What we see today is appropriate level of investment: Ben Mathias

At a time when venture capital firms have been shying away from making investments due to various issues such as macroeconomic uncertainty, and business loss and declining valuations at companies, Ben Mathias, managing partner, Vertex Ventures Southeast Asia and India, said that it is a great time for capital deployment. In a video interview with Peerzada Abrar, Mathias said there is a correction taking place in the ecosystem compared to three years ago when companies were given money unjustifiably. He said that the venture capital firm’s investment strategy is to avoid high-valuation companies. Edited excerpts:

How do you see the investment scenario amid funding winter and macroeconomic uncertainty?

Our strategy is to invest early, generally at the Series A stage. We also participate in Series B and sometimes even before Series A. We closed our most recent fund, Fund 5, in September last year, raising $541 million. The previous fund was $305 million, which we closed in early 2020. We are currently in the early stages of deploying Fund 5. I think it's been a great time to be an investor. All the macro trends are still intact. Look at all the countries we invest in: their GDPs are growing, and there is increased digital spending. All the macro trends are positive. So, the investment opportunities are there. I think this is actually a great time for capital deployment.

But industry reports say that after a decline of 35 per cent in 2023, Indian private equity and venture capital dealmaking is expected to remain tempered in 2024. Your comments?

What we see today is what we think is normal. We believe this is the right level of investment that needs to happen and it is the right pace. What happened in 2022 was not normal. There was too much investment in 2021 and 2022. We are not seeing any problems with good companies being able to raise capital. If a company is growing, has good margins, and has strong unit economics, there is plenty of investment available. Many investors are ready to deploy capital. I think what we are witnessing is a correction from a period three years ago when companies that should not have raised that kind of capital were being given money unjustifiably. What we see today is an appropriate level of investment.

Where does India fit in your overall investment strategy?

Currently, we are seeing tremendous opportunities in India, with about 50 per cent of our investments happening there. This percentage could increase or decrease depending on the economic activities in various countries. Right now, India accounts for about half of our investments. And of course, we are only 20 per cent through deploying the funds. The other half is allocated to Southeast Asia, which also has very exciting startup ecosystems in Singapore, Indonesia, Thailand, Vietnam, and Malaysia.

What are the investment opportunities that you are looking at in India?

Firstly, we are very excited about the rise of digital consumer brands in India. We have been investing significantly in this sector, with recent investments in Pilgrim, Kapiva, and Licious. The consumer spending in India is rising year-on-year, driven largely by the millennial population. Secondly, we are excited about the "Make in India" strategy, which encompasses everything from toys to semiconductors. Semiconductor manufacturing, in particular, is critical infrastructure, and India has substantial talent in R&D for designing semiconductors. We are seeing interesting startups in this area. Thirdly, we see startups building all types of software, especially vertical SaaS for various businesses. For example, we recently invested in Attentive, a company building software for the construction and landscape industry. This is a traditional industry that is being disrupted by software developed in India. Fourthly, the whole EV infrastructure in India is very exciting. Rolling out electric vehicles is just one part of the ecosystem. There is also the need for charging infrastructure and battery infrastructure. We see a lot of innovation in this space driven by India, which will first get rolled out locally and then expand to other countries. The fifth area here is what we call the next generation-BPO. By this, I mean leveraging India's large white-collar services talent to provide services globally and utilising AI. Many people have talked about AI replacing jobs, but we actually believe AI is creating new opportunities for the workforce.

Has there been any change in your investment model at a time when many top startups have been facing various issues?

We have always been very disciplined in our investing. You will never find us on any list of the highest number of investments in a year. We focus on the most successful investments. We avoid high-valuation companies and do not chase expensive firms raising excessive capital. Our strategy remains the same: we focus on company performance, metrics, gross margins, and team quality and it is not about vanity metrics.

How do you view the declining valuations of unicorns and business losses there?

Yes, some companies got caught up in the hype. I don’t know why an Indian company would need to raise a billion dollars. It’s completely unnecessary. Such companies become victims of their own hype. When investors throw too much money at a small company and expect exponential growth, they set the company up for failure. This isn't the entrepreneurs' fault; it’s the investors setting unrealistic expectations. You won't find us doing that. Even when we were seen as too traditional, it didn't bother us. Our goal is to make returns for our investors, even if it means being boring.

What kind of exits are you looking at from your investments?

We have several companies in our portfolio that are planning for an IPO. In fact, they are IPO-ready, and it's just a matter of the market being ready for them. We have always held the view that when building a startup, it should be geared towards an IPO. If someone acquires the company along the way, that's great, but the primary goal should be an IPO. We have quite a few companies in our portfolio in both India and Southeast Asia that are ready to list in the next six months, provided the market conditions are favourable.

How do you view exits via mergers and acquisitions?

We have had considerable success with M&A exits. For instance, we sold Flutura to Accenture, Active AI to Gupshup, GlowRoad to Amazon, and Recko to Stripe. M&A has been a strong avenue for us. Additionally, we have also exited through secondary sales. For example, our investments in FirstCry and XpressBees, which we exited a couple of years ago. Generally, if the price is right, we take the opportunity to exit through a secondary sale. One key lesson I've learned in the VC industry for over almost 20 years is that when you have an option for liquidity, you generally take it because the opportunity may not last for a few more years.