What do the poster boys of Indian startup world—Flipkart, Myntra and BookMyShow—have in common? It’s Accel Partners, which has invested in all of them. At the recently concluded second edition of Techcircle Startup 2014 conference in Bengaluru, we interviewed Subrata Mitra, partner, Accel Partners, at a live session, where we quizzed him about his experiences and learnings from investing in companies like Myntra, Flipkart, BookMyShow and Mu Sigma. Here are the excerpts of the interview.
What do you look for while investing in a startup? What struck you about Sachin Bansal of Flipkart or Mukesh Bansal of Myntra?
Today our investment portfolio is just north of 50 companies. Apart from the Flipkarts and the Myntras, we also invested in firms like BookMyShow, which is rare and different. The company was already profitable when we invested in it and hence the metrics were different. They had a running business and were already leaders in the Indian movie ticketing space; therefore the decision-making was different from when we invested in Flipkart, Myntra or even Mu Sigma.
For this set (Flipkart, Myntra, etc.), the determining factor was primarily the quality of the team. What I mean is that these companies had people who came with a lot of belief in what they were trying to do. In Sachin and Binny Bansal's case, the belief was that 'the quality of service that an Indian e-commerce company should provide to its customers should be better than any company in the world'.
We actually had a lot of interaction with them before we finally took the investment decision. And what we found out was that they were tremendously passionate people and would come by our office every other day and tell us about the mini-steps that they covered. The beauty of it was that they knew why they were coming and we knew why they were coming, but they never actually urged us to invest in them.
The biggest challenge while investing in Flipkart was that we knew it had to raise a lot of money. But we were a $60 million fund; so how do we play a role in a company that would need to raise over $100 million going forward?
Did you ever imagine that Flipkart would actually become this big?
No way. I still remember the conversation I had with Sachin and Binny around the time we were signing the deal. I was asking them: assuming that you are going to get to a $100 million exit, are you happy to have 15 per cent each—considering the dilution that will happen in the follow-on rounds—of a $100 million business? And the answer was: yes definitely; why not?
Isn't having the right business model also critical?
It depends on the stage of the company. We have always looked at the founding team as the number one requirement and the business model as the second one. Myntra is the classical example of this since it is actually the third or fourth business model—depending on how you look at it—that is starting to scale. When we started we never had a clue that it would end up here. So I would reiterate that having the right team that can actually look at all these business models, put up an unbiased analysis of it and make weighted decisions to tweak the model accordingly, is very important.
And the fact is that in India you do not need to get it right the first time. There are enough opportunities. In a nascent market like India, if the team is good and can maneuver a little bit and find the right thing in the second or third attempt, you can still make it big.
Can you clear the rumours surrounding the Flipkart-Myntra merger?
So if you were to draw global parallels, Flipkart is more like Amazon, while Myntra is like ASOS. Myntra wants to excel in fashion, primarily in women's fashion, and within that build a number of private label brands that can have their own dedicated websites going forward. We are launching three such brands—one each for young men and women and a third one focusing on Indian dresses for women.
Flipkart, on the other hand, should continue to do everything that is horizontal. They are very good at cell phones and need to be really good at laptops and accessories, etc. However, this is just my thought process and Sachin and Binny could differ.
Can you list three or four areas where the board led the trajectory of Flipkart?
The first one was setting up the company metrics. When we got in, the company was doing 100 books a day, but we rapidly wanted to expand into categories like mobile and electronics. We had several months of discussions at the board level about how to go about doing the same.
The other thing when we got scared was when Sachin and Binny came and said they wanted to try out COD. But looking back, we wouldn't have been where we are if we did not do that. Then there were many more discussions over the years on topics like what kind of team members we need to bring in, where is the scale and supply chain side going to come from, etc.
There have also been some missteps, particularly Flyte...
