Funding may be waning in Indian startups — in the second quarter of 2016, funding dipped sharply to $583 million, nearly 60% lower than $1,402 million in the previous quarter — but Silicon valley-based venture capital (VC) firm Social Capital is bullish on India. The firm, one of the biggest in the business, could likely end up investing tens of billions of dollars over a 30-40 year period, its founder and chief executive officer Chamath Palihapitiya has said.
The top venture capitalist’s comments come at a time when many VC firms and hedge funds are turning bearish on India, after nearly five years of frenzied investing that catalysed the growth of unicorns (billion-dollar startups) like Flipkart and Paytm.
Palihapitiya, who leads the $1.5 billion Social Capital, spoke to FactorDaily at the Nasscom Product Conclave earlier this month. He plans to invest up to a billion dollars over a 10-year period in Indian companies in areas such as financial technology (fintech), he added.
He also gave us an insight into his investing philosophy and told us what makes him bullish on India. Watch the video interview embedded in this post or read the edited excerpts below.
Q. You’ve been called a VC who other VCs love to hate.
A. Progress happens when two things come together: an absolutely innovative idea and approach and the catalyst of money. If money is controlled by a handful of people whose perspective is limited or biased, then truly innovative things can’t happen. Many of the greatest inventions in the world have been somewhat serendipitous. That’s because of two things: one, we’re actually more successful, so we’re making more money than all the others. Second, because our view is one where we open up the aperture to more innovation from more people — we are colour blind, gender blind, religious blind, age blind. That’s very unsettling for a small group of people who’ve been spending their whole life trying to figure out how to get into that position and stay in it. They bring too much baggage. And when it prevents other people from doing things, it functionally limiting the amount of innovation that is possible.
Q. You said recently that we’re close to a “reckoning for Indian startups”. What did you mean by that?
A. Every time I would come here (India), a number of companies would pitch their ideas to me and they were always saying the same thing. They would start with saying that they are the ‘blank’ for India. And my reaction to that was: that’s not the right way to think about India. India is not a copy of the US or any countries in Europe. It’s a unique country with its own customs, problems and opportunities. Also, the person who gives you the money would then have the expectation that you will run your company exactly like those in the US. I feel this is crazy because you can spend five minutes on the street and realise that it is not the same. So, it is only a matter of time until these investors get skittish and nervous, because they won’t be able to map the things that Indian entrepreneurs need to do to succeed to their model of what works. I thought unless we change the game, we are in for this reckoning in 12-18 months where investors will get exacerbated as they won’t have adapted quickly enough.
Progress happens when two things come together: an innovative idea and money. If money is controlled by a handful of people whose perspective is limited, truly innovative things can’t happen
In this trip, however, I’ve been really positively surprised to see how many people have the courage to present an idea that is endemically Indian. There is no obvious natural corollary or analog that you can make. So, as an investor, I want to spend more time here and be more thoughtful to understand the market. Because now when I allocate capital, I do it with an expectation that it will be more difficult, slightly awkward even, than a decision I would have made in the US for a similar company.
Q. What kind of capital do you want to allocate to India?
A. A few years ago, my perspective was that I would love to get at least a billion dollars invested in India over the next 10 years. I would stick to that. However, I have a broader view now and I’d say that the goal is to be here for the next 30-40 years. Over that timeframe, it could easily be tens of billions of dollars of investments. We will be very methodical about the investments, and we will take our time and be patient.
The most obvious area today to invest is financial services. The goal should be to expand the consumption class in India, to create mechanisms so that we transition to a fundamentally consumer-driven economy where consumers and their consumption patterns represent a large percentage of the GDP. This is what will make India a progressive, expanding, high-growth economy that thrives on the transactions of hundreds of millions of people. That’s the level of health I think can support fantastic company building.
So, financial services first and foremost. Once the consumption base is created, I think you will see us transition to areas that are more typical: healthcare, education, enterprise, and hopefully we will have the potential to expand in serious technology. We do a lot of that in the US, but haven’t had many opportunities here.
