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India-China-US: Byte back

This was a 2,500-word feature for AVCJ focusing on rising Sino-India tensions and their impact on the Indian venture capital and internet technology ecosystem.

Historically a neutral power, India appears to be siding with the US in a multi-faceted war with China. This could have far-reaching consequences for VC investors and the technology ecosystem

Over the decades, Indian foreign policy has espoused a policy of non-alignment in international affairs across administrations. Prime Minister Narendra Modi has applied this in practice as he regularly seeks to establish a friendly relationship with world leaders of every ilk. Ten months back, Modi invited Chinese President Xi Jinping to an informal two-day summit just weeks after visiting US President Donald Trump in Houston.

What started out as a dispute on the parity of international trade flows between the US and China, however, has now pulled India into the dogfight not necessarily by choice. A high-altitude clash in June at a disputed area along the India-China border that led to the death of 20 Indian soldiers shocked a nation already scarred from the economic shock of COVID-19. While Modi refrained from directly criticizing Xi – he initially claimed China had not encroached on Indian soil much to the displeasure of his detractors – the incident forced Indian policymakers to abandon their friendly outlook on China.

Clearly outmatched on the military front, India took an unexpected snipe at Chinese internet technology by banning 59 apps owned by Chinese companies, most notably TikTok, citing data security concerns. It has inspired similar measures in the US. “It was a great way to apply pressure in a space that matters to the Chinese investor and technology community given that India is a prominent marketplace for products and a promising investment destination,” says Amit Narayan, an India-based partner at Control Risks, a specialist global risk consultancy. “I have no doubt that the intent to put pressure on China will continue for a while.”

Already upset by China’s close economic relationship with Pakistan, which many Indians claim offers base to terrorists, and harboring lingering resentment from a 1962 war that India claims was unprovoked, Sinophobia has come to the fore. There have been increased bureaucratic hurdles, cancellations of government tenders, a review of Chinese investments in the country, queries seeking to discover potential censorship of anti-Chinese content by apps, and higher tariffs on a host of imports from China.

The Indian government has also launched “Aatmanirbhar” or “self-reliant India,” a rhetoric-laden yet premature import substitution campaign that seeks to wean the country off Chinese-made goods.

Friend, not foe

On the other hand, Indian venture capitalists have a more balanced attitude towards their Chinese peers. Apps owned by Chinese companies or those significantly backed by VC investors rarely conflict with their portfolio companies anyway. Instead, Chinese investors – financial and strategic – were seen as a welcome addition to India’s growing stable of capital providers. They were especially of use to cash-burning consumer internet players.

Moreover, support from a Chinese investor was regarded as a kind of validation, given that investor’s experience of an earlier start-up boom. Last year, Chinese parties took part in PE deals totaling $6.9 billion in India. They rarely sought significant stakes, aware as they were of the political sensitivities involved.

Back in April, a regulatory update requiring mandatory government approval of Chinese investments unexpectedly targeted them. The action was taken in response to criticism from an opposition politician for an innocuous public market deal by China’s central bank, with the government maintaining that Chinese investors can participate in the growth of India’s technology sector. They just have to abide by new rules. Chinese VCs and strategic investors have since gone quiet, worrying industry watchers.

“I don’t think Indian venture capital can sufficiently replace Chinese investment,” says Sanjeev Krishan, a partner at PwC. “It may open the door for start-ups to court Western investors but most of them favor mature businesses. They like to sprinkle their financial bullets.”

An Indian VC manager currently fundraising observes there is interest from investors in Europe and the Middle East but it is still too early to tell if they will join a roster of familiar names from North Asia and the US. Anyway, COVID-19 has created a climate of uncertainty, complicating decisions to change emerging markets allocations for most investors.

In the long run, however, investors anticipate that increased digitization of staid sectors and the  exponential growth in user activity witnessed by many start-ups in a country where it will take months for life to get back to normal means they will get capital if they have a clear use for it.

“Good companies never die of starvation, but they could die of indigestion,” comments Sanjay Swamy, a managing partner at Prime Ventures Partners. “Every market in India needs to be digitized – we have companies doing this for intercity trucking and gated communities.”

He believes the Indian government will also be more nuanced about its approach to Chinese  investment in time. Thresholds for deals that require government approval are likely to be clearly defined, while in many industries data security concerns are meaningless.

Jio politics?

The border conflict also occurred after India’s start-up ecosystem received a huge boost in the form of INR1.5 trillion ($20 billion) of capital commitments for Jio Platforms, the holding company for telecom and internet assets owned by Reliance Industries. Facebook and Google accounted for more than half of this, with global GPs and sovereign funds contributing the rest. In a matter of weeks, it created India’s largest start-up.

Some analysts speculate the deals might have been influenced by US foreign policy and the desire to position India as an ally. The US technology giants and private equity investors could be looking to grab a foothold before major decisions are announced that signal even closer collaboration between the two large democracies.

“India as a country can be some kind of a counterpoint to China in this part of the world,” says Nitish Poddar, a partner and national head of private equity at KPMG India. “India and the US have always enjoyed a good relationship whether it was a Republican or Democrat administration. If the US wants China to be in check and it doesn’t have friends in India, then it can’t grow its influence in Asia.”

Meanwhile, Sanjay Kukreja, a managing partner at ChrysCapital Partners, offers a more prosaic explanation: It was simply a case of investors looking to put capital to work in a large-ticket deal at a time when it was fast becoming clear that private equity deal-making would be muted in 2020.

Jio Platforms plans to further increase access to affordable internet by offering low-cost broadband and telecom services and developing apps that increase their appeal. It will also invest in creating a nationwide e-commerce network. There is an agreement with Google to manufacture low-cost smart phones as well. The goal is to bring 350 million Indians who still use basic phones without touchscreens into the modern internet era.

“A lot of this capital will help roll out internet infrastructure at the size and scale that will play out well for the country in the long term,” adds Kukreja. “There could be a blurring of the lines – the oldworld consumer will finally be reachable by digital companies.”

Like a rising tide that lifts all boats, it is assumed Jio Platforms will look to acquire many start-ups, facilitating exits for VC investors. The company has made no secret of its desire to create a powerful ecosystem of apps under the “MyJio” – Hindi for “My Life” – banner for first-time internet users that are usually subscribers of Jio, the telecom service.

Indian media reports indicate that Reliance Industries, the oil-to-retail parent of Jio Platforms, is also in talks with ByteDance to see if it can acquire TikTok’s Indian operations.

As Google’s $4.5 billion commitment to the company came out of a newly launched $10 billion India digitization fund, there are clearly a lot more checks waiting to be signed. Others could follow the trailblazers.

“With that much capital coming in, every large pocket of capital in the US who hadn’t thought about India will stand up and take notice,” says one local growth stage investor. “They will say,’ ‘There’s something happening in India… why am I not spending time there?’”

Muted outlook

Regardless of any geopolitical agendas, these investments are contingent on monetization, specifically the ability and willingness of Indian consumers to pay for services. Much rests on how the country deals with COVID-19.

As of mid-August, total infections since the start of the pandemic exceeded 2.7 million – behind only the US and Brazil – with 52,000 fatalities. City streets usually characterized by boisterous activity have turned eerily silent in recent months. Businesses remain shuttered while public transport has ground to a halt as strict quarantine measures across states deter what little inter-state travel is being attempted.

People who can work from home continue to do so. Those who are required on-site are taking necessary precautions. Meanwhile, massive layoffs in the informal sector and the return of thousands of migrant workers from overseas imply millions of Indians will be unemployed for the coming months. Everyone agrees that the epidemic has severely dented consumer confidence for the near term.

However, a closer look at the underlying numbers offers some hope. India’s population is larger than that of the US and Brazil, while its infrastructure is less substantial, but the mortality rate is 13 times lower. “The fatality rate has been very, very low,” says Sateesh Andra, a managing director at Endiya Partners, a health tech-focused VC firm. “Nobody knows if it’s because of our genes or because of a particular mutation of the virus. The worst appears to be behind us.”

Exhorted by Modi to live with the virus, India is getting back to work. The recovery is happening at different paces at different locations based on the intensity of local outbreaks, but predictions of catastrophe have largely missed the mark.

“We are all reconciled to India’s economy taking a massive hit,” says Control Risks’ Narayanan. “It could be as much as a 10% decline in the real economy. At the same time, India’s digital economy will grow faster and sooner simply because so much of consumption is moving online.”