You can call it a misstep, but we have retracted it and it is not as if we will never launch it again. In fact, I would call the timing of Flyte a misstep and not the product itself. A startup is all about trying small experiments. However, since we were so big, the small experiment was also worth a couple of million dollars. But it didn't hurt us and at some point we thought that there are many things that are already happening; hence, we should focus on them and take a step back on Flyte.
What are the key lessons learnt from investing in these high-profile companies?
I will start with Mu Sigma. It was the first time we were being investors and we didn't even know what it meant in the true sense. Because of this our association was that of a co-founder than an investor. I was amazed with Dhiraj C Rajaram's (founder of Mu Sigma) sales ability—he would never walk away from a customer without getting something, even if it was just the next meeting. He would almost always make us believe that every time he walked into something, the result would be positive. So the lesson learnt was just be die-hard positive about what you are trying to do.
In comparison, Sachin and Binny are the epitome of execution. These are two guys who can think big and make it work. The interesting part is that both of them have completely different DNAs. While Sachin is an emotional, big thinking, 'let's go and do it’ kind of guy, Binny is one who will say 'I know we need to do it, but let's figure out how'. And that's why the combination works so well.
Flipkart also went through a bad PR stretch with ED probing FDI into the company, among other things. What advice did you provide?
What I told them is that every PR is good PR; you just need to live through it. If somebody knows your name, it could not hurt; you just need to 'massage the message' in a way that it turns out to look positive. And the fact that Flipkart is still there as the largest company to potentially ever come out of India, I think those PR guys should retrospect on what they talked about.
Do you subscribe to the view of 'Topi Investments' in Indian e-commerce? Do you think Flipkart raising so much capital at such high valuation is justified?
Beauty is in the eye of the beholder. I might like and be willing to pay a lot more money for something that you will not. But that aside, there are some standard metrics that get applied to companies like Flipkart and Myntra. There are five or six parameters that we the board level look at, which include GMV, net MV, gross margin, net margin and finally contribution margin. Contribution margin is the contribution made to the bottom-line by, say, each bottle of water you sell.
The negatives come when you add GNA, which is engineering, sales and marketing team, etc. All of these, as well as other parameters are considered, and then a final valuation is done.
Can you rate Accel’s top five portfolio companies in terms of return expectations?
4. Myntra; because our holding has come down drastically
5. Power2SME; it is too early to tell
Who is the largest homegrown competitor to Flipkart? How many times is Accel right now into Flipkart?
The largest homegrown competitor to Flipkart is Snapdeal. Currently, we are a little less than 300 times in Flipkart.
Can you name two anti-portfolio companies of Accel?
The first one is InMobi. We didn't even come to know of it, since we were too early in the game when it happened. We should have probably hustled more for it. The second one is Snapdeal. We wanted to make the investment, but Kunal Bahl decided to go with someone else.
What is the one thing that keeps you awake in the night?
What keeps me awake is the number of people (in India) who have ever shopped online for physical goods from an e-commerce store; it's around 20 million. Also, the average basket size of Indian's shopping online is one sixth of China. The total market size of physical goods in e-commerce was $2 billion in 2013. If this market does not get to about $20 billion—which is not big since the US is a $250 billion market while China is about to cross $250 billion—we will not reach critical mass and maybe all of these companies will start tapering at some point.
But if it starts getting to $10 billion and beyond, I think Myntra, Flipkart and even Snapdeal could succeed.
How has the startup ecosystem in India changed?
There are all kinds of startups today, but where we are gravitating towards are the products companies that are coming out of India. We have had phenomenal successes in the services space and some of the biggest examples are iYogi and Mu Sigma.
All entrepreneurs should understand that building a company for 2x takes as much time and effort as it takes to build 1,000x; obviously you need more management, more bandwidth and more money. But once you are beyond 10-20x, other things will follow. Examples of the same are Flipkart and Mu Sigma. So be patient in analysing what you are getting into because the opportunities are truly global today.
(Edited by Joby Puthuparampil Johnson)