Episode 64 / May 10, 2020
Impact of COVID19 on India Startups: Deepak Gupta, WEH Ventures
Deepak’s investment journey started with him joining Intel Capital in early 2000, where he spent 14 years managing global investments, mergers & acquisitions. In 2015, he started Equitycrest, which identified and worked with early-stage startups and assisted them in engaging with investors to realize their funding needs.
After gaining over 17 years of investing experience and managing acquisitions, in 2017 he founded WEH Ventures. Some popular startups in its portfolio – Trell, Pratilipi, and smallcase among others.
In this podcast, Deepak shares his experience of investing during the 2000 & 2008 crash and what he expects now.
00:43 – Joining Intel Capital & starting WEH Ventures
03:05 – Successful exits from Telecom, Consumer Internet startups
05:07 – Working at Intel Capital & understanding fundamentals of Venture capital
06:57 – Investing during previous downturns of 2000 & 2008
09:27 – Investing in Pratilipi – Crucial to India’s vast vernacular landscape
13:08 – Investing in smallcase – Simplifying investing in Stocks by creating thematic bundles
16:31 – Overall approach to finding & adding portfolio companies
18:45 – Advice for Startups in tailwind sector – Being semi-aggressive
20:15 – Advice for Startups in badly hit sectors – Cut down cost & preserve your runway
22:22 – Distinct qualities of entrepreneurs who survive & thrive during such crisis
28:06 – Impact of Covid-19 on upcoming investments (Series A & Series B) in 2020 & early-2021
Read the full transcript here:
Today, we have with us Deepak Gupta, Founding Partner WEH Ventures. Welcome, Deepak to the podcast. We would love to know about your journey as an investor and what made you start WEH and the journey before that.
Thanks for inviting me. So as far as my journey is concerned, it started almost 20 years ago, so I’ve been around for a while. The way it happened is there was a lot of euphoria in the late 90s about internet And there was in late 99 or 2000, a company called Rediff, which was venture-backed, listed on NASDAQ, or the first venture-backed companies out of India List, pure consumer internet play. And at that time, I sort of learned a bit about venture capital and got very excited. It was early in my career, and I decided to sort of pursuing that as a career opportunity. I connected with Intel capital, the venture arm of Intel Corp, and it’s in a couple of quarters, I went through a few interviews and I landed a job, moved to Bangalore. And that’s how that started. As it turns out, I prior to WEH Ventures I spent about eight years in Intel capital, and before launching WEH ventures I actually got into the angel and seed ecosystem. I set up a startup investment bank called Equitycrest, where I hired my current colleague, Rohit Krishna. And worked with some companies in the seed stage to raise capital. We got more into the ecosystem, and then we launched WEH ventures about three years ago. So that’s the history of how this all began.
Almost been up for around 20 years in the venture investing space directly or indirectly?
Well, I wouldn’t say 20 years in the venture but yeah, more than 12-13 years now.
Siddhartha Ahluwalia 2:43
And from the previous avatar, tell us about the successful exits you had.
Yeah, so a lot of people have been talking about all the downturn in COVID, etc, of late. It’s at the top of everybody’s mind and that’s sort of makes me think about my sort of earlier innings. So, fortunately, I’ve had quite a few decent exits from my sort of corporate venture innings, a few M&As, a couple of IPOs. In fact, like we have a downturn now, I actually made an investment in a company called Sasken in 2002 or so. And that was a time when the market was quite low. It was sort of the center of the NASDAQ meltdown. And we had good reasons to invest, both from a financial and strategic standpoint. And within a few years in about three years, that company went IPO, for peak valuation at that time of about six hundred billion dollars, it was a very different time and $600 billion was a lot of valuation for a company. And we made a pretty, pretty good return on that. And of course, there were many other companies in telecom software, which I invested in got exits. There were a few others, there was a consumer internet company Career Launcher, where we actually got an exit. So all in all, it turned out well, started investing before the meltdown of NASDAQ invested through it. And once that came out, there were some good exits. So that sort of gives me some experience in terms of how some of these things work out I guess.
You spent a long time working with Intel in the venture capital arm of Intel, how did that experience help you in your WEH Venture journey?
