'Indian companies scale prematurely, so spend too much on marketing'

Bejul Somaia has spent over 20 years on both sides of the table — as entrepreneur and investor in the US and India. In his current role as managing director of Lightspeed India Partners, he’s making big bets on the country. The US venture capital firm, which launched a dedicated India fund of $135 million in 2015, has invested in companies such as Byju’s, Freshmenu and Sharechat.It was an early investor in online hotel network Oyo, which went on to bag $450 million in funding. This year, one of its earliest portfolio companies, Indian Energy Exchange went public, and Lightspeed opened its second India office in Bengaluru. Somaia tells TOI why it’s a great time to invest in India.
What’s the difference you see in the startup ecosystem now compared to 10 years ago when you started investing in India?
The ecosystem is more mature now. The emergence of mobile internet makes this an exciting time to invest. In 2014 and 2015, there was a lot of capital flowing in and an exuberance around the internet. It has normalised now. While the early-stage deal quantity is down, quality has gone up, and quality is what matters. Today, there is a ready market for internet companies but the companies that started in 2012 or 2013 had to invest in creating the market, awareness and infrastructure. Today, companies can launch into an existing market. So naturally, we see capital-efficient companies. Today, we see a lot of diversity with startups emerging in healthcare, education, payments, lending, logistics and content, to name a few. The opportunities have broadened and diversified.
Do your investments reflect that diversity? Are you looking at new sectors?
We have invested in edtech, vernacular social networks — which you didn’t see four years ago — consumer fintech, online to offline, mobile consumer, India-focused SaaS, B2B commerce. More recently, we invested in SME lending and logistics. So it has been quite diverse.
You raised an India fund in the midst of a downturn...
As VCs, we are driven by opportunity. We raised our dedicated India fund in 2015 because we sensed that the opportunities were getting more interesting. We also see good exits. We were disciplined and measured when it came to investing in India. We are taking a step up, and accelerating our focus and investments. The bar for an early-stage startup to raise follow-on investment has gone up.
Why did you invest in Indian Energy Exchange, which recently had an IPO? It’s backed by large power companies and doesn’t seem like the kind of investment that a VC makes.
I wish we could do that every time. It is a successful investment. When we invested, it was a startup. When we met them eight years ago — we invested seven years ago — they were not making money. It had a concentrated marketplace model and there were a lot of questions. They roped in other power companies as shareholders, kudos to the original founders. They gave out 5% of the company. So they had access to the inventory. That helped aggregate suppliers around the platform. It was a strategic call.
Do you see more funds chasing fewer startups?
In 2006, a bunch of funds came in, and many ended up not being serious and leaving. The number of firms in the market hasn’t gone up in the last six years. It has come down, while the opportunity has increased. In 2014, hot money came in from other markets, hedge-funds, even that has gone down. It is far more disciplined now.
What are the challenges startups face in India and how different are these from challenges in the US?
Fundamentally, young companies need to do the same thing regardless of the market. They need to look at market opportunity. Building leadership teams in India is more difficult. A lot of entrepreneurs are first-time entrepreneurs, who haven’t built teams before. The other thing is that companies tend to scale out prematurely in India. They need to have a strong product-market fit before scaling. I think that’s problematic. If the value proposition is not great, then you have to spend a lot on marketing.