Given the formal working class that usually resides in urban areas is a key consumer group, effective remote working measures have ensured they remain financially healthy. As similar trends play out around the world, it has created opportunities for Indian IT services companies to develop their enterprise offerings.

“India never used to have large software-as-a-service (SaaS) start-ups,” says Atul Mehra, a partner at EY India. “Postman [a collaboration platform for API developers] achieved a $2 billion valuation recently, joining Freshworks as a unicorn. There is also healthy investment in Indian data infrastructure from private equity and technology giants alike.”

Hardware dreams

It is too early to say whether the country can add hardware to its software competencies – a clear objective under the “self-reliant India” agenda – despite a general move among multinationals to reshore supply chains that are heavily reliant on China.

The government’s stated desire for a nuts-and-bolts technology sector has been backed up by various policy initiatives, including the relaxation of labor regulations and production-linked subsidies, However, a plethora of problems that have long continued to deter global corporations.

“There is the pentagram of Indian issues – land, labor, capital, infrastructure and taxes,” says Narayanan of Control Risks. “Add to that sector-specific regulation, growing data localization requirements and state-level risk.”

Nevertheless, supply chain diversification efforts could see India win a second chance with multinationals. The country lost out on the first wave – triggered by rising labor costs in China – because the likes of Vietnam were deemed to have a more stable policy environment. Private equity firms are also tracking evolving geopolitical risks and considering the implications for their portfolio companies.

“China is not a final market for our portfolio companies, it’s a source of inputs,” says ChrysCapital’s Kukreja. “I think there will be people who will capitalize on the whole import substitution goal and it’s an opportunity for Indian entrepreneurs.”

Conversations have begun but large corporations will not rush into decisions on manufacturing destinations. At present, India does not have the same purchasing power as China to support expansion plans, but time might be on its side.

“Foxconn has already started manufacturing the latest Apple models in India,” points out KPMG’s Poddar. “There are at least 10 different Japanese companies talking to us about setting up sourcing arrangements in India, either organically or inorganically. It’s happening but the impact will only really be felt over a 5-10-year period because these are long-term strategic investors.”

Exit angst

Ultimately, for investors assessing the potential of India’s technology sector – as an LP, GP or a strategic player with a balance sheet money – exits trump all other concerns. Indian companies can make smart phones and develop software that works on them, and local  consumers might be willing buyers, but this commercial activity must crystalize into distributions.

An enduring problem for Indian start-ups is the lack of a reliable path to liquidity via public markets. Trade sales continue to dominate. “While the exit landscape has expanded and diversified significantly in recent years, the market has not been extensively tested yet for large exits, or for large PE-backed IPOs,” says Frank Su, head of Asia private equity at Canada Pension Plan Investment Board (CPPIB).

The industry drew succor from the recent $300 million all-cash acquisition of WhiteHat Jr, an 18-month-old online coding school, by local education player Byju’s, which facilitated exits for several VC investors. However, such deals are few and far between; all-stock acquisitions, which might offer no near-term liquidity event, are much more common.

Meanwhile, the prospect of IPOs on NASDAQ has long been mooted and this year came a little closer to fruition. The Securities & Exchange Board of India has signaled a willingness to explore the possibility of revising rules that currently require Indian companies to  complete a domestic listing before listing overseas.

“Rumors in the market indicate Jio Platforms could lead the way but the bar at NASDAQ is pretty high,” says one growth equity investor.  “A NASDAQ listing is for people who have private investors chasing them. Apart from Jio Platforms, I’m not sure if most Indian start-ups qualify.”

Jio Platforms has clearly captured the imagination of India across multiple vectors. Not only will its war-chest lead to significant acquisitions, there is a hope it could inspire a new generation of entrepreneurs to leverage a transformed internet landscape. “When you see such a massive level of investment, it will lead to state-of-the-art expertise and innovation coming to India,” says Prime Ventures’ Swamy.

And this is where the US-China angle swings back into view. It is claimed that Google decided to double down on India by investing in Jio because the country had proved itself as a testbed for technology solutions in emerging markets – Google Pay, formerly known as Tez, was first developed here.

“You can’t copy and paste what works in developed markets in India, but you can do the reverse,” Swamy adds. “Jio Platforms is unique but it’s not the only one. There are several diamonds in the rough out there.”

Putting Indian start-ups in a position where they can think about accessing developed markets, and build strategic relationships with large corporate partners, will likely require the return of Chinese capital. For that, relations must thaw between US, China and India.

An online version of the article can be found here. This article featured in the August 18 edition of the Asian Venture Capital Journal released a week before the annual AVCJ India Forum.

Capital Square Partners and Aegis/StarTek: A complimentary merger

This was a 2,000-word feature for AVCJ focusing on a Singapore-headquartered PE firm’s attempts to merge and find synergies between two companies in the world of customer care centers

Capital Square Partners’ acquisition of Indian business processing outsourcing (BPO) player Aegis ultimately helped two different companies find global relevance after a turbulent and disruptive decade

Three years ago, Sanjay Chakrabarty, a managing director at Capital Square Partners, was considering ways to restore Indian business processing (BPO) player Aegis to tis former glory. He opted for a reverse merger with a US-listed company – a tricky move but one that appears to have paid off.

At the start of the previous decade, Aegis – then a division of domestic oil-to-steel conglomerate Essar Group – operated 56 call centers in 13 countries. Mounting debt at the parent company level, however, resulted in the sale of Aegis’ operations in the US and the Philippines to Teleperformance, the France-headquartered industry leader.

Profit margins subsequently fell as rising competition and falling demand meant the key markets of Malaysia, Saudi Arabia and India failed to make up for the loss of the lucrative and higher revenue-generating US market. In 2017, Capital Square, a Singapore-based private equity firm, offered to take out Essar in full. It paid $270-300 million for the business and soon began positioning it as a suitable acquisition target for a US peer.

“Executing back-to-back acquisitions is not easy,” Chakrabarty says. “Doing a control transaction and merging two companies requires the ability to understand multiple dimensions of a company – its organizational culture, regulatory requirements, and market mechanics.”

Know your target
It helped that Capital Square had earlier experienced a similar process. A year earlier, working in conjunction with CX Partners, it completed a $420 million exit from Minacs Group, which was also the former division of an Indian conglomerate. The buyer was US-based BPO provider Convergys. As a result, the private equity firm built up an understanding of the US BPO landscape and it knew which companies were interested in M&A opportunities.

Capital Square identified StarTek, a Denver-headquartered business that traded on the New York Stock Exchange, as its buyer of choice. Prior to 2017, StarTek had posted losses for is straight years. Three of the four leading US telecom carriers were its customers, together accounting for over 50% of revenue. The rise of interactive voice response (IVR) solutions and customer care apps, however, meant call centers were becoming less popular. The proposed merger between T-Mobile and Sprint, the country’s third and fourth largest carriers, was set to further jeopardize the company’s future.

The challenge facing StarTek was easy to grasp but difficult to address: It needed to become more than a BPO provider to stay relevant to US clients.

Capital Square presented a vision – a merger that could lead to the eventual creation of a globally competitive brand – that appealed to the company’s majority shareholder. This led to StarTek acquiring Aegis in a cash-and-stock transaction with Capital Square taking a 55% interest in the new entity.

As the result of the merger, StarTek’s international operations have grown substantially. Telecom carriers now contribute less than two-fifths of revenue. Meanwhile, the company that used to be Aegis – now able to bill clients from the higher revenue generating markets in North America – has a more secure future. “Started brought the US and Philippines market presence [back for Aegis]. It also brought significant new growth opportunities in e-commerce. StarTek previously had a large customer engagement with a leading e-commerce player,” says Chakrabarty.

The numbers back up the investment thesis two years on. Before the merger, Aegis generated $400 million in annual revenue from 47 call centers in 10 countries. As part of Started, pro forma revenue for 2019 reached $657.9 million, with 49 call centers in 13 countries. In the most recent quarter, StarTek posted record gross quarterly profits of $27.6 million, chiefly due to the creation of a leaner unit. Headcount across the two companies have been reduced by 6,500.

The unification came at an appropriate time as well. Less than three months after the event, Teleperformance, which has 460 call centers globally, entered the Indian market by acquiring Intelenet from the Blackstone Group. In the same year, Concentrix acquired Convergys to create the second-biggest player in the US. In both their primary markets, StarTek and Aegis might have struggled had they continued on their own.

