 you know, cheap capital was more prevalent, right?
06:22 So if you were thinking about getting to profitability
06:25 in five years, you probably have to shrink that down
06:28 to maybe half the time, right?
06:29 Or, you know, cut down the business burn
06:33 and get to like contribution level profitability
06:35 in a shorter timeframe.
06:37 So I think that is here to stay.
06:39 And I think the ecosystem is also internalizing that,
06:43 you know, quite well in my view.
06:45 So, you know, that's a conversation that we are having
06:48 with folks that come in and talk to us,
06:51 new investments that we've seen,
06:52 as well as our own portfolio, right?
06:54 Many of our scale companies are headed in that direction
06:57 or already there.
06:57 - Right.
07:00 I mean, yeah, I'm sure founders themselves
07:03 would also be including a lot of stress on this
07:06 in that pitch text whenever they come to you.
07:08 - Yeah, I mean, it's part of the conversation, right?
07:12 It's definitely top of mind for everybody
07:14 because one, the amount of capital in the system
07:17 has definitely sort of shrunk,
07:20 not the dry powder in the system,
07:22 but what is actually being deployed
07:24 has definitely shrunk in the last two, three years.
07:28 So this tightening means that, you know,
07:30 you as a founder have to be very real
07:32 about what is out there
07:34 and how you're gonna use that resource
07:36 to build your company.
07:38 - Right.
07:40 Bharath, there have been several instances
07:44 of corporate misgovernance that have sort of popped up
07:47 over the last six to seven months, let's say.
07:49 Is it because there is a mismatch
07:53 in terms of a realization that there is probably
07:58 not that bigger market of paying users
08:01 that Dan was previously estimated?
08:03 - See, I think my view on this part is,
08:10 depending on which sector you are in,
08:14 how you had estimated the market
08:15 versus what the reality has been,
08:17 there might've been some mismatch,
08:20 but it's also a function of the pace at which
08:23 some of the rounds happen,
08:24 you know, when there was excess capital
08:27 that was available,
08:28 and maybe some of the milestones that were set
08:33 were really not realistically achievable, right?
08:35 So that might force some kind of behavior change, right?
08:40 So to actually get to those milestones,
08:43 if at all it's possible.
08:45 But I think fundamentally as an ecosystem,
08:47 there is a lot more awareness,
08:49 there is a lot more top of mind recall
08:51 to making sure that these kinds of things don't happen
08:54 and processes that are being put in place.
08:59 Also in general, if you look at the Indian requirements
09:02 for a startup versus say a company
09:04 that's incorporated in the US,
09:06 I think the bar is definitely higher, right?
09:08 So you have statutory audits and internal audits
09:11 that are being mandated by the government
09:14 beyond a certain scale,
09:16 as well as each fund might have its own requirement
09:18 of how governance is run, right, in these companies.
09:23 So my guess is, you know,
09:26 you'll start seeing a better sort of board construct
09:30 happening earlier now,
09:32 more conversations around information
09:36 of the different committees that are required under law
09:39 that were usually happening at a much later stage
09:43 will start to happen at a slightly earlier stage now.
09:46 And I think that's-- - Very interesting.
09:49 Okay, sorry, go on.
09:51 - No, I was just saying that's overall good
09:53 for the ecosystem, right?
09:54 It shows that you're maturing.
09:56 - Right.
10:00 Okay, Bharat, coming back to Accel in particular,
10:04 there have been a few sectors that you spoke
10:06 that you're double-clicking on.
10:08 Are you bullish on these sectors a bit more than the others?
10:12 And what would those be?
10:13 - No, so the way, you know, we've run Atoms, right?
10:20 So the two sectors that I spoke about
10:23 with respect to Atoms,
10:24 these are sectors where we think that
10:28 in the next 10 years or beyond, right,
10:31 there's a massive tailwind.
10:32 So the opportunity to build in these sectors
10:35 is here and now, right?
