Episode 63 / May 3, 2020

Pankaj Makkar, Bertelsmann India Investments, on Investing in Growth Stage Startups

hr min

Episode 63 / May 3, 2020

Pankaj Makkar, Bertelsmann India Investments, on Investing in Growth Stage Startups

hr min
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Pankaj joined Bertelsmann New York in 2009 and later started Bertelsmann Corporate Services India Pvt. Ltd and Bertelsmann India Investments. Bertelsmann India Investments has several popular startups in its portfolio – Licious, Pepperfry, and Quikr among others.

In this podcast, Pankaj shares his opinions on how startups can optimize spendings and become more cash efficient in the long run.

Notes –

00:40 – Joining Bertelsmann in New York & starting Bertelsmann Corporate Services India

02:33 – Thesis behind the diverse portfolio of Bertelsmann India Investments

07:02 – Exit from Saavn which is now JioSaavn

11:02 – What change can startups expect in consumer behaviour post Covid-19?

14:45 – Biggest value addition which Bertelsmann brings to its portfolio companies

20:20 – Average ticket size & ideal phase for making an investment at BII

21:12 – Personal habits and hobbies which he attributes to his success

23:35 – Ability to see far & deep and implementing future prospects within the business

26:30 – Investing companies which raise minimum capital and are able to build great businesses

28:58 – Identifying companies with high profit margins(Treebo as an example)

29:59 – Advice to entrepreneurs to sail through Covid-19 crisis


Read the full transcript here:

Siddhartha 0:01

Today, I’m with Pankaj Makkar, Managing Director, Bertelsmann India Investments. Welcome, Pankaj to the podcast.


Pankaj 0:38

Thank you very much, Siddhartha. It’s a pleasure to be here and although uncertain times but this is the best we can do and podcast is a great medium to talk to you as well as to talk to other people in the ecosystem.


Siddhartha 0:51

Thank you, Pankaj. Pankaj, we would love to know more about your journey before Bertelsmann and what made you join Bertelsmann. And now, how is the journey going on?


Pankaj 1:03

Well, I’ve been a strategic investor in India since the early 2000s. And in my previous avatar before Bertelsmann, I used to do what we call as mid-stage private equity deals for a strategic house called Usaha Tegas Group In 2009. I joined Bertelsmann in New York. They have a pretty amazing program called the Bertelsmann entrepreneurs program, where they handpick either entrepreneurs or entrepreneurial managers who have worked in such settings. And these managers can then go on building the next generation businesses, for Bertelsmann. For me, I joined them in New York, but the idea was to then go and build businesses in India or Asia, and so on. So in 2011, I came to India and I started the Bertelsmann corporate center in 2013 after working for two years on the corporate center and working with our operating businesses and we do have four or five key operating businesses in India like Penguin Random House, Arvato, Majorel, RTL and so on. We started kind of looking at making our first entry into the startup scene or the venture capital scene in the country. And that’s when we started Bertelsmann investments in 2013.


Siddhartha 2:29

So now your current focus is entirely on the startup scene or there are other entities also you’re giving your time in Bertelsmann?


Pankaj 2:37

Well, to be honest, I wear three hats. The first hat is at Bertelsmann India investments where the majority of my time goes, but I do run the Bertelsmann corporate center as well. And within that, we do both back end and front end, help, and support to our operating businesses in India and outside. So from that perspective, I’d have multiple roles. And yeah, that kind of keeps us quite excited about the variety of topics we work on.


Siddhartha 3:08

You have led investments in startups such as Treebo, Saavn, Pepperfry, Agrostar, and LendingKart, and much more. The portfolio looks very diverse. What’s the thesis behind some of these investments which I just mentioned.