For the stakeholders of what used to be Aegis, the association with an entity listed on the New York Stock Exchange brings with it other tangible benefits such as a repetitional boost, a perception of improved transparency and a brand with a longer legacy.

Following the removal of the CEOs at both companies, Started initially brought in Lance Rosenzweig, Aegis’ former point man for the US, to lead the management team. Capital Square then recruited a CFO who had previously worked with them at Minacs and appointed Aparup Sengupta, an operating partner at the private equity firm, as chairman of the board. As CEO of Aegis in the first decade of the millennium, Sengupta is credited with turning the company into a globally competitive player.

After outlining the vision, Capital Square tasked Rosenzweig, and a management team comprising executives from both companies, with establishing global service delivery capabilities and global sales teams. The objective was to show clients that they were now being served by an improved operation that offered nearshore, onshore and offshore call center capabilities. StarTek now provides customer care services across time zones in Southeast Asia, South Asia, the Middle East and North America.

“There are inherent benefits to being a global partner. For example, StarTek primarily delivered services in Spanish and English. With Aegis, it is now capable of delivering services to customers in more than 20 different languages,” Chakrabarty says.

Global mandate
After making sure the right people were in charge in the US, Capital Square then turned its attention to the overseas operations. Rajiv Ahuja was duly hired as global COO of StarTek last year. Over a 40-year long career, Ahuja claims to have been part of 18 acquisitions. Integrating disparate international operations and settling nerves has become an all-too familiar task. It also helps that he’s familiar with the non-US operation having earlier built much of it himself at Aegis a decade back.

“I built and sold Aegis’ Philippine operation to Teleperformance. I was very familiar with half of the new company. I think I played an instrumental role in building what was Aegis [outside India],” he says.

While Ahuja was not at the company at the time of the merger, his assessment upon arrival was that Capital Square had opted for a mature and patient approach as the financial owner of two companies with very different cultural backgrounds. “Either you buy into the ‘big bang’ theory and you put together a team that is going to address the integration challenges across the three broad domains – people, process and technology – or you wait for the dust to settle,” he says. “When I talk to my global teams, a large amount of the insecurity that a workforce typically endures [post-merger] is not there”

Earlier in the year, Sengupta was promoted to CEO after Rosenzweig opted to leave. The GP had earlier agreed that Rosenzweig would only stay for an interim period after meeting ana agreed set of objectives. It was only towards the middle of 2019 that the two companies began operations under the unified StarTek brand, Ahuja says.

However, merely having a global presence may not be enough to safeguard StarTek’s future. Some bullish technology start-ups believe a post-call center world might not even involve a human picking up the phone. Skand Bhargava, a practice director at Everest Group, says clients are also critically evaluating service providers by looking at whether they offer digital solutions as well as call center capabilities. “Scale continues to be important in this industry to drive better margins and deliver economies of scale but it’s also about building adjacent capabilities,” he says.

In particular, many BPO firms are investing in digitalizing back-end operations by employing agent-assisting software solutions that improve analytics and visualization capabilities. If they can speed up the phone call experience for both the employee and the user alike, there are contracts to be won.

Purely focusing on “butts on seats” as the industry’s long-preferred metric is expected to go out of fashion. Ahuja states StarTek is aware of such trends, but he believes there will always be a need for effective human-centered customer service especially as newer industries emerge that can replace falling demand from telecom firms. The in-house view is that customer service will become a lot more technical, involving helping customers deal with problems such as interacting with apps or solving other complex issues beyond bill payments.

Investments in such capabilities can now be made given StarTek’s emergence as more than just a regional player. “With the capability of a much larger scaled organization, we can invest in newer areas such as digital [customer service] that is increasingly a requirement,” Chakrabarty says.

For now, though, Ahuja’s main task involves finalizing the global integration plans. To that end, StarTek appointed a new chief technology officer and global head of sales after Ahuja’s appointment.

With the coronavirus pandemic muting investor sentiment across markets, the call center operator’s stock does not have a positive outlook for the near term. As of March 30, StarTek’s shares closed at $4.05. On the day of the merger, it reached $6.81. Even if the stock were trading higher, Capital Square would not be tempted to sell, arguing that it is too early to be considering an exit. Owning a listed asset, though, does give the firm several options that private equity owners seldom obtain so early.

For the time being, the GP is focused on cost and market synergies that have yet to be fully realized. According to its 2019 annual report, StarTek earned $13.4 million per facility based on the pro forma revenue calculation that combines sales figures from Aegis and StarTek centers. This compares favorably to EUR11.6 million ($12.7 million) per facility earned by Teleperformance, but it’s lower than the Concentrix figure of $17.1 million.

Consolidation continues
Nevertheless, StarTek is in a favorable position in an industry where consolidation is expected to continue. With the company’s five largest call center competitors capturing less than 20% of the market, the pace of vertical mergers will quicken, Bhargava says. Later in the year, Synnex, the parent company of Concentrix, plans to list the business, which will bring back attention to the industry.

For Capital Square’s Chakrabarty, the back-to-back deals also demonstrate that Asian private equity firms can go beyond providing growth capital and execute complex transactions. Not only did Capital Square recognize the right deal-making opportunity early on, the GP formulated and carried out a multi-year plan by leveraging its experience, network and financial acumen. “Everybody talks about operational leverage but when you translate it, it really comes down to whether you are able to operate in a seamless fashion in multiple markets,” he says.

By doing so, Capital Square believes it has placed StarTek in a good position for the fourth decade of its existence. “There is opportunity for consolidation [in the BPO sector] and we have contributed to that consolidation,” Chakrabarty adds. “While it is a fragmented market, the number of companies that can do it on a global scale are not that many.”

Gobi Partners: Beyond the oasis

This was a 2,000-word feature for AVCJ focusing on China and Malaysia-headquartered venture capital firm Gobi Partners, a firm with an eighteen-year history

China’s Gobi Partners has grown from a four-person team to an 11-office franchise. The coming decade will test the VC firm’s aspiration to become a pan-Asian enterprise 

Thomas Tsao is a storehouse of memories. The only founding partner still actively involved at Gobi Partners, the affable American from Long Island remembers the 1997 Hong Kong handover, the tumult of the Asian financial crisis, the riots that toppled Indonesian dictator Suharto, and the experience of being quarantined in the US while trying to raise capital amid the SARS pandemic.

Back then, few foreign or local VC funds wanted to invest in China – a promising if somewhat risky investment destination that made more sense as part of a broader regional allocation. Launching Gobi in 2002 with two other partners, Tsao sought to help enterprising Chinese entrepreneurs, many of whom were new to the game.

“I remember taking some of our company founders to Sand Hill Road [in Silicon Valley] and they would put on their best outfits – ill-fitting suits worn with black leather shoes and white socks,” he recalls. “The first thing we did after raising money was get them to dress differently.”

Gobi could have been christened Malibu Partners. A sandy location was picked because the partners believed entrepreneurs are essential for the development of a technology ecosystem but hard to spot – much like silicon, a key component in semiconductor production, which is found in sand particles.

Initial breakthrough

The timing was bad for that debut fund; it launched on the day the Iraq war began. Moreover, LPs that had been jolted by the collapse of the US dotcom bubble were wary of a repeat experience in China. It took Gobi three years to close Gobi Hi-Tech Fund at RMB425 million ($60 million). “We also went in when nobody thought Chinese entrepreneurs could be innovators. A lot of people from the US or Europe were dismissive of whatever came out of China. They thought Chinese companies were only good at copying,” Tsao says.

Nevertheless, anticipating improvements in internet infrastructure, Gobi bet on digital start-ups. Digital Media Group (DMG), a video equipment and content provider for urban subway networks, was an early investee. It won plaudits from commuters and commercial partners for a 40-episode series of two-minute shorts featuring pop star Huang Xiao Ming. Watched by a captive commuter audience in an era before smart phones, DMG was advertising in a way no one had done before. A $125 million trade sale exit came in 2009.

Four successor funds have continued to identify and support local ventures, many of which are situated outside the main start-up hub of Beijing. These include workforce collaboration app Teambition, online travel platform Tuniu, second-hand car trading site Chezhibao and Australian cross-border payments service Airwallex, which counts two founders of Chinese heritage. Teambition founder Junyuan Qi, then an undergraduate, recalls being sought out by a Gobi partner who was an avid user of the beta version.