Q. Limited partnerships (LPs) could invest in their backyard, then why exit starved India?
A. If I ask myself — because I’m the largest LP — when I give money, I decide where to put it. So, I’ve decided that I want to be in India. I think you’ve raised a very good point about the exit environment. I think the best way to think about exits is as follows: If you are raising money from outsiders, trying to represent the business in the context of an American company, then you may accidentally also misunderstand how to construct the right business model. You may misunderstand unit economics. You many misunderstand the cash flow cycle of the business. These things push the path to profitability out much further into the future. What we’re seeing today — a dearth of liquidity instead of a surfeit — is a result of that.
But, I would take a step back and say: if we could find the right capital, patiently focus on the Indian market and truly understand it, then we may have the ability to construct the right long-term and medium-term business model. We need to understand the right unit economics and contribution margin profile that allows us to get to profitability sooner. I think over the next few years you will see many companies actually get to profitability and be in a position to go public. That will solve the liquidity problem.
Q. What is your approach to investing in India?
A. When I make an investment, I ask myself: can I see myself putting hundreds of millions of dollars behind this entrepreneur and this idea. Investing in 40-50 companies, the way it is done today, can only result in poor returns because of the diffused approach. You don’t understand any one company well enough and so there isn’t a lot of value creation. History will tell you that concentration is what drives major outcomes.
Wherever capital we can allocate programmatically — using computers and algorithms — we’ll do that, because it’s high velocity and results in a high turn of money. But, when we make direct investments personally out of the fund, we try to invest in as few companies as possible and look at investing hundreds of millions of dollars in each of them. This is what has made us successful so far.
Q. What are your thoughts on technology and gender?
A. When you look at value creation, inclusive environments generate the best outcomes — it’s been measured every which way. What inclusion means to me is that irrespective of one’s birth, cast, religious affiliation, education, we put the best people out in the field. The list must fundamentally include gender. I feel that I have a personal responsibility to do so.
I would love to get at least a billion dollars invested in India over the next 10 years. I’d say the goal is to be here for the next 30-40 years. Over that time, it could easily be tens of billions of dollars
In India, we already know that’s important. Take a look at microfinance and microlending businesses — the most creditworthy people are the women, not the men, who often make the wrong decisions. There’s a certain power in how women think about things and problems that I think we should just harness; it will help us win more. I think it’s just about asking the question: do we want to win? For example, if I own a basketball team, I don’t say I’m going to put my buddy on the team. I draft only the best people in the team. That’s how you win championships.
Q. Are Valley innovators looking at different markets at all?
A. Silicon Valley has a bit of a mercenary culture. The reason is that so much money has come into the system that people have incentives now that go beyond their mission. If you have incentives around short-term compensation, you can hop over to any company irrespective of what they do because so many of them are so over-funded that they will pay you huge amounts. If you cared about perks and benefits or about minimising your commute time, you could do the same. So, the huge amount of capital that has come into Silicon Valley has unfortunately distorted the decision-making that used to govern how people would allocate their time.
Q. Advice to entrepreneurs?
A. The most important thing you can do is psychologically divorce yourself from a world where there is right and wrong. The reason is that when you live in such a world, you put too much emotional and psychological pressure on yourself to be right. Instead, I think you need to live in a world of learning. If you live with this mindset — the modern philosophy of it is called the growth mindset — you are constantly learning things. So, it’s not like something went right; it’s that you learnt something. It’s not like something failed; it’s like you learnt something. The best entrepreneurs I’ve seen in Silicon Valley fundamentally have a growth mindset. They are less concerned with right and wrong and more with trying to learn more every day.
The second thing is, when you need to raise money, you have to be morally aligned with the people you work with. This moral alignment is critical because companies are difficult to grow. There are always trials and tribulations and if you don’t have an emotional connection around a higher order purpose, the work relationships will be fleeting. The capital will be fleeting and this will put inordinate amounts of artificial pressure on people.
Note: This transcript has been edited for clarity, brevity, and better readability.