Pankaj 3:26

So that’s a fantastic question. And to be honest, this is not the first time we’ve been asked this question. When we set up our venture capital arm in 2013. A lot of people thought that we would put together a media-centric or at best of media and services centric VC fund. A very few people know that we are very big in the supply chain, financial solutions, education, and other sectors as well globally. And the general mandate for us is to make an investment in anything digital, and anything, education. Of course, we can do media and services as well as services for us as BPO services. Having said that, a lot of them are also get covered in digital. So that’s the mandate for us. And we’ve been doing it since 2013. The other thing that we started thinking about when we entered the market was that we didn’t want to be a me-too fund. There were so many funds which were all focused on early-stage investments, whether it’s seed funds, Series A funds, and we thought that market would get saturated very fast. By 2013, there were already strong names that were emerging, very strong partners for us like Accel, Sequoia, Lightspeed Mayfield, and so on. And I don’t think, we wanted to create another fund which would directly go and compete with them. What we did realize was there was a significant market in series D and Series C stage which at that time we called as growth investing in a VC market. And honestly, we did not find even a single dedicated Fund, which was focused on that market. And we decided to exactly focus there just because of the wide gap in the market. And if you were to ask me, what is common across our diverse set of the portfolio that we have, all deals that we have done as a series D or Series C as a growth stage investor in the VC market.


Siddhartha 5:30

So, some of them are a mix of online or offline plays like Treebo, Pepperfry, Agrostar, can you throw some more light on it? What made you jump into completely from a media house perspective to jump into offline and businesses, which were outside the Bertelsmann coast?


Pankaj 5:52

So honestly, as I said, Bertelsmann is not just media, we are a large conglomerate, which obviously has a lot of media businesses. But we do have services businesses, whether it’s supply chain e-commerce, it can be education, financial services, and so on. And if you look at all the investments that we’ve made, parts of these businesses are very similar to what we do in Europe or other parts of the world, so I think there’s a consistent theme that we follow. Now, of course, are we a furniture maker, No, we are not a furniture maker. But do we understand how complex supply chain work? If the answer is yes, we do that, and we saw a similar type of complexity in a company like Pepperfry as well. Now honestly, for us, the idea is not to be sector-specific, but look at capabilities and understand if there are capabilities, which are very difficult to replicate, and that’s what we call a complex business. We like those businesses because we ourselves are in such businesses.


Siddhartha 6:58

And one of the large exists for Bertelsmann includes Saavn by Jio if I am right?


Pankaj 7:05

Yes, last year, we exited out of the company. And we were very lucky to have partnered with Reliance Jio and we found a very good home for our portfolio company there.


Siddhartha 7:20

Can you share some learning from the Saavn journey because you were early in the journey, and what kind of different phases Saavn went through?


Pankaj 7:37

Sure, I am happy to answer that. And I think we were very lucky to be part of such a great company. I still, by the way, in touch with the Saavn team or Jio Saavn team, and they are just incredible entrepreneurs and operators, really smart people, and I wish them all the very best going forward as well. As far as the journey is concerned, I think it was a very typical journey that any VC would go through with a good startup, we did see hyper-growth. In the first few years of us investing in the company as Series B, we also saw a lot more competition. At that time, there used to be three-four players, who were fairly dominant and Saavn was able to raise ahead and become the leading player in the country. And honestly, after some time, we did see a lot more strategics entering into the game as soon as they realize that this is a large market. And at that point, we realized that the best bet we had to make sure that the company becomes fairly viable and sustainable to join hands with other strategic like-minded people. And we were lucky to have found the right home for the company with Reliance Jio.


Siddhartha 9:02

We are sitting in April 2020 facing situations that we never expected to get into. How are businesses like Pepperfry and Treebo coping up with the COVID 19 repercussions which we are dealing with today? And what are the learnings for other entrepreneurs, which we can derive from the actions being taken?