Fund II, the firm’s first US dollar-denominated pool of capital, which closed at $150 million in 2008, failed to meet expectations due to the global financial crisis. Gobi switched back to renminbi for its next China vehicle. A final close of RMB350 million came in 2012.

Gobi’s first foray into Southeast Asia was essentially a response to this difficult fundraising environment. The Singapore government was willing to seed professional GPs as part of efforts to jumpstart its venture capital ecosystem, so the team seized on the opportunity. In 2010, Singapore’s Media Development Authority appointed Gobi manager of a S$100 million fund. Kay-Mok Ku, a local entrepreneur-turned-investment executive at media conglomerate MediaCorp, was recruited to manage investments in the region.

Ku concedes Gobi was a bit too early because smart phone and internet penetration were not at the same level as China. Moreover, the mandate to invest only in digital media companies meant opportunities in e-commerce and mobility could not be pursued, while attracting institutional LPs was difficult. Few were active in Southeast Asia VC at the time and Gobi had no track record in the region.

“It was a bit frustrating in the early 2010s because the VC ecosystem just wasn’t that ready, the deal flow just wasn’t there,” says Ku. “With the more recent funds, we have seen a turnaround. It’s a confluence of factors – the market is ready and start-ups have cross-border ambitions.”

Five years later after the Singapore fund launched, Tsao relocated to Kuala Lumpur at the behest of Malaysia Venture Capital Management (MAVCAP), the country’s leading fund-of-funds, which sought a similar kind of impetus. MAVCAP supported Gobi’s initial seed fund and now anchors the firm’s $200 million growth fund – the 2017 Gobi Meranti ASEAN Growth Fund.

It represents a departure from the early-stage remit that Gobi previously fiercely protected, but there is a recognition internally of the need to experiment in different segments. Ku observes that there is increasing competition for seed and early-stage deals from local and regional peers.

Change in China

With Tsao concentrating on Southeast Asia, Michael Zhu stepped up as managing partner responsible for China. He had already been with the firm for more than a decade, having been recruited fresh out of university in 2003. “I remember interviewing him and his QQ [instant messaging] name funnily was ‘Michael Bryant’ [like the late NBA star Kobe Bryant],” Tsao recalls. “I asked him, ‘How good are you?’ He said he was the best at his college. I used to play back then and… yeah, he definitely was.”

Zhu is supported by two partners, Wing Hu and Chibo Tang. The trio came to the fore as Don Jiang, Wai Kit Lau and Ken Xu scaled back their involvement due to retirement and commitments related to family office management. Tang actually left the firm once only to return; he observes there is room for career growth at Gobi that he would not likely find in a consulting role with the likes of McKinsey & Company.

China remains a crucial part of the overall business, accounting for more than 70% of its $1.1 billion in assets under management. Gobi uses renminbi-denominated funds for early-stage opportunities and brings in US dollar vehicles for larger-ticket transactions. In 2015, the team closed its largest local currency fund at RMB600 million. A majority of Gobi Fund III’s $150 million corpus went into Chinese start-ups. Zhu is now raising Gobi’s latest China-only US dollar and renminbi vehicles.

As for investment activity in the country, the firm is moving towards enterprise-facing start-ups. “From 2011 onwards, we saw a bubble in the consumer space,” Zhu says.

Considerable effort is devoted to identifying and realizing synergies between portfolio companies in China and Southeast Asia. Gobi’s initial expansion was in part driven by a recognition that established trends in one market were beginning to play out in the other. Ironically, Chinese start- ups once chided for being copycats can now help Southeast Asian counterparts “copy from China.”

“A lot of start-ups say in their fundraising statements that they would like to expand quickly but it’s not easy,” states Eric Cheng, co-founder of Malaysian used car-trading platform Carsome. “In China, some of the Gobi companies expanded to 50 cities within three months. We learned from them how to do it in a sustainable way.” Gobi facilitated exchanges between Cheng and Chezhibao founder Lee Huang and the two companies ended up trading notes on pricing strategies.

Christina Suriadjaja, founder of Indonesian property management platform Travelio, adds that she learned much from Tuniu during meetings at Gobi’s annual general meeting in Nanjing in 2016. Back then, the idea for her company had not fully materialized, so Gobi’s Jiang assigned homework – reading up on several Chinese hospitality start-ups.

However, Suriadjaja adds that Chinese start-ups operate in a more aggressive manner. For instance, Tuniu targeted rapid growth in second-tier cities with a property management arm snapping up assets. Travelio is growing at a slower pace due to lower disposable incomes in Indonesia and does not anticipate much demand in tier two cities. “If I did what Tuniu did, I don’t think we would be alive right now,” she says. “It was definitely helpful, but execution ultimately depends on the entrepreneur and their specific situation.”

Gobi is not alone in pursing China-Southeast Asia synergies. Larger China-focused players such as Qiming Venture Partners and GGV Capital have opened offices in Singapore, while numerous other firms operate on a fly in-fly out basis. According to AVCJ Research, China oriented venture capital investors participated in 35 deals in Southeast Asia last year, up from eight in 2015.

Gobi argues that it stands out from the pack by virtue of its 11-office network and track record of exits in the region. “They enter early and quite often exit through a trade sale. They don’t try to earn the maximum they can but deliver a stable and satisfying return,” says Liyong Zhou, a general manager in the VC unit under Shanghai STVC Group, one of China’s earliest state-backed LPs for venture funds. In Southeast Asia, Gobi claims to have achieved seven exits.

Gobi has leveraged its local presence in Indonesia, the Philippines, Pakistan, and Malaysia to raise single-country funds that scoop up seed-stage deals. However, the firm’s ambitions do not stop there. Gobi wants to use its Malaysia base as a potential conduit within the Islamic world, while the Tokyo team makes overtures to Japanese companies seeking partnerships in Southeast Asia. There are plans to open in Riyadh in Saudi Arabia as well.

Working with multinational corporates has long been part of Gobi’s DNA. LPs in Fund I included IBM, NTT DoCoMo, McGraw-Hill, and Disney’s Steamboat Ventures. In 2015, the firm brokered a deal with the Alibaba Foundation to manage the HK$1 billion Alibaba Hong Kong Entrepreneurs Fund.

The evergreen vehicle arose out of a desire to create more job opportunities for young people in the city. Aspiring virtual bank WeLab, logistics platform Gogovan, e-commerce enabler Shopline, and cooking-based lifestyle platform DayDayCook are among those that have since received funding. “When I moved to Hong Kong four years ago, all my friends doubted whether there could be entrepreneurial projects in Hong Kong. Four years later, seven to eight unicorns have emerged,” says Gobi’s Tang.

Jack of all trades?

However, there is a danger that all this disparate and decentralized investment activity could stretch the VC firm thin. Whenever GPs push aggressively into new geographies and strategies, it always raises concerns internal culture will fray, investment discipline will lapse, and teams will fracture. In addition, efforts to drive synergies between these various moving parts – the very reason for expansion – could flounder.

Like most of its peers, Gobi has seen team members spinout. Two years ago, Victor Chua, a vice president based in Malaysia, departed to form Vynn Capital, a venture capital firm that claims to pursue technology opportunities at the nexus of travel, property, consumer goods, and female economics.

These industry dynamics put pressure on Gobi’s leadership to maintain cohesion, but they believe the firm can become that rare early-stage Asian GP with a multi-regional presence. “We may have started in China, but I don’t think we are a Chinese VC firm,” says Singapore-based Ku. “I think there’s a shot at becoming a homegrown pan-Asian VC fund.”

To that end, Gobi has invested heavily in the last two years to expand headcount in Southeast Asia, including female partners and professionals focused on environment, social and governance (ESG) issues. For example, Thailand-based former entrepreneur Shannon Kalayanamitr was recruited as a venture partner. Several hires reflect the firm’s intent to invest more in healthcare, agricultural technology and advanced manufacturing.

In the end, Tsao believes it will all work out because Gobi has a clear long-term vision that is almost impact-oriented. “We believe great entrepreneurial talent is evenly distributed around the world but access to opportunity is not,” he says. “We don’t operate just to make institutional LPs happy. We do things that we think will create the value that needs to be created.”

