Transcript
0:00 Fintech is dead. Long live Fintech. What's up with all the puns though? I think it's the RV C thing. No one understands what goes behind the VC. The brutality of it is poorly understood. 106 companies have gotten funded series B and above. About 40 series B, 30 series C, and there are 10 IPOs. This is just Fintech. the first innovation comes in how do I get to the next 1 million customers at the lowest CAC. What can a founder who's very passionate and believes that you are not getting it? Have they ever come back and said or done something that changed your mind? So, there's a little bit of a culture friction in how venture operates globally. And the first wave of Indian startups that have become quite successful now.
0:49 Of the 600 billion, 250 to 300 billion was generated in the last 5 years. That's how fast financial services compound. Uh I had to chase him three, four times, but he was gracious enough on a day of his crazy reviews today. Yeah, it was just it was pretty much back-to-back. Wow, wow, wow. Uh but I think for for you I will I really appreciate you coming. I I know See, with both of you I've had we've had common companies, but I honestly never had a chance to sit down. And what I was telling Karthik was it'd be really nice if we cut out the interview general format. It doesn't doesn't make any sense for us. So, three things I wanted to get out of this, okay? One is I think you guys have done 20 companies in Fintech. You've done more than 15.
1:42 And we all do companies outside Fintech also. But, however you look at it, it remains the largest sector with the largest exit, most seed funded, most startups, most everything. And I thought it'd be really nice if there are a bunch of founders. And for me also to learn from you guys, hey, in 24 Vidya Vi versus CreditVidya Day or, you know, back there. That's one. For me, more interestingly, I want to spend the first 15 minutes talking about you guys. And lastly, I While it is about Fintech, Pranav and Vikram, I want to intersperse that in between with certain, you know, key things around founders, right? I mean, what does it take to be a successful founder in this space?
2:27 Sounds solid. You're a Bangalore boy. I am. I I grew up not very far from here, around the corner on 12th Main. Uh and 12th Main was, like a, believe it or not, was a green haven. It had one general store. Seriously? But, which years are these? On on 12th Main, '96, '97 till '99, yeah. So, at that point of time, you know, it was just this quiet lane. I used to cycle to school. Today I can't even let my kids sort of walk on this road. So, it was just a different different Indiranagar back then. And so, one of the reasons when we moved back, I joined Z 47 Matrix then in 2010. I moved to open our Bangalore office in 2014. At that point of time, I I I said Indiranagar because that's the place where I grew up. And that was the only reason I wanted to set up the office in Indiranagar.
3:22 What's the deal with Jerusalem? You were you were in Jerusalem for a while. I was. It was just one of those, you know, hindsight 20/20. These are the dots that connect. But at that point of time, as a young kid, you're just doing things that interest you. I had a pretty nice job at IBM at that point of time. It was one of those jobs that everyone wanted. And so, therefore, you were getting it, so you took it. And I realized that, you know, there was this thing of going offsite. That was sort of what our life was then. There was this interesting Israeli company, NDS, which was building conditional access systems.
3:56 So, how long were you there? A couple of years. Couple of years. Actually, some of the best Indian food I've ever had was in Jerusalem. How did you end up in VC? I mean, you quickly covered it, but how did you end up at Matrix? So, so I essentially I was at a startup mid-stage startup NDS before. Another startup that that I was very early in. That didn't go very far. Then went to B school thinking that, you know, the reason some of these startups, you know, didn't work or I wasn't very successful shaping them was because I didn't know business. Lo and behold, you realize in B school you don't learn stuff that helps startups.
4:32 You instead end up in the rat race. And so, IIMB, and then I went to McKinsey. McKinsey was a great finishing school. And then I was writing all of these reports on how the India startup story is going to take off. Digital India is going to be the next big thing. And this is 2010. And I decided to believe in what I was writing. And I really wanted to be part of it in some way. Uh met my founding partner Avnish at that point of time and joined Matrix. I think most VCs end up being more accidental VCs like you and me versus him being, you know, very early to his purpose. And so, that's how you ended up I ended up in VC, which was but sort of by accident. I want to come back to a little bit of uh your basketball side of things. But but Pranav, you are probably the millennial VC.
5:16 Yeah, yeah. Right? So, tell us more about how you ended up in VC, but you also spent time at Stanford. That's right. That's right. So, I'm also a Bangalore boy, also RV College. I think Vikram and I didn't know that about each other when we met the first time. It was a good meeting. Uh I'm the only engineer in my family. So, I come from a family of lawyers and accountants. So, made an interesting choice to not leave Bangalore in undergrad. Although I could have gone to the States, did well in the entrance exams and so on. I think very important to be here because I saw that tilt happening, right? I still very famously remember Flipkart coming to RV in 2011, the first year they came to recruit.
5:51 None of us knew what Flipkart did. So, we had to, you know, ask for permission to go into the computer lab, remove our shoes, sign in, 15 minutes, 5 minutes to start the computer, Google what is Flipkart, like why are they offering 6 lakhs in fees, giving 4 lakhs. How come they're giving 6 lakhs? So, I was there. It was an interesting time. I guess he was just starting his stint in a VC. I was graduating college back then. After Stanford, I just remember I was in that course that he taught on campus that became the book Zero to One.