Pankaj 9:24

Look, I think, not a few businesses but all businesses at this time whether big or small, need to be agile and they need to adapt to the new reality. The reality is that we are living in extremely uncertain times. And some businesses over time will go back to their normal some businesses will do even better. We think that a company like Pepperfry may end up eventually benefiting significantly after this COVID episode is behind us. The reason, of course, is that it is part of an online trend where people will spend less time looking at offline options but may go significantly towards online. And that would benefit companies like Pepperfry. So, from that perspective, I think that we want to make sure that we put our heads down, make sure that runways are strong, and we stay relevant for the times after COVID, of course, at the same time, it does give us a very good opportunity to not only fix our cost base but also think about a significant innovation that we can do to make sure that we continue to be the leader in the space that we operate in. And I think that is general feedback I would give to all good internet companies and that is how they should think of life.


Siddhartha 10:51

And any change in consumer behavior that we are going to see post COVID which are currently working on or helping your companies prepare for those?


Pankaj 11:05

Yeah, look, I think first of all very uncertain time. So even if we will give advice to portfolio companies or other advice in general, I’m not sure if they are all the right advice. So with that caveat, I must say that in general, we feel that given that physical contact is a big issue related to this situation, anything which does not promote physical contact towards businesses will pick up after the lockdown. Online, of course, will be the big beneficiary of that or should be the big beneficiary of that segment. And in general, whether it’s essential items today or nonessential items tomorrow, all of them will be the beneficiary slash in advantages position going forward, if we expected adoption of consumer behavior or change of consumer behavior in two to three years, they will get accelerated by a few years and may even happen, let’s say in a year’s time from now.


Siddhartha 12:14

So coming back to the portfolio. What’s been the process to get such high-quality deals?


Pankaj 12:21

I think the process is fairly simple. Keep your head down, talk to a lot of companies. Make sure that you look at fundamental levers behind, the growth of the companies versus artificial levers, like using digital marketing to get scale. And wherever you find a good combination of great entrepreneurs, strong business models, large markets, and less competition, you try to make an investment in such companies.


Siddhartha 12:54

And how do you help your portfolio companies you know, with the scale of challenges, being a growth partner?


Pankaj 13:03

I think what is very important for us was to realize that as a partner, we should choose the areas where we can help our companies. Thankfully Bertelsmann has been in the venture capital business since early 2000. And so this was not our first funding that started in India. Bertelsmann runs funds in the US, China, Brazil, and India and now making investments in other parts of the globe. And together, we have more than 200 portfolio companies, and collectively probably about 20 plus years of work experience. And, of course, a fairly large venture capital Team. One thing that we knew from day one when we were starting, was that we cannot handle the company in every shape or form, and choosing the battles that we can fight was very important for us when it comes to value add. Can we provide value add in 50 directions? The answer is yes. But can we actually on the ground do it to our satisfaction? The answer is no. So from that perspective, our value add, we started focusing on three or four things so that we do them very well. First is, of course, talking about the growth strategy, and networks, which kind of goes without saying and spending a lot of time with entrepreneurs to help them think about life. Number two activity where we significantly help our companies is about HR and hiring when companies are in a growth stage, they have to hire a significantly large number of people that could if a team is about, let’s say, 100-150 people, by the time we invest in two to three years time, it goes to about 500-2000 people that’s a lot of hiring. And also culture goes for a toss and so on. So we started helping our companies think about some of these issues. Of course, we help a lot in sales and marketing as well. But if you were to ask us, or ask our entrepreneurs, what is the biggest value add that Bertelsmann or any partner or team member from Bertelsmann has provided, I would say, and this came to us as a very pleasant surprise, and we fundamentally believe in it. It’s the camaraderie as well as companionship that we can give our entrepreneurs, by being there for them and talking to them in the middle of the night as far as business is concerned. Entrepreneurship is a very lonely journey. And within that, if you can make some friends and you can talk to each other in a very informal fashion, so that any inhibition or difficult situation that the entrepreneurs facing, you’re able to talk out as friends, that I think would be the biggest value add that any VC could provide.