India technology: Elephant in the room

This was a 2,000-word feature for AVCJ that centered on Jio Platforms, India’s upcoming ‘super app’ with the article focusing on the non-app aspect of the project that was oft overlooked by international media.

India’s Jio Platforms has received substantial private equity backing as it looks to build a digital platform that is all things to all people, from cable to retail. Will it succeed? 

From Facebook to General Atlantic to KKR to Vista Equity Partners to Silver Lake, international investors are falling over themselves to back Jio Platforms. The company – established five months ago by India’s Reliance Industries as a holding entity for a nascent app ecosystem as well as Jio Telecom, the country’s leading mobile carrier – has raised $8.8 billion in a matter of weeks. Saudi Arabia’s Public Investment Fund will reportedly be next.

The potential fusion of online and offline technology infrastructure assets under the Reliance banner is being closely observed by countless interested parties, including India’s venture capital community. “We clearly have another elephant in the room,” says Gopal Jain, founder of Gaja Capital. “People have spent a lot of time trying to guess Amazon’s ambitions. Now they will spend just as much time trying to guess Reliance’s ambitions.”

This guessing game will likely be protracted. It is hard to fully appreciate the potential of Jio Platforms at this juncture because the company appears set engaging in battles on multiple fronts and the first skirmishes have barely begun.

“Jio Platforms is a truly homegrown Indian next generation technology leader. It’s impressive because, around the world, there are many companies offering wireless connectivity, broadband services, entertainment and developing various internet apps. Yet Jio Platforms is many of those things put in one,” says Rupen Jhaveri, a managing director on KKR’s private equity team in India. “Jio’s aspiration is to provide a unique and all-round digital experience via its super app – MyJio – and they want to help small-and-medium enterprises [SMEs] next.”

For any company seeking to interact with India’s internet users, there are several touchpoints from e-commerce to content consumption. Jio wants to cover them all, leveraging the brand recognition and subscriber base of Jio Telecom. In four years, the mobile carrier has brought 387.5 million Indians online, tempting them away from competitors with low prices.

On the box

Broadband internet services are a longstanding part of the portfolio; Jio Telecom was known as Infotel Broadband Services. Television, a mainstay of every Indian household, was added last year with the acquisition of a majority stake in two of the country’s largest cable operators. They are now part of the plans for JioFiber, a low-cost high-speed broadband network, also launched last year.

These services will be bundled together with the over-the-top (OTT) assets – news, entertainment, streaming – provided by partners to create a one-stop solution for using the internet, watching television, and streaming content. It throws up the prospect of affordable services for consumers who are currently priced out of the market as well as greater viability for businesses that rely on high-bandwidth internet access.

At present, DishTV is the market leader for OTT services with 23 million subscribers nationwide. ACT Broadband is the largest broadband internet service provider with 1.5 million customers. Both should be wary of JioFiber. Earlier this month, the company announced it had added Amazon Prime Video, India’s third biggest video streaming platform, to the collection of services users can access through their televisions.

However, it will take time for cable and internet users to migrate. According to the Telecom Authority of India, JioFiber had just 840,000 subscribers at the start of the year. Its broadband network does not have the widest coverage among internet service providers. “Wired broadband had its appeal in the past mainly because data plans were very limited. The success of Jio’s wireless telecom business will not let the broadband business reach its potential so soon,” says a Hyderabad-based analyst at credit rating agency CRISIL. “Most people do everything on their smart phones where they can get many free services anyway.”

Should it succeed, however, in becoming the main internet gateway for devices larger than a smart phone – personal computing devices are not commonly found in Indian homes – then other companies will have to negotiate with Jio Platforms for user access.

For all these ambitions, it is the planned overhaul of India’s retail network that has attracted most attention. This week, JioMart, the Jio Platforms e-commerce unit, announced it would start delivering goods across 200 cities. “India has rediscovered kirana [local neighborhood] stores in the last two months,” says Gaja’s Jain. For much of that period, a nationwide lockdown imposed to combat COVID-19 has meant few Indians could leave their homes and even e-commerce was disrupted.

Mukesh Ambani, chairman of Reliance Industries, has previously suggested that users will soon be able to shop for household goods on the app and their orders would be fulfilled by a physical JioMart store nearby. The shop’s inventory needs would be supported by Jio’s retail and logistics network. Reliance Retail, another subsidiary, currently owns the largest chain of supermarkets in the country so it’s not exactly new territory.

It remains to be seen whether consumers will continue to patronize these Jio-branded outlets – neighborhood stores carrying Jio signage, with the cost of the rebrand borne by the merchant – and do so regularly. Jain observes that this theoretical nationwide franchise of small convenience stores would need to charge the same prices as e-commerce platforms like Amazon or grocery delivery providers such as Alibaba Group-backed BigBasket.

“Jio will likely plan to sell goods below the maximum retail price for a long time and it has the capital to do that,” adds the CRISIL analyst. “Amazon and Flipkart have beta tested similar hyperlocal delivery models, but they failed. What JioMart does have going for it is Reliance Fresh [its whole foods brand], which is professionally run and present across urban India.”

TechCrunch reported a Jio Platforms representative as stating that more than 1,000 districts in the country will have JioMart stores within a year. Not only would they sell household goods, but the online catalogue is set to include electronics and office supplies. However, most of India’s 60 million- strong kirana stores are not expected to join the JioMart network. They are known to be highly efficient operators.

“Our kirana store has not changed in the last 20 years. He [the shop owner] is a very efficient guy. He accepts orders via phone calls, gives 30-day credit, and delivers anything and everything. There isn’t even a minimum order value,” explains Gaja’s Jain. “The only reason we moved to BigBazaar for certain items was pricing, variety, and the digital experience.”

Face to face

Facebook could be the missing piece of the puzzle. After all, the private equity firms only came in after the social networking giant had put up $5.7 billion for a 9.99% stake in Jio Platforms. The exact nature of the partnership is unclear.

E-commerce is certainly a frontier Facebook is keen to explore as advertising revenue growth begins to flatten. Recently, the company unveiled plans in the US for small businesses to open virtual storefronts on its platform as well as on Instagram.

In India, Facebook has a poor image. An initiative in 2015 to offer free access to a limited number of internet services through its app sparked outrage among net neutrality advocates. In addition, the company has been striving for more than two years – without success – to obtain approval from the Reserve Bank of India to launch WhatsApp Pay, a payment service affiliated with the country’s leading messaging platform.

Should WhatsApp Pay finally make its debut, having Jio Platforms as a local partner is expected to catapult the business to top spot in the market. Moreover, the payment service would likely integrate with JioMart, making it even easier to shop. “All India communicates and transacts on WhatsApp but Facebook makes no money from it almost as if it’s a public utility. I feel that Jio will come up with an innovative way to leverage WhatsApp,” says Jain.

The commercial partnership between the two companies is confidential, and details are expected to only be revealed in the coming months, but many analysts says it is definitely one of the key attractions for private equity investors.

In the end, if Jio Platforms’ plans are realized, it will become every bit the elephant in the room. “If you consider the connectivity that they’re looking to provide to individuals, SMEs and enterprises, Jio Platforms is extremely well positioned to be the provider of choice for many more cloud-based B2C services and B2B SaaS [software-as-a-service] solutions,” says Lucian Schönefelder, KKR’s head of technology for Asia. “I think they have already made a huge impact on the digitization of the Indian economy and will continue to do so.”

Meanwhile, Indian venture capital investors backing direct competitors to Jio Platforms believe they will have to tread a lot more carefully – some business models could quickly become unsustainable when pitted against a well-funded giant. Jio Platforms will pose a threat in multiple consumer sub- sectors. Earlier in the month, for example, local media reported that Reliance Industries was looking to buy a stake in online pharmacy Netmeds.

“What will life be like for other e-pharmacy companies if Reliance is serious about online medicine delivery?” asks Jain. “Jio will have its fingers in various parts of the e-commerce pie. The only question is which parts?”

India technology: The Jio effect

This was a 2,500-word feature for AVCJ that centered on Jio Platforms, India’s upcoming ‘super app’ with the artic;e published long before the company became a regular talking point in financial media.

Nearly three months have passed since Reliance Industries launched Platforms as a holding company for its digital businesses. Is it poised reshape India’s technology landscape? [Note: it did.]

