Consumer Services Spell Unique Returns for Indian VCs

[media-credit name="Snigdha Sengupta" align="alignnone" width="150"][/media-credit]Kanwaljit Singh started Bangalore and New Delhi based venture capital firm Helion Venture Partners with Ashish Gupta and Sanjeev Aggarwal in April 2006. The firm has raised $350 million and invested in 21 companies till date. In 2008, Helion added consumr services businesses to its investment focus alongside technology-powered businesses. Singh, who earlier led Carlyle Group’s venture investments in India and held key operational roles at Intel Corporation and Hindustan Unilever for over two decades, talks about why consumer services are such a great venture opportunity in India.

Why Indian Venture Capitalists Are Investing in Consumer Businesses

By Kanwaljit Singh

The consumer services market, which we at Helion see as a key area of focus, is a very interesting opportunity that could potentially translate into unique returns for venture capital in India. There are a few reasons that make this market compelling for investors.

To begin with, there are several business models or opportunities that are large and growing and yet, do not have dominant players. For instance, sectors such as retail, education and healthcare are turning out to be very interesting.

Second, there is a very interesting dynamic to these businesses in terms of their capital efficiency. For venture capital investors, capital efficiency is an important benchmark. This implies that such investors are interested in businesses that require smaller investments, create proof-of-concept and start self-generating some cash. Typically, venture capitalists don’t see themselves playing effectively in areas such as hospitals (healthcare) or large format hypermarkets (retail). But, if you take a company like YLG (R&R Salons), which operates in the specialised personal care space, it has the qualities of a niche business, and is therefore unique. At the same time, it’s a highly scalable opportunity and still very capital efficient.

The differentiation in businesses like YLG and HummingBird (service apartments chain) comes from execution, processes and training. That immediately creates entry barriers and gives the business some protection from a large player entering the market and throwing in big money. As investors, we have an important role to play in bringing in the financial and operational discipline required to build those processes. The first mover advantage, combined with the capital efficient nature of the business and a potentially large but fragmented market make such consumer businesses very attractive for venture capitalists.

Technology remains on the radar

This is not to say that the consumer services theme does not work for the technology sector as well. There are however some key differences with the more developed markets and it is not fair to compare venture investing in India to ‘US Silicon Valley style’ venture investing. In the last 25 years, most of the big returns in the Valley have come from technology investments in intellectual property and innovation on the enterprise side. Think about companies such as Intel, Cisco Systems and Sun Microsystems. The shift to investing on the consumer side of technology has happened with the Internet in the last decade or so.

In India, that has not happened, because the dynamics are different. It is a much slower market because of factors such as infrastructure constraints and the consumer’s aversion to risk. In the US, the real monetisation of the Internet happened because advertisers participated in a big way. In India, advertisers still don’t see the Internet as a viable and effective medium. The US also saw the creation of a large ecommerce opportunity. Here there are still major constraints with respect to payment instruments and risk perceptions. So, the range and depth of technology investing in India is going to be relatively shallower than in the Valley, at least for now.

The solution, therefore, seems to be that – for the time being, an Indian venture capitalist can decide to do a few, select deals in the technology sector. He will have to be very selective in choosing the right companies and work with them over the next 5-7 years. At the same time, he can also expand his horizon and look at other areas, such as consumer services and domestic demand. I don’t think venture capitalists have abandoned or even claim to have abandoned the technology space. It is certainly not the case with us at Helion.

Early days in the learning curve

What is happening in India now, is partly a discovery phase for most venture capitalists. Nobody has really seen this market before and so everybody jumped on to the bandwagon based on global benchmarks. We are such a unique geography that one has to understand it and adapt to it in a specific manner. Just believing that it happened somewhere else and will happen in India does not work. You have to go back to fundamentals of why a business will succeed. The reason we believe that consumer services is more interesting, is because, we already have the numbers to play the scale game.

The trick to those numbers is to pick businesses that are relevant to the consumer. There is no case for blindly copying what has worked elsewhere. If you must copy, adapt or start from the ground up. For instance, MakeMyTrip has adapted very well because they have call centres and local offices in 20 cities. Clearly, this is not the Expedia model. Then there is a JiGrahak where the model has no global parallels. They went bottom up with what will work in India.

One learning (for us at Helion) has been that there is a long gestation and learning cycle. It can take 6-10 years for an investment to yield results. Companies like Naukri (Info Edge India), OnMobile and Educomp Solutions took over a decade to hit the high notes. Venture capitalists, therefore, need to have the appetite to wait 7-8 years before an investment pays off. The same goes for the entrepreneur. Along the way, the business model will get corrected, even as there will be critical learnings – and that is how those 20x returns will come. Both have to be willing to go through this learning curve.