10:37 So which is why we're going like super early
10:38 in Industry 5.0 and AI, right?
10:43 Specifically Industry 5.0,
10:45 which is a cohort that I'm anchoring,
10:46 we've done about, you know,
10:48 10 investments in that space already, right?
10:50 So some of the names that I spoke about earlier.
10:53 So here we think that, you know, the tailwinds are,
10:55 there is this whole global supply chain realignment
10:58 that's happening, which is net positive
11:01 for manufacturing in India.
11:03 This whole China plus one, you know,
11:06 sort of playing out with respect to India,
11:09 emerging as an alternate place
11:11 for large-scale manufacturing.
11:13 And because a lot of this manufacturing investment
11:17 is gonna be in wide field,
11:19 sort of green field sort of nature,
11:24 the ability to, you know, absorb and try out
11:26 and implement new digital-first solutions is higher, right?
11:31 And the proxy for that we've seen is with, you know,
11:34 digital transformation spans that are happening
11:36 from large enterprises in India,
11:37 which is, you know, quite large in tens of billions.
11:41 So we think that there is a here and now opportunity
11:44 to transform some of that into, you know, product spans.
11:47 So that's really what we are working on.
11:51 - Right. Bharat, lastly, if you could sort of summarize
11:57 how India has been a market for Accel
12:01 over the past 15 years or so that Accel has been in,
12:05 and also over the next five years,
12:07 if you're looking to raise any new funds and, yeah.
12:11 - Yeah. See, our journey in India,
12:15 we started out as a $15 million fund, right?
12:18 And we made like 10 investments.
12:21 We are now in fund seven, which is a $650 million fund.
12:24 So in some ways fund size, we've grown sort of 65X.
12:28 And, you know, we've seen that, you know,
12:32 correlate with how the ecosystem has grown, right?
12:34 So in 2005, six, when we started,
12:38 even doing these 10 investments was quite a struggle
12:42 because we really had to like, you know,
12:43 scout hard to find these entrepreneurs, find ideas,
12:47 and, you know, convince them to take capital, right?
12:50 Because venture capital was very new at that time.
12:53 But now if you sort of roll forward, you know,
12:57 the ecosystem has gone through a tremendous learning curve.
13:00 You have scale companies, you have, you know, founders,
13:04 you have, you know, L1s, L2s who've seen scale
13:08 in these companies, who've built products,
13:10 who've conceptualized products.
13:12 And the overall market, domestic market itself
13:15 has expanded significantly, right?
13:18 You know, we are a $3 trillion economy, you know,
13:21 it's a matter of time before, you know,
13:24 we double a lot of that additional 3 trillion
13:28 that is gonna get added is gonna be, you know,
13:30 digital first or digitally influenced, right?
13:32 And a lot of that is what we are super excited
13:34 about looking forward.
13:36 And with respect to this, again,
13:40 part of the question around, you know, fund raise,
13:42 you know, the way we are structured,
13:43 we have, you know, three early stage vehicles in India,
13:47 UK and the Bay Area where we collaborate on ideas.
13:51 And then we have these, you know, global vehicles
13:54 that can do late stage.
13:55 And, you know, typically these are, you know,
13:58 two to three year or, you know, four year cycle times
14:01 where we raise these funds, right?
14:03 So there is always sort of availability of capital
14:06 for interesting ideas, no matter what the stage is.
14:09 So we've, you know, done growth investments
14:12 in the last two years in companies like Amagi,
14:15 Aeroditus, you know, good land company, for example.
14:19 And then early stage of SCB, we continue to be active.
14:22 This current fund, which is fund seven for us
14:25 was raised, you know, second quarter of last year.
14:28 So there's still a lot of dry powder left in that fund.
14:31 - Got it.
14:33 Thanks so much Bharath for sharing your viewers,
14:36 sharing your views here with us.
14:38 This was Bharath Shankar Subramaniam of Accel.
14:42 Thanks so much for watching.
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