Amit Shukla is on a mission to make government services in India more accessible. He believes many basic functions are not digitized for two reasons. First, officials fear being overwhelmed by the level of public utilization. Second, politicians use paper-based systems to maintain a stranglehold on service delivery and thereby manipulate voter favor.

“After getting married, an Indian woman usually needs to change her last name on five official documents,” he says. “It costs a lot of time and money and rarely gets completed within a single visit. Many women are also daily wage laborers. Around seven million marriages take place every year – the amount of money being wasted is phenomenal.”

Shukla’s start-up, EasyGov, brings digitization to the most neophyte corners of Indian bureaucracy. Getting permission to access central databases in order to automate processe and move them online is a significant challenge, but Shukla has an ace up his sleeve. Last year, Reliance Industries (RIL) bought a majority stake in EasyGov and its telecom unit, Jio, integrated the service into its growing app ecosystem.

Now known as JioEasyGov, the company continues to operate independently, billing government agencies for its services. However, a direct link to Jio’s customer base means user acquisition costs are lower than whatever its private sector peers might achieve on the own.

Countless Indian start-ups seek to establish partnerships with RIL so they can tap into the conglomerate’s vast resources. In the past two years, 13 would-be Jio collaborators have accepted a counterproposal: acquisition by RIL. “I reached out to them because they had the largest customer base,” Shukla says. “The talks quickly changed in another direction.”

The Jio proposition is uniquely powerful – and potentially transformative for India’s technology sector. The company is positioning itself not only as a gateway for consumer- focused start-ups seeking scale and an exit route for their venture capital investors, but also as a prospective digital giant that can make its own rules.

Transition time

At present, RIL generates most of its revenue from offline business. In the most recent financial year, refining was responsible for INR3.9 trillion ($54.5 billion) in sales, over half th annual total. Digital services – the unit comprising the firm’s telecom and internet business activity – contributed 6%.

Mukesh Ambani, the company’s chairman, has said he expects more than half of future EBIDTA to come from consumer-facing businesses, principally Jio and Reliance Retail, the country’s largest retailer. In the most recent quarter, that proportion was 37%. The success this transition will depend on how loyal Jio subscribers are to its app ecosystem.

The company already enjoys a position of dominance in mobile services. Its subscriber base numbered 370 million as of last December and it is likely to grow if Vodafone-Idea is forced to file for bankruptcy in the coming weeks over a tax-related fine of INR530 billion ($7.3 billion). Vodafone-Idea is India’s third-largest telecom carrier with 304 million customers.

“If you see typical Jio users – a guy with a basic plan who can now watch videos nearly for free – they live in a completely different parallel universe and use different apps,” says Anan Prasanna, a managing partner at local venture capital firm Iron Pillar.

Jio’s digital push has two prongs: engaging Jio users directly through service-oriented apps and JioMart, an e-commerce platform that displays inventory from small-scale retailers. Th question being asked by many investors is whether the competitive pricing that underpins the company’s telecom offering could prove to be its Achilles heel.

“A majority of people in India are pre-paid customers, that’s where Jio is massive,” says Rajesh Raju, a managing director at Kalaari Capital, an investor in two start-ups that have since been acquired by RIL. “Can you monetize with a universe of apps that could work alongside the Jio mobile platform? Yes, it could work at very low price points, but it needs t work for hundreds of millions [of users] to really make money.”

Jio’s average revenue per subscriber is INR128.4, lower than Airtel’s INR135. In the most recent quarter, Jio lost 22.3 million customers after it reversed a longstanding promise of free outgoing calls for life.

There are currently 13 consumer-facing apps on the Jio platform offering video content, payments, messaging, news and music streaming services. Saavn, India’s leading music- streaming app, was the first acquisition in March 2018. Since then, the ecosystem has grown substantially, with Reliance Strategic Business Ventures (RSBVL) leading the deals. More recent additions include cloud-based web development services provider NowFloats Technologies, which was acquired last December, facilitating an exit for Iron Pillar.

Reliance Corporate IT Park, the official name for the developer of Jio apps, leads the list of India-based developers on the Google Play store. Over the last two years, total installations of its apps have grown by 46% to 536 million. In comparison, Hotstar, the country’s most popular video streaming app, ranks second with 100 million installations.

However, JioSaavn is not a runaway leader. According to App Annie, an app data and analytics provider, JioSaavn posted 69 million downloads across Android and iOS phones last year. Gaana, another music streaming app, was close behind on 58 million.

Given successful app-based ecosystems are usually anchored by a single category killer that wins permanent digital estate on smart phones, Jio appears to be lacking. In China, for example, Tencent Holdings has leveraged the dominance of its WeChat messaging app to enter other segments, notably financial services, and become a conduit for other start-ups. Indonesia’s Go-Jek has done the same, initially relying on ride-hailing.

“They will have to pay a price,” says Manish Kheterpal, founder of WaterBridge Ventures. “They will have to buy [a leading app] like ShareChat [a regional language social media platform] or Paytm or create one of their own.”

The counterargument is that Jio can achieve critical mass by catering to a wide variety of use-cases – mobility services is the only major vertical missing from the platform – but it must still convince local consumers that its offering is comparable to those already availabl This isn’t easy for a late entrant, even if there is an existing mobile user base to target.

“Jio is a great brand and today it stands for a telecom service,” says Rahul Chowdhri, an investment professional at Stellaris Ventures. “As they expand into other categories, they wi get the benefit of the Jio [telephony] platform but will also need to build a value proposition for consumers in each of those categories.”

Gopal Jain, a managing partner at Gaja Capital, puts it more bluntly: “I don’t think every ap they have will become valuable – only a select few will.” However, he does concede that Jio could pose a threat to the likes of Byju’s in education by offering mass-market products at low cost. Content providers may see value in teaming up with Jio in these efforts.

A $70b holding company

Three months ago, buoyed by the progress of its app ecosystem, RIL announced the creation of Jio Platforms, a private holding company for its internet and telecom businesses. There are plans to launch a host of news apps focused on services related to healthcare, education, agriculture, e-commerce, gaming and manufacturing.

It is still early days, but market watchers are quick to talk up the potential value of Jio Platforms. “Even a 10% stake sale could bring in about $7 billion,” says Vikash Kumar Jain, an investment analyst at CLSA.

Jio has yet to raise third-party capital by selling minority interests in its digital assets, but RI is a regular collaborator with foreign investors. Its debt pile of $22 billion implies a need for external support. Last year, it formed partnerships with BP, Saudi Aramco and Brookfield Asset Management in retail fuels, chemicals and telecom infrastructure, respectively. Amba has said there is “strong interest” from potential strategic partners for Jio Platforms.

Should RIL go down this path, the spotlight will inevitably fall on RSBVL. A corporate VC arm established last year, it makes acquisitions for Jio Platforms but also supports other RIL business units. This creates powerful cross-pollinations – Fynd, a start-up that helps brick- and-mortar retailers fulfill online sales, was acquired by RSBVL last August and now works with Reliance Retail – but also potential conflicts of interest.

Alongside another RIL-owned investment firm, the conglomerate made nine investments totaling INR8.5 billion ($117.5 million) last year. RSBVL concentrates on technology firms with a B2B2C focus and is said to allow founders a high degree of autonomy despite buying majority control.

“Most of our customers are third-party customers and that’s how it should be,” says Aakrit Vaish, the co-founder of Haptik, a cloud-based virtual assistant provider. “If you want to build a large independent operation, you need to depend on large independent customers rather than intergroup captive companies.”

Founded in 2013, Haptik sought to create a chat-based assistant for individuals but did not attract enough paying customers, so pivoted to an enterprise service model. It was seeded by Kalaari Capital and acquired by RIL in April 2019.

“They were trying to basically create a virtual personal assistant for each one of us that can’ afford a personal assistant handling 70-80% of our daily needs whether that’s making travel arrangements or answering simple questions like where is the closest ATM,” says Kalaari’s Raju. “You can use search, but it’s a cumbersome process.”

His conclusion is that Haptik was ahead of its time. By aligning with Jio, the start-up may have achieved a second lease of life. They are primarily focusing on premium markets where there is already considerable comfort with internet services delivered over mobile devices. The expectation is that India will get there eventually, and Haptik will be ready and waiting.

This is keeping with RIL’s willingness to make moonshot bets. It has backed drone manufacturers, artificial intelligence-enabled teaching assistants, augmented reality headset manufacturers, e-commerce enablers for micro-businesses and language-as-a- service firms – all with a long-term view.