Siddhartha 15:55

And how do you use your global presence to achieve portfolio business objectives?


Pankaj 16:01

Look, I think, first of all, each of us is empowered as well as incentivized on a local geography basis. So, we make sure that our portfolio companies in India would continue to do the best and we are hundred percent aligned with them. Number two, the good thing about Bertelsmann is the global network and whether it’s talking about brainstorming with other portfolio companies or learning from for example, what is happening with COVID situation in China and relaying those action points as well as positives and negatives to our entrepreneurs in India. I think we do all of that.


Siddhartha 16:42

And Bertelsmann own four VC funds in Brazil, US, China and India. How do you see the next 10 years of the Indian market as compared to the other markets in which you are in?


Pankaj 16:53

So, I think the Indian market, thankfully is following the China market. I would say, we have some similarities to the China market. And we have some similarities to the US market. And then there are certain features which are very unique to the country. So from that perspective, it’s kind of a mixed match of various markets with its own flavor also added to it. So from that perspective, I think if I were to look at the Indian market in isolation, I would feel quite excited to be here. We are long term investors as well as operators. And we think that we have made a fundamental commitment to the country as well as the ecosystem. And we do hope that the next not only 10 years, but 20 or 30 years are very strong for India, as well as our businesses in the country.


Siddhartha 18:35

And could you share some insights about the average ticket size you come in? And what is your sweet spot for your valuations?


Pankaj 18:50

Look, I think it keeps changing and depends on deal to deal. Our typical cheque size would be let’s say five to $15 million, $10 million been average check size in the first investment. Of course, we continue doing pro-rata and Super pro-rata in great companies or strong companies, and our total exposure to the company can be anywhere between 20 to $40 million in the lifetime of the company. Having said that, we obviously think about ownership and we would like to have double-digit ownership preferably 20% ownership in a company to start with, so that would be either exit at 20 or 15 or 12, type percentage numbers.


Siddhartha 19:38

Pankaj, what are the major focus areas for Bertelsmann to invest in the coming years?


Pankaj 19:45

So, that’s a very good question. And to be honest, when we started the VC fund, I would have a laundry list of sectors that I would get excited by, and then I would go there for the next six months and invest in very different sectors. I think the job of figuring out the sectors and opportunities should be with entrepreneurs. And our job as VC should be to find those entrepreneurs who are quite excited about solving these problems and invest behind them. So from that perspective, I think I’ve been now very open-minded without having some specific sectors in mind.


Siddhartha 20:36

and what is the typical valuation and ownership you look at during the investigation with the process?


Pankaj 21:00

The ownership I just talked about, and that would kind of give you an implied valuation of anywhere between 30 to $100 billion, depending on the deal and how much are they raising and so on.


Siddhartha 21:11

Pankaj, coming on to a personal size of yours, which are the habits you follow which attribute to your success?


Pankaj 21:21

Well, I can tell you that I’m a fairly organized person. For me, my life revolves around my calendar. If there’s something on my calendar, then I consider it done. So, right from my professional as well as my personal work, including, for example, going to the gym or even eating lunch, everything goes into my calendar. So from that perspective, it’s my calendar that runs my life. And that kind of helps me being extremely efficient. The second thing I would love to do and I really do is I ended up kind of mixing work and pleasure when even when we are working when we are in a very informal environment, with entrepreneurs, with my team and so on. And that does not let me get fatigued as much as I otherwise would be if I would be in a very formal setting that would obviously mean casual dressing, that would obviously mean having informal conversations. Having furniture in the office would be a lot more casual in nature and so on. And I think that kind of helps you have a very relaxed mood, wherein you’re able to take tough decisions relatively easily. And on top of that, making sure that you’re able to not get too fatigued, even if you’ve had long hours in the office or at the time at home. Lastly, of course, you know, finding time to spend time with family that is very important and playing sports and pursuing some hobbies like reading some good books. I definitely try to indulge that over the weekend. And actually, with that, I love to play Badminton. And that is where the Bertelsmann Badminton championship was also born, where we do get a lot of venture capital firms and the partners to come together with us and play the sport. And we do a second edition with our portfolio companies. So from that perspective, you know, we end up kind of mixing a lot of concepts between the personal slash casual work, as well as professional slash formal work. And I see that that kind of brings in a lot of excitement in the work that we’re doing.