I think Intel has been a great learning ground, they gave a lot of autonomy. One had to do the entire lifecycle from sourcing to pitching internally to board and exit. And, you know, it has taught me about the basic principles of venture capital. These principles sort of getting broken in bubbles. But fundamentally, how to evaluate the companies, how capital is raised, how capital is deployed, and allocated. I’ve been through a couple of downturns. One is I was a financial controller for Intel’s Asia business when the 2008 downturn stuck. And I’ve seen how even for big companies, it becomes very difficult to predict the precipice and the valley below when things turn south. So there are a lot of learnings I would say, in terms of seeing downturns, in terms of the basic principles of venture capital. And having seen so many founders at different stages of evolution in different markets, which perhaps help, especially when the chips are down, I guess.
And if you can share the lessons you are applying right now in 2020, during COVID, from your investing days of 2002 and 2008?
Yeah, so I think the first thing is, at least far as I’m concerned, a downturn is not necessarily a crisis. So if you can hold your conviction, and invest, you should do that. It may be harder to invest at the same rate and is probably foolish to do that. But I don’t think a complete withdrawal is something that I would pursue. That’s one. I think the second is that you have to step back and look at the sort of which companies you have and which sector they are. And how those sectors may or may not pan out. Because if the downturn is very prolonged, if you see the nice tech downturn, it was actually quite prolonged, it was for more than two years. And in those kinds of downturns, even the best of founders may flounder simply because it’s very hard to sustain a business over two-three years of a downturn. So You have to look at it sectorily really as well, to see which sectors you may not want to participate in, and sort of which ones will work out. So that’s not so easy to do, because these trends are not always obvious. And sometimes they regress, you get certain signals and then they go backward. And third is obviously, the value of capital and using it wisely. We have this tagline in our fund, purposeful seed capital. We’ve always sort of believed in that, that our founders should use our money for a certain goal, and not just to fill the bank and not know what to do with it. And that goal should get them to the next milestone. So in downtimes, the value of capital goes up by multifold. And, you know, to be used wisely, and to actually longer runway, I mean, we’ve seen all of that. So those are the lessons.
Siddhartha Ahluwalia 9:06
Deepak, in WEH, you have some of the very interesting companies, which are doing great, that have also raised the follow on Series B round like Pratilipi, smallcase. What has been your thesis behind these companies?
Okay, so I think the thesis has been obviously different in each, so I’ll have to talk about each of them. As far as practice is concerned. Pratilipi is a company that I encountered a long, long time ago in early 15. Before I launched WEH Ventures, they were essentially at that time and still doing the same thing which has a user-generated content platform for literary content, a model which was a crime made in India due to the lack of distribution opportunities for Indian content. And something that had actually worked out well in other countries like China or Canada, combined with a very impressive founder was very driven and charismatic. So when I encountered this company, it made me think about the overall content landscape. And I concluded at that point in time that a few years from then India would have a fairly bustling local content, a vernacular content market. And this company could easily be one of the major companies that content landscape. So I actually engaged with the company, shook hands with them and worked with them to help them raise their first major round, which was a billion-dollar seed round. In which I also did small personal participation, so by the time I launched my fund wh ventures the company had flowered and grown quite well. And due to, I guess, my association with the company, they were kind enough to allow us to invest in their oversubscribed series A round. And that’s how we invested in Pratilipi and it is grown quite well since then I suppose. As far as smallcase, what smallcase does for the benefit of your listeners is essentially they create a matic equity portfolios which can be purchased at a low cost. And they have actually been able to play a part in moving the Indian investment landscape. It was low cost investing thesis then was that compared to Western markets US, Japan, etc, where if you see the trend towards low cost investing and ETFs the market now in the US is 50% in ETFs have crossover at that point also did a very high percentage, but in India, it was only 2% people who are not aware of low-cost passive investing that market has now grown from 2% to almost 6%. And so, we expected at that time that this low cost investing has to come about in India and that has actually come true to some extent. So, as I said from 2% to 6% on the ETF side, if you see the percentage of people make plans that is really short up and smallcase, therefore, could be a driver of that wave. Aside from that, of course, they had a fantastic product, fantastic high chemistry team. And so in the second meeting, we were convinced and we offered to invest and they have grown quite well. And, you know, even now, if you see in the COVID situation, the inflows are actually pretty strong. So the Indian retail investor continues to hold forth. And that’s wonderful to see. That’s about smallcase as well as Clinikk, I guess, what Clinikk does is provides an outpatient solution, which is primarily via telemedicine and health insurance solution, in combination with a focus on lower-tiered population. Our thesis on Clinikk was primarily driven by our interaction with the founders who we actually met them once early in our fund cycle. For some reason, the deal didn’t happen, though we were somewhat interested. And then when we encountered them again, after a year, we had seen how persistent they were and mission-driven they were to solve this problem of lack of health care access to the bulk of India’s population. And they had made some progress on their business. So we believe there was a large problem there to be addressed. And the founders were very, very driven to solve that. And therefore, we decided to invest that. So broadly, I would say these are sort of different types of thesis perhaps for these three companies.