Source of liquidity

For venture capital investors, RIL represents a much-needed exit route, given India has yet t fully accept IPOs by internet-related start-ups. The annual average number of trade sales in India’s technology space since 2015 is 29, according to AVCJ Research. Most of them are secondary exits to other financial investors. Last year, RSBVL and Reliance Investment Holdings (RIHL) were the most active strategic buyers.

“We do think of them as potential acquirers for some of our businesses and sometimes as partners,” says Chowdhri of Stellaris. “I would also say that the market they will go after will be a really large market which is good, since it will likely allow for multiple large companies to co-exist.”

Indeed, RSBVL is expected to become more prolific once it becomes more familiar with VC and figures out what works for RIL and for Jio Platforms. The combination of comfort and confidence may also lead to bigger investments.

“I would like to believe that at some point they would like to take stock of what they have acquired, how those acquisitions have worked for them,” says Ashish Fafadia, a partner at Blume Ventures, another early investor in NowFloats. “When they see some of these early acquisitions develop as successful case studies then they will start going deeper and acquir bigger companies with larger acquisition values.”

Despite RIL’s recent acquisition activity, the newest addition to the Jio app ecosystem attracting the most interest was developed in-house: JioMart.

The e-commerce platform was launched in January and is currently only open to customers who pre-register in three districts of Mumbai. It will enable customers to purchase daily items – often at a discount – usually found in a kirana store or a neighborhood shop, with the nearest such establishment to the buyer taking responsibility for fulfilling the order. Wholesale goods come from Jio-owned superstores.

It is a highly localized solution – another RIL-owned start-up, Reverie Technologies, could help with execution by providing local language integration – which could become the glue that holds the Jio ecosystem together. However, app-based grocery delivery, much like e- commerce, is already well-penetrated. The likes of BigBasket and Grofers, which are backed by Alibaba Group and SoftBank, respectively, have been operating in the space for more than seven years.

JioMart differs from the rest in that it owns some of its inventory, but it remains to be seen whether this translates into a service offering strong enough to wean users away from the incumbents.

Dominance predetermined?

Any technology company, regardless of its financial and strategic resources, that seeks to imprint itself on an existing internet ecosystem faces a litany of challenges. But proponents of JIL argue that the 46-year-old company recognizes it is running a marathon, not a sprint. Jio-related ventures don’t need to deliver immediately. In any case, given the bureaucratic complexities inherent in a large corporate, it will take time for Jio to finalize its plans.

Should it succeed in creating a dominant ecosystem serving India’s price-sensitive mass market, the balance of power will shift not only within India’s technology sector but within the broader consumer sphere as well. “In a market like India with players like Reliance, if they decide to put their minds to something, they can change the game,” says WaterBridge’ Kheterpal. “We’ve seen it in telecom.”

The earlier comparisons with Tencent’s WeChat ecosystem are not idly made. Baidu, Alibaba and Tencent used search, e-commerce and social networking, respectively, to carve out substantial digital domains in China. Alibaba and Tencent – which have monthly active user counts of 824 million and 1.15 billion – have pushed most aggressively into new verticals. Their shared dominance of digital payments should not be underestimated in this context.

Both have become prolific backers of start-ups – Tencent made 50 investments in China last year to Alibaba’s six, according to AVCJ Research – and their value proposition can be compelling. Few consumer-facing businesses have achieved critical mass in China without their support, but they are feared as well as lauded. VC investors often counsel founders against entering into alliances too soon in case it limits future options.

Will Jio Platforms become to India what Tencent and Alibaba are to China? Investors downplay the threat, citing the relative freedom foreign strategic and financial players enjoy in India. “India is a lot more open,” insists WaterBridge’s Kheterpal. “Domination by players can only happen in closed markets where outside competitors are completely shut out and government support is given to a finite number of companies for category leadership.”

Moreover, even in markets like the US where Amazon is the runaway leader in e-commerce, there is still scope for specialists to thrive. “And Jio is a long way away from being the Amazon of India,” Gaja Capital’s Jain points out, stressing that the company has yet to demonstrate its value proposition through a couple of successful apps.

In the meantime, stakeholders will look on with interest as the Jio Platforms story develops Different industry participants have their own perspectives. For EasyGov’s Shukla, there is n dilemma: RIL’s digital foray is a welcome one because there were few competing sources of capital for technology start-ups with an impact focus.

“Civic technology is not an investor-friendly sector because working with government bring a lot of uncertainty,” says EasyGov’s Shukla. “It only appeals to those who understand the larger impact of investments where it’s difficult to get an immediate return and the problem is complex.”

Asia lending start-ups: Bump in the road

This was a 2,500-word feature for AVCJ focusing on how lending start-ups in India and Southeast Asia were responding to the COVID-19 pandemic.

Digital lenders in emerging markets need to survive a tricky year under the shadow of potential defaults, but the survivors might become significant players in a renewed financial landscape 

Financial technology start-ups in Asia emerging markets turned the tables on their Chinese peers for the first time last year, racking up $2.4 billion in venture capital funding to $792 million. Nearly two- fifths of the 156 funding rounds announced in India, Indonesia, Singapore, and the Philippines involved a digital lender. In 2016, there were only 28 deals.

As a group, they represent a more efficient path to profitability than payment start-ups, many of which have received substantial VC funding but are criticized for high levels of cash burn.

These branchless lenders offer a user-friendly interface connecting prospective borrowers with capital providers. They promise to democratize access to finance, serving consumers and small and medium-sized enterprises (SMEs) that are typically dismissed by traditional banks as too great a credit risk.

India and Indonesia, which have the largest unbanked populations and the biggest small business communities, are naturally the core markets. But a large crop of local, regional and even foreign players has emerged. They all start with retail capital and look to graduate to local institutional funding sources, while limited foreign debt funding trickles in from development financial institutions.

VC investors like this combination of stability and a proven value proposition, although it is more easily achieved in some markets than others. In Australia, for example, AirTree Ventures has witnessed the phenomenon firsthand with Prospa’s rapid growth from a Series A round in 2015 to a domestic listing just three years later.

“We felt that the macro trends around small businesses growth being the engine of most economies but not having a finance solution was a gap in the market,” says Craig Blair, a managing partner at AirTree. “A good lending business should be able to get to profitability within Series B if not C.”

Walking on fire

It remains to be seen whether Prospa’s Indian and Southeast Asian contemporaries – which are not supported by developed market financial infrastructure – can replicate its growth tangent and exit trajectory. Much rests on their performance this year, specifically how they cope with a very difficult operating environment.

Mandatory lockdowns enforced across the region due to the COVID-19 pandemic have crippled business activity, pushing companies into distress if not default and causing job losses. Many loans are likely to go unpaid.

Meanwhile, funding sources are being locked up. Banks, the primary source of capital for digital lenders, have taken out bad loan provisions and adopted a conservative stance. Analysts warn that these start-ups’ loan books will sour. On top of that, the credit risk scoring systems that underpin lending policies may not apply in a post-COVID-19 world where many business models will be disrupted. Historical data might not be a reliable guide.

“All assets today in India would look poor in the digital lending space. Asset quality would have worsened because of COVID-19 and a lot of loan books that appear healthy may be window dressed because of a six-month moratorium [on loan repayments] ordered by India’s central bank,” says Asish Mohapatra, co-founder of OfBusiness, an Indian digital lender and distributor of raw materials to SMEs.

Lizzie Chapman, CEO of ZestMoney, a consumer lending platform that facilitates checkout financing for online merchants and retailers, puts it more bluntly: “Nobody’s making a lot of money at this time.”

Needless to say, venture capital funding has dried up and new arrivals in the lending space have dropped to zero. But there is still room for optimism. Whoever survives the harsh summer will probably face reduced competition and have opportunities to consolidate demand.

At the same time, partners – clients, banks and non-banking financial companies – are increasingly turning to the start-ups still standing to learn how to conduct lending online. “It was such a difficult conversation a year ago but retailers now realize that customers don’t want a random agent running around [to help them sign up for a monthly payment plan on the app] if they can avoid it,” Chapman says.

Other processes like in-person meetings or paper-based documentation that were long seen as the norm are now being questioned as well. “People would send an email and then call you up on the phone and ask, ‘I’ve sent you an email, did you receive it?’ A lot of the steps in digital lending were like that and are changing favorably as a result of this crisis,” explains Ganesh Rengaswamy, a co- founding partner at fintech investor Quona Capital.

