Alok Mittal, the co-founder and CEO of Indifi Technologies, has been among the most prolific angel investors in India, having participated in over 30 deals.
Last year, he decided to go back to being an entrepreneur — he had co-founded jobs portal Jobsahead before it was acquired by NYSE-listed Monster.com in 2004 — and started Indifi, a platform that aims to connect small businesses with formal lending institutions such as banks and non-banking financial corporations (NBFC). Before that, he quit venture capital firm Canaan Partners as its India head in 2014.
Mittal talked with DEALSTREETASIA about Indifi, and his perspectives of the changing funding landscape, and how does it feel to become an entrepreneur after years of investing experience.
Several investors say that they are asking hard questions of startups about a road to cut cashburn, and towards profitability. Why were they not asking these questions in 2015, when almost any idea and venture was getting funded?
VC investing goes through cycles of peaks and troughs. It is not the first time this has happened. It happened in 1999, 2007, 2011 briefly and again in 2015. These are phases where the ecosystem throws up some proof points, which gets everyone excited. For example the growth that eCommerce companies like Flipkart, Snapdeal etc have shown suddenly built a momentum, proving for the first time you can build $1 billion businesses in India in a 5–7 hour time frame. Now that was a new proof point that came out, people got excited about it. Both entrepreneurs and investors started believing that over-investing in the market is one way of winning. So we went through that phase in the last 12 months.
Did More Funding Towards A Few Companies Also Affected The Overall Availability For Other Startups?
A: Sizable chunks of capital have the effect of also pushing out other capital. If someone knows that company XYZ has raised a $100m bucks no one wants to compete with it with $20m. Even though the latter guy might have a slightly better product. So there is competitive dynamics to capital raise itself. Some of those were at work in 2015. And then people realized that you still need to get the product market fit, you still need to have a good quality of the business so they took a step back and said, let me digest what I have taken, and ensure that entrepreneurs are focusing on these elements before we send in the next check.
What Do You Expect 2020 To look Like? Figures For January Show That Investments Are Continuing To Happen At A Fast Clip.
We are in a regular cycle which recurs every 4–5 years in the venture industry. What we are seeing right now — to me it seems like a pause — its not a stop — to say let me digest what I chewed on. Im not hearing people say that they have invested too much and need to step back for this year. And it’s a question of extent. Till recently, 2011 was the best year for Indian VC industry. About a couple of billion got invested then, compared to a more regular pace of a billion dollars or therebouts. 2015 was likely a $5 billion year. 2016 might touch that level, but even if venture investing hits say, $3.5 billion, you are seeing a 70 per cent jump within a space of four years. So it would still be a strong year. It might just be lower compared with 2015, and who knows, the latter half might pick up. But its nothing to get concerned about.
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Will You Continue To Invest Like Before?
I have been investing on a personal basis although that activity is lower than what I used to do before. But I still love meeting with entrepreneurs, and listening to their ideas. They are full of energy. I have just north of 30 personal angel investments. That’s an ongoing activity but happening at a slower pace than before, at about 1 investment every 2 months.
Startups That Got Funded Last Year, Despite Not Having A Great Product, Or A Plan To Reduce Cash-Burn Are Being Asked To Control Costs This Year By Investors. How Difficult Will It Be For Them To Make That Shift?
There is definitely an adjustment period. I think the question is, do those adjustments happen quickly enough? I do think that the names that normally get mentioned as burning the most cash have enough in their kitties to be able to make that adjustment, so I am not expecting casualties of that sort. But there will be a set of companies that haven’t found a good product-market fit, and still landed up raising large amounts of money. I think the challenge is there because if you don’t find that fit, you have to adjust quickly, which is hard to do if you have 2,000 people on board. And they have to make that fit before they can leverage the bandwidth that you created. Smaller startups, that raised say $50 million without a product-market fit, will need to make drastic adjustments to prioritize that fit before scaling. In some sense, last year had inverted that prioritization.
With Indifi, You And Your Co-Founders Are Trying To Plug A Major Void When It Comes To Funding Small Companies And Industries. Would That Include Certain Startups That VCs Normally Would Avoid?
Yes. Normally the startups a VC would back are those that carry a high degree of risk and a high degree of upside. Startups are also MSMEs in some sense. These are the millions of small businesses, which are not high-risk, high-reward startups. They are low risk, steady growth kind of companies and are constrained for lack of working capital because VCs won’t invest in them because they don’t see a 10x upside. I woudn’t invest in that as an angel investor. But the reality is that they are healthy businesses struggling to scale for lack of capital. The only source of capital for them is debt financing and that is severely constrained because of lack of origination channels and lack of secondary data that can be used to make a debt call in those businesses. We are trying to close those holes. The problem is big — a 2012 International Finance Corporation report estimated the gap in financing for the micro, small and medium enterprise (MSME) sector in India at $380 billion.
Are You Liking Being An Entrepreneur Again?
A: Absolutely. It is exciting to get my hands dirty again and being in an operating role. We started Indifi in June with two co-founders, and went live in October. We are seeing early traction, some twisting and turning, and the experience has been great.