Siddhartha Ahluwalia 14:52
Overall what’s your fund investment philosophy and approach?
So, we are modestly sized Fund. And like I mentioned before, we want the companies to raise seed capital to reach a certain milestone. We also do not think that just doing large numbers of deals is the answer to get to good companies, the companies have to be of a certain quality. So our approach, I would say is to do not a very large number, a modest number of companies to make sure they are well-capitalized. So we will invest and typically co-invest with other smaller or larger investors to make sure there’s enough runway. We typically would like to say yes to them, regardless of who else is investing. So we typically will not ask the question, who else is there? We just want to know what capital amount is around the round or how will we get there? And then engage with them to move them forward. So essentially, don’t do spray and pray, make sure that companies are well-capitalized, collaborate with other investors, and, you know, move them forward.
Siddhartha Ahluwalia 16:22
What is the average check size that you have invested in?
Yeah, so far we’ve invested around 200,000 we hope later in the year that we will have sort of more dry powder to sort of increase this to 400,000. And of course, the companies are raising more capital as I mentioned in that round because there is a significant amount of co-investment
So, as you are, you are a very experienced investor you have seen many cycles So how are you advising your portfolio companies or the entrepreneurs who are even not in your portfolio, but you are a mentor to them to prepare for a crisis because there might be some commonality, though all crises are very different. There cannot be one generic answer, or each one fits all. But what’s your key advice?
See, there are two kinds of companies in this crisis. Those who are in the right sectors, which has some tailwind from the crisis, those are the sectors that may have a negative headwind and within that, also those who have capital which is very significant as those that don’t. So if you are in the tailwind sector, many of our companies are especially those who have content or even smallcase and you have the capital, then you should be what I call semi-aggressive. Because if you see the general advice, it is to survive, I think survive is good but if you are actually getting tailwind you should do better than that. So you should be semi-aggressive, which means not blow up all your capital but slightly, be aggressive, maybe we’ll look for acquisitions, etc. If you have some scale. If you are in a sector which is more badly affected, then you need to just tighten down and reduce your costs. So you can really extend your runway because there are some companies where there’s almost zero business at this lockdown. And then as the lockdown opens up, you will have to see what is the recovery spike, and then adjust your business at that point. It’s very hard to predict the sort of how quickly that recovery will happen or not. So you just have to batten down a lot to preserve your runway. So that’s what I would say to them. Of course, the whole point here is that it’s very hard to say, how long each crisis will be. And I think we are all hoping that this crisis is not more than six or nine or 12 months. And of that, you know, only one or two months is very severe or three months but if it is a very prolonged crisis, of course, that you know, there are many questions in terms of which companies will survive, etc. I would also say that I would actively urge companies who are slightly in a weaker footing, to think through potential M&A possibilities, because, you know, raising capital is going to be different And they will lose some competitive advantage during if this crisis is somewhat prolonged, then they should think of the outcomes for themselves and for the investors. So, they should not be very averse to M&A type situations, if possible.
Siddhartha Ahluwalia 20:23
Almost every five years they have a huge change in macro environment when it especially hits, you know, the consumer, the entrepreneurs when no one is prepared, no one was prepared for Demonetization back in 16. If you can highlight the qualities or the entrepreneurs who thrive in these changing environments the most. What are those?