Unlike their traditional asset-heavy peers, digital lenders were able to continue operations under lockdown. It is also a vertical where there are established players – the top 15 digital lenders have scooped up nearly 75% of all VC capital committed to the sub-sector since 2016.

They are expected to fare better as they are already deeply enmeshed within their target users’ digital universe. Even if marketing budgets have been slashed, online businesses and banking partners still bring these digital lenders to people’s attention.

In the Philippines, non-bank consumer finance institutions are turning to financial technology companies in a bid to reach an increasingly digital customer base. Mikko Perez, CEO of Ayannah Global, an Indian and Philippine fintech solutions developer, has seen lending slow down but he notes a greater willingness to do know-your-customer (KYC) processes using video apps, originate loans through social media channels, and conduct loan management processes online.

“Your ability to acquire users as they start coming online and become more digital will be the key success factor. Those lenders with e-commerce experience or any form of online experience are better positioned to ride the wave,” he says, adding that Ayannah is currently working on digital remittance and insurance products.

Opportunities, threats

As a result, many digital lenders could find they are unexpectedly in demand. And help will come in the near future from unexpected sources as well. Tek Yew Chia, KPMG’s head of financial services advisory in Singapore, believes that family offices, charitable foundations and the likes of Asian Development Bank might provide debt funding because of financial inclusion imperatives and a desire to let money flow to underserved parts of the market.

It is also suggested that corporates will offer financing, so they can use technology solutions to help preserve the health of their supply chain ecosystems. Many digital lenders are looking to partner with property developers, for example.

Supply chain finance-focused lenders are traditionally the oldest and strongest constituent group in the digital community because they have accumulated plentiful data on SME borrowers through invoice and payment history provided by corporate buyers. They seldom require VC backing.

However, Chia warns that digital lenders could also face competition from banks in some jurisdictions as the latter have shown a willingness to engage with the same group of borrowers. It helps when governments share the risk of the loan portfolio in a bid to kick-start the economy. They are also narrowing down the advantage that digital lenders have in terms of smoother onboarding processes and quicker loan approval times.

Consumer-focused lenders, in particular, are expected to fare poorly in the near term. This is partly due to the uncertainty over the speed of labor market recovery in many countries. OfBusiness’ Mohapatra predicts that it will get worse before it gets better with partial lockdowns likely in the coming months as cases continue to climb in India.

Among consumer lending platforms, loans earmarked for goods or services that meet a clear functional purpose are considered preferable to straight cash loans.

“In good times, payday lending looks good and does well. In downturns, it’s ugly all over the world,” says ZestMoney’s Chapman. Where possible, consumer lending platforms are temporarily looking to increase lending tied to education spending and productivity tools.

For a long time, VC investors have anyway stayed away from the consumer vertical. It has only been in recent months that some start-ups have been able to raise seven-figure funding rounds.

Eddy Danusaputro, CEO of Mandiri Capital, the corporate VC arm of an Indonesian bank, declares himself bearish on consumptive loans and bullish on productive loans. He sees a lot of potential in digital SME lenders as long-term partners that can help the bank win new business.

“As banks were rolling back their branch operations before, and especially after this pandemic, it makes sense to collaborate with these peer-to-peer lending platforms because they have the distribution while we have the funds,” Danusaputro says.

But consumer finance is also a domain where data science can play a crucial role in analyzing alternative non-financial information related to user behavior. Lenders can check how frequently individuals look up their credit scores on an app and compare behavior to that of similar users in the past. When cross-referenced with data from centralized repositories like credit bureaus, digital lenders can make assessments in a way that traditional banks cannot.

“The combination of borrower and data set volumes are typically several orders of magnitude higher in consumer lending than SME lending,” says Quona’s Rengaswamy, adding that for SME lending, experience in being able to understand business intent matters more in the long run. “There is obviously a lot of leverage possible out of alternate data, but we have to be intellectually honest about the realistic usage of it across the spectrum.”

Waiting for winter

AirTree’s Blair observes that the path for a top-performing digital lender in the current climate is clearly marked out. Should its credit scoring models stand up to COVID-19 scrutiny, it will need to focus on lowering the cost of capital, improve unit economics for more than the first loan, speed up loan processing, and build strong relationships with borrowers so they remain loyal.

“Prospa used a lot of software to understand clients better. They wanted to know when clients would value more lending and when they wouldn’t. I think the key metrics Prospa tracked were net promoter scores and repeat rates,” he says. The company kept these numbers up through a constant customer education process. It found that not many SMEs had been socialized on the importance of a good credit record.”

As the loan book grew, Prospa was able to attract larger sources of capital beyond banks and securitized its loans in order to focus on its core strength – digital origination. The company raised debt across multiple tranches to bring in a wider variety of funding providers, which reduced the cost of capital because potential lenders used attractive terms as bargaining chips. It took time to reach that scale, though.

“You have to demonstrate that you can price, understand and manage risk and that just comes through time,” Blair says. “The number one focus area right now would be around managing the loan book and the risk and defaults around the book. It’s a real test of whether your decision models or your credit risk models are working as expected.”

Should they end up seeing a rapid rise in non-performing loans, digital lenders will feel pressured to go for safer assets – such as secured lending at higher sums – but then they would stray from their original mission. Right now, few in developing Asia are thinking about changing their business models because they believe they have achieved a suitable level of specialization.

Those that are unable to manage the risk on their loan books and who are not well-capitalized might have to agree to be acquired or sell their portfolios.

However, OfBusiness’ Mohapatra argues that populist economic policies result in far too many digital lenders convincing themselves they can run on fumes and will eventually get some form of government assistance.

An IPO could be another rescue scenario, provided there is sufficient investor interest. Mandiri’s Danusaputro predicts some start-ups will rush to list and get much-needed external financing while others scale back expansion plans.

A longer term threat comes in the form of leading payment start-ups that have all declared an ambition to enter small business lending or consumer finance. However, there are two obstacles. First, it is unclear if they have the necessary capabilities to assess credit risk. Second, their vast user bases could translate into a volume of loans that cannot be contained on a single corporate balance sheet. Outside help from a bank or other financial institution might be required.

“Payments is actually a business centered around deposits – people deposit money in a wallet so they can make payments,” says KPMG’s Chia. “You could ask them to use any excess funds to buy insurance or asset management products where there’s no additional risk involved, but lending involves credit risk.”

Missing unicorn?

In the meantime, digital lenders anticipate room for further expansion when the dust finally settles. And they are looking to private equity to provide the growth capital, much like how it has been channeled into payments, education and healthcare in recent years.

“Not a single lending start-up or digital lender in India has raised a $100 million round. That’s quite damning because India has one of the biggest untapped demand pools for credit,” says ZestMoney’s Chapman. “There has been a bit of nervousness or reticence from the larger investors to back digital lenders.”

Even the debt capital pools are thin. ZestMoney is courting global banks that might be open to working with digital lenders in emerging markets. Towards the end of last year, Goldman Sachs led a $15 million Series B round for the five-year-old start-up.

In time, ZestMoney and others would like to follow Prospa’s lead and securitize their loan books so they can accelerate growth. However, Asian regulators are wary of encouraging the use of complex financial products that have often been abused in other jurisdictions.

“No one had figured out how to price the risk and it was considered risky to lend to unproven small businesses with unsecured lending facilities,” says AirTree’s Blair. “I think now it’s a much better- understood asset class.”

Whoever gets it right in Asia is expected to reap rich rewards. With the right economic conditions and infrastructure, support from regulators and banks, and with sufficient VC funding, they can become significant financing sources. “Most SME lenders are not even worth $500 million,” Chapman says. “I’m surprised there haven’t been more [big ticket] investors given the size of the opportunity.”

Ultimately, digital lenders can even go lower down the value chain and truly help businesses and individuals that are truly unbanked and have little option but to pay sky-high interest rates for an array of gray market products. Right now, for many this represents too large a step outside their comfort zone.

“I don’t want to sound ironic since I work for a large bank, but we lack good quality lenders in the world right now,” says Mandiri’s Danusaputro. “I think there are not enough start-ups that serve the unbanked or the underbanked. They don’t do it because it’s either difficult or there’s no money in it. If done properly, it could be sustainable.”