Siddhartha 23:41

And can you share the top habits and the mindset among the most successful Bertelsmann portfolio entrepreneurs, what are your key learnings from them? Any candid conversation with any new entrepreneur joining Bertelsmann’s portfolio in a late-night chat over drinks?


Pankaj 24:01

Look, I personally think that a lot of entrepreneurs have brought a significant amount of skill set and value to even us as entrepreneurs, as managers as well as human beings. So first of all, I can tell you without fail, all the entrepreneurs or partners, we’ve had our fantastic human beings and we would love to kind of go out for a drink with them or this entire question that people ask us, will you be happy if you’re on a deserted island with one of your entrepreneurs, I think without fail, I can tell you that we will, at least I will personally be quite excited to be with any of our entrepreneurs happily, in a deserted island, just by virtue of how strong and good people they are and so much that we learn from them. Having said that, some of the good habits that we have seen successful entrepreneurs implement in the business, not on the personal side, are of course ability to think far and deep. I think that’s a very critical point. And making sure that entrepreneurs have an ability to see not to, you know, one or two years further out, but probably 10 to 15 years further out, having that vision, and then using that vision to create deep capabilities within the organization is, in my mind, a recipe of how successful and sustainable businesses are build which lasts a long time. And I think that I would say would be one such skill set slash ability that some of our entrepreneurs or most entrepreneurs bring to the table.


Siddhartha 25:37

And what do you think in your observation, are those qualities you know, for the entrepreneurs because fundraising is measured as one part of success, those were able to fundraise aggressively and subsequently over a large period of time?


Pankaj 25:53

We don’t like that concept too much. To be honest. There are business models where you need a lot more funding and for that, disconcert would be good. But if you were to ask any venture capitalist, what would his dream be, his dream would be to invest in a company that takes a minimum amount of capital becomes profitable and becomes extremely valuable as well as. So if you tell me that I have an option to back an entrepreneur who can build an average business, but with the ability to raise a lot of capital, or back an entrepreneur, who raises very little capital, but can run the business efficiently that he can do wonders with that little bit of capital, guess which one will you choose? The second.


Siddhartha 26:38

Any examples of the second category which you would like to share?


Pankaj 26:43

Yeah, you know, so a few companies on ours but the one that kind of stands out is Eruditus, which is a company being run by entrepreneur Chaitanya Kalipatnapu and Ashwin Damera now and both entrepreneurs have built a fantastic company with very little capital and other people in a portfolio, which is used by little capital to build a great business is Shiprocket. And to be honest, the list continuous not that these are the two companies, even Rupeek as a company in our portfolios raised less capital to build value till now, Licious would be another example. So I actually feel like that idea and most of the entrepreneurs would fit that bill versus finding entrepreneurs or business models which are cash guzzling. We ideally don’t like those.


Siddhartha 27:29

And what kind of exits you’re usually looking at, because if you’re mentioning that, you know, the kind of entrepreneurs you like, right? The ideal funding round should stop at you and their next goal should be to become profitable?


Pankaj 27:45

I said that we like entrepreneurs who are very efficient with capital. That doesn’t mean that our round has to be the last round of capital. What that means is that their business model is the one which does not take too much capital, even if there are two or three rounds of capital after us, it should be growth capital to tap into other adjacent categories or to build their business forward. But if things get too really, really bad situation like COVID, some of the business models can break even relatively faster with less capital. And having that optionality in the business model, as well as the DNA of the founder will make sure that your success rate of companies would be very high. And very early in the podcast, you asked me, How do you get so many good companies, these are good companies because they know how to dial-up and dial down expenditure by virtue of the circumstances in front of them, the opportunities in front of them and the capital available in front of them. And being agile in that fashion is probably one of the biggest success factors that most of the entrepreneurs have as we build these businesses.