Yeah, I mean, most of the entrepreneurs that have been funded In the last five years are relatively young, on average sub 30. So I would say ab initio it’s hard to gauge if they will necessarily thrive in a crisis. I don’t think it’s a very easy question to judge. But you can obviously observe them when the crisis hits. So I think when the crisis hits, one of the things is to be pragmatic and nonemotional, right? This is actually a contradictory quality to when we appraise entrepreneurs upfront where we want them to be passionate and all that, but they have to be sort of passionate and pragmatic. That’s what we’re asking them to do. The second is I mean, that’s an even higher ask is some of them are actually able to slightly see around the corner before things going really bad, and then take action before the headlines are full of shit. If they are able to act, not many of them can. I think that’s a very valuable trait. I would say the third is sort of personal leadership, you know, where they are willing to take the pain. And the fourth is, I would say transparency and clarity with their investors, stakeholders, and employees so that they’re able to carry them along very quickly, and come to some common ground and actually proactively do that. Like I said, if you see the venture market in the last five odd years, at least my observation, we funded a lot of young founders. So we can only see them in action now that things have become difficult. But I’m not sure they were tested with this necessarily or evaluated on this before they were funded.
If you can share, you know, how is Ranjit of Pratilipi or Vasant of smallcase responding or reacting to the COVID-19?
So again, I’m not sure I can share too much detail. But as far as I can see, as far as those companies are concerned, they’re actually in a very strong footing. So there is not much action to take. Because their business is actually doing quite well. So sometimes, that crisis is an opportunity. I mean, if I look at a portfolio, I would say, at least half the companies are actually doing better than maybe they would have if this had not come. So it’s not that everybody is falling off the cliff. And what about the other half of those companies?
So, if you look at our portfolio we have broadly four categories of companies. One is in the content space, we have the likes of Trell, Pratilipi, Gifskey. Then we have a couple in FinTech, smallcase, and early-stage company college Infino. Then we have a couple in consumer brands, which is Henry and Smith and Noto. And then we have Clinikk which we’ve talked about, which is more of a healthcare slash FinTech play sort of. I think the brand companies have a bigger challenge right now simply because of the lockdown. They are not in the grocery space, so they’re not able to ship the product. It’s not that there is no demand. It’s just that they can’t. So they have to just tighten up and wait for this to open out. So they are probably in the short term more affected. As far as the content companies as far as even Clinikk, I think it is generally positives because they don’t have to ship anything physically. Similarly, with smallcase, there is an appetite for people to invest and with volatility, trade more. So, that’s what it is essentially. So I would say the brand companies obviously have to adjust more. They’ve taken some action on reducing the costs, etc. Now, how quickly will it open out? We don’t know that right? It seems very hard to predict the path of recovery and we shouldn’t try to guess too much. So as it begins to open out, they will adjust the strategies.
And what is mean the impact of COVID going forward on early-stage and series A investments in 2020 and early 2021? Have you given a thought about it? And if you’re preparing for the market, you know, how it will react?
I mean, I would like to give it a thought. But unfortunately, it’s very hard to predict these things completely. I mean, I think if the companies at the seed stage have the adequate runway, then that runway should last them longer because the cost of doing business should go down. Right, so the cost of hiring will go down. Also rental should go down. So, you know, if you needed a million dollars earlier, I think 700K should be good enough. Now the question is what milestones do they need to show or what kind of founders will get funded at series A? I do not know the answer to that. What I also feel is because there is dry powder in the US market as, by some analysis, there is $150 billion of dry powder. There is dry powder in the Indian market as well. So, if the macro actually improves somewhat, I am not sure that you know the VCs are going to stop doing deals, in fact, deals are still happening. Few sectors like maybe gaming education, etc. So, things will continue just there’ll be a smaller set of companies so the flight to quality will be higher. The bar will be a little higher. But, you know on this thing’s really bad. I am not sure, in nine months’ time we will be doing only half the deals that we did before. We’ll be doing probably better than that.
Thank you so much for being on the 100x podcast. And I look forward to seeing your companies thrive and WEH ventures going forward?
Thank you so much, Siddhartha.