Q&A: Bertelsmann India Investments’ Pankaj Makkar

Bertelsmann India Investments (BII) is a sector-agnostic early-stage VC arm of German media conglomerate Bertelsmann with USD 300m in assets under management. Last June, it earmarked an additional USD 500m for deployment in the country. The plan includes opening offices in Mumbai and Bangalore to support existing headquarters outside of New Delhi. Bharat, a term for India’s upwardly mobile mass market, is core to the thesis.

Q: How has Indian VC changed since BII entered the market?

A: We feel that the entire ecosystem has deepened on all counts. The quality of entrepreneurial talent coming to us now is far better than it was 10 years back. We’re getting second and third generation entrepreneurs building companies, people who have worked in start-ups for several years and understand the nitty-gritties of building a company. The perspective, attitude, depth, skillsets, expertise, and experience that they bring to the table is much better than it used to be. Capital has also fundamentally increased in India, so there’s a lot more available to these entrepreneurs to build large businesses. That’s a big plus.

Q: What about the broader environment?

A: The economy in general has become a lot more resilient. It’s come out of the 2009-2010 shocks and the aftershocks around 2011-2012. The continuity and the build-up of the government’s various reforms – especially in digital infrastructure – is proving out right now. We’ve built amazing digital highways that are much better than our physical infrastructure. That’s propelling the whole digitalisation wave in a big way. We are still slightly lacking in exits, but it’s been a good start. I hope that in the next five years, we will complete that loop for companies. It’s the last piece of the puzzle and a work in progress.

Q: Private equity investors appear ready to dive deeper into the start-up market. How much could that drive VC exits?

A: Not every start-up would qualify for a private equity buyout. But there are a lot that have the unit economics sorted and are profitable or have a path to profitability, and they’re leaders in their segments. Fundamentally, those are bets that private equity firms would take anyway if they weren’t tech companies. At the end of the day, a lot of tech companies in India – or China for that matter – are online avatars of offline companies that the private equity guys like to invest in. We see people like Temasek and Goldman Sachs, and even pension funds, investing in such assets because they recognise the similarities to what they’ve bought previously. It’s just that there’s now a tech element on top.

Q: Is there an example in your portfolio?

A: We have an online furniture marketplace called Pepperfry [backed by Goldman Sachs]. While private equity may have shied away from investing in assets like that because of the tech angle, at the end of the day, it’s a furniture company, and furniture they like. It’s got strong macroeconomic tailwinds. It’s a very unstructured market with unorganised set-ups. So, we do see significant interest from private equity firms in portfolio companies they can understand – production services with a layer of tech as opposed to hardcore software.

Q: How many start-ups in India have the profitability private equity wants?

A: Very few are profitable today, but I can tell you that at least 30%-40% should become very profitable for the simple reason that they are organising a very unorganised market. When you do that, you are changing consumer preference to a new default way of shopping for that category. Unlike in the West, digitalisation and organisation are happening together in India. That means the time to profitability will be longer, but once you get the infrastructure built, you get the margin of the whole supply chain, and you end up being more profitable.

Q: What kind of timeframes are involved in this?

A: If a tech story of similar theme takes five to seven years to become profitable in the US or China, it might take 10-20 years in India. But once that winner emerges, it will be far more profitable and more resilient because there will be a full stack end-to-end. We see that in our portfolio with companies that are inherently building a lot more capabilities than their Western counterparts just because those capabilities don’t exist in India. And along with that capability building, profit will start.

Q: How does that longer timeframe translate into pricing risk?

A: Unfortunately, a lot of funds get carried away looking at global comparables. They don’t factor that risk and burn their hands. People who can factor that risk will end up getting that benefit in a significant fashion because businesses building digital and infrastructure capabilities will get more value out of winner-take-all or winner-take-most types of markets. That will involve a much longer horizon, but it’s what you sign up to when you’re looking at India. If you are patient and you are a true long-term partner to entrepreneurs, then it’s a great place to be.

Q: Bharat has emerged as a buzzy theme in Indian VC, but there are concerns spending power is too low for viable business models. What’s your view?

A: Our view is that the rise of rural India will be much faster than the urban phenomenon, but it depends on what you’re selling. Will the next billion buy a Louis Vuitton bag? No. Will they buy sugar and milk? Yes. Their aspirations are similar, if not the same as urban India. They watch OTT [over-the-top] content, although maybe they’ll want it in their own language. Simple middle-class things like televisions and washing machines, and interestingly, fancy birthday parties for kids are part of that. We must be mindful of the type of products that we sell in rural India. It needs to resonate with that audience.

Q: But how workable is remote delivery of sugar and milk at small ticket sizes?

A: This is where the innovation needs to come in. Do you take one person as a unit and look at the USD 2 they’re spending, or do you take the village as a unit and take the USD 2,000 it spends? First, let’s figure out what the market wants and is willing to pay for. The first investment BII did in this theme was AgroStar, which is the Amazon of agri-inputs. Farmers are willing to buy seeds, fertilisers, pesticides, and hardware because it’s their livelihood. But again, how do we design the logistics per unit? That’s why we say the Amazon of India will not be the Amazon of rural India. It could be an entirely different company because the entire supply chain needs to be different.

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• Topics
• South Asia
• GPs
• Venture
• Early-stage
• India
• corporate venture capital