Siddhartha 28:57

But for example, looking at a model like Treebo, Siddhartha and his team have built a model very frugally. How were you able because the business model and the market look very large? How are you able to spot that agility early on when you and the entrepreneur are dating before the investment is made?


Pankaj 29:23

Yeah, I think one of the things that we don’t like to do is don’t invest in businesses that have very little profit margins. Because as more competition comes in, and let’s say it’s a category where the profit margin is either a single digit or even as little as three to 5%. Then in order to build a lot of profit at the bottom end, you will need an extremely large volume and until and unless the business is as strong as let’s say Flipkart and otherwise and Amazon you will not end up winning that game, which is why a lot of these businesses are winner take most businesses. However, in most of my businesses which we have invested, the gross margins would be in double-digit, sometimes even in 30-40 percentage points, because that is how the structure of the market is. We like those businesses, because from that business for every hundred dollars of revenue, and the company will get at least 30 to 40% of that will flow down to a gross profit level, which means there is significant room to become profitable with less capital. And if they see continue to see adjacent opportunities or opportunities for the core product, they can continue growing, but these are definitely businesses that will become a lot more profitable, much faster than businesses that would have single-digit cost margin characteristics.


Siddhartha 30:50

Got it. Pankaj, any final message for the entrepreneurs? I know it’s a generic one, but entrepreneurs in their first few rounds dealing with COVID crisis, surviving and keeping themselves and their team mentally healthy as this is the most challenging situation I think entrepreneurs of this generation are facing.


Pankaj 31:18

Yes. First of all, let me start by saying that while I would love to give you all advice, I am not in your shoes and hence, probably I can’t even comprehend how difficult it is in your shoes, but I can try and imagine that. With that in mind, I would say the best thing in your pocket, of course, is cash and cash runway. You don’t know how long the crisis will last, you don’t know how the recovery will be. And hence having at best 18 to 24 months runway is needed in the business at this point. If you think that there are ways in which you can cut your costs, delay some amount of expenditure, and even grow less, that is absolutely fine. But create that runway. That’s very important. And that’s point number one. Point two for me would be to make sure that you go back to the drawing board and do what you do best, which is innovate. You know, use this downtime to create the most innovative solutions that you can do or think of for your business at the end of the day. Challenging situations leads to innovation. And we have seen that and heard various entrepreneurs do that on a proactive basis. So this is that time, innovate as much as you can. And lastly, if you are a larger startup, use this time to fix your costs. have a very little opportunity that you get when you are running very fast to achieve top lines to fix your cost base, this is a time when you don’t have to worry about the top line. So, fix your cost base renegotiate your contracts if you need to. And make sure that you know you come out of the situation with a very strong financial architecture. And lastly, please be positive, please be safe. Please spend time with your family. All sustainable long term businesses which last for 40 50 60 years. Bertelsmann has lasted for 186 years, is built with the mindset that you will be running on a marathon for at least 10 to 15 years. within that timeframe. If three-four tough months come, then it is bliss in that entire journey. Please use that mindset to create your businesses. And once you’re successful, and you’re sitting in the 15th year of your journey in the startup, you will positively remember this time from a business perspective. And at a time that gave you a lot of strength, a lot of clarity, and the best innovation happened at this time. So with that positive note, I wish all the entrepreneurs The Best of luck to build a strong and successful company.


Siddhartha 34:15

Thank you so much Pankaj, it was wonderful to have you on the 100 x Entrepreneur podcast.


Pankaj 34:20

It’s a pleasure to Siddhartha. Thank you for having me here.


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