6:19 So, I was in a room with 120 kids and you can see everyone's being reprogrammed at once. It's a fascinating experience. It's literally minor reprogramming. But, I decided, you know, I should take that risk. I wasn't going to be in the States forever. It was very clear that in my first year and I wanted to come back. I joined a SaaS company. I was employee number three. We got acquired for just under 400 million a few years later. So, built that thing and sold it. We were a vertical SaaS in HR. So, we did the whole Uh Coursera and Udacity. I just come out of Stanford. Andrew Ng, Sebastian Thrun, both professors. Both companies had become quite hot back then. EdTech was quite the rage. Uh so, our founder decided that we'll build a corporate version of that. And not content, but SaaS. Software that delivers the content. Um turns out to be a good cuz that's a huge market in the US, still is. So, uh good memories. But came back with the intention of either joining an accelerator. So, I thought, you know, let me spend a year or two understanding what's going on here because things have changed in 6, 7 years.
7:15 Um but got a chance to think about venture formation itself. Got a shot at talking to some Indian LPs who explained why they they were the way they were, let's put it that way. And saw an early opportunity to start a firm that might do a different take on India, right? Um realized that that's quite an edge if you talk to early stage founders because the whole ecosystem is very different back then. And everyone's learning on the job. So, we said, okay, cool. There's some edge that we have over this.
7:40 Uh turns out that if you're willing to work hard and you're patient with Indian capital, let's put it that way. Um then that was a perfect time to start. So, from there to close to a billion dollars now, it's been an interesting journey, 8 years. We'll be finishing our ninth year in March. Uh so, fascinating experience. I think Kunal's scripted a better I think both your both your funds are right there at the very top. And state basketball player, you're keeping all this under wraps here. Very very very very very very long back, more, you know, college, university, and things like that. But it is uh core to who I am and, you know, who I've become.
8:19 What I learned on the court with sort of teams. And the fact that I was um more unsuccessful than successful. It teaches you this thing of grit and picking yourself up again and again. Uh and I, you know, for for me, the reason I shove my kid into sports and now, thankfully, they they they love it on their on their own, is that it just truly teaches you to fall down and pick yourself up. Nothing better. And, you know, as a VC, actually, it's one of those things it's a very boring job. It's also a very lonely job. Uh and most of the time you're actually experiencing more failures than successes along with your companies. And it is one of those things where you do have to have the thing of, you know, what, this thing worked, but I'm going to get up and bat again. Uh and that, you know, I'd like to think that's, you know, that's sports. Hey, it's a very interesting point. Do you think, Pranav, that uh VCs are you know, need to put up a certain posture externally and you know, maybe they also have a lot of internal self-doubt.
9:20 I think Vikram said it right. It's a very lonely job. And you don't get enough feedback on whether you're right or wrong. It takes years sometimes to know, right? And everyone thinks and assumes, okay, you're building a portfolio, so why do you care if you That's a very common perception. hand-wavy way of explaining the sentiment away. But you don't want to lose anything. All of these founders are human beings. You don't want any of them to fail, right? To be honest, because the human cost of failure, you're also part of that cost. And yes, you sympathize for the founder when it doesn't work. But no one understands what goes behind the VC, like the large chain of capital that exists and how a fund is raised and how formation happens and so on.
9:55 I think the lack of better word, the brutality of it is poorly understood. I wanted to start with each of you with what is the state of the market today with two dimensions. One is 106 companies have gotten funded series B and above. About 40 series B, 30 series C, and there are 10 IPOs. This is just fintech and these are and I was a bit confused at one level I thought man these are not bad numbers and I'm thinking against what frame of reference, right? So, is it against where we were in 16, 17, 18?
10:31 Is it against where we are going? That's one question. And second question, where is innovation really happening in fintech? So, I'm going to go back to your original question on just sort of where we are, right? And you know, where the way I characterize it is you know, somebody had asked me to do a keynote last year at the Razorpay conference and I'd said fintech is dead, long live fintech. And what And and by the way, every everywhere I went it it said Vikram said fintech is dead.
11:00 They forgot the other part. They they forgot the long live fintech. And what I mean by that is that in we're right now in this middle journey of having been in fintech financial services ecosystem for the last decade and a half or so. If you take that entire ecosystem that's give or take generated about 100 billion in public plus private value. And if you take the in quote unquote incumbents and like you said HDFC HDFC are one of the more more innovative companies in across the world, but they're incumbents. And so, if you take all the incumbents that's about 600 billion dollars.
11:32 Of the 600 billion, 250 to 300 billion was generated in the last 5 years. So, it doubled and it took 30, 40 years. And so, that's how fast financial services compound. So, what happened in 10, 20 years then happens in 5 years. So, if you take this stock of early financial services fintech that 100 billion give or take is going to generate another 100 billion in 5 to 7 years. So, that's the middle journey, right? It is a new version of incumbents that are going to get created from the companies that we've all collectively invested in which are going to generate about 100 billion.
12:08 Now, what is the market context in which this natural compounding is happening happening where in the next 5 to 7 years what happened in the previous 10 to 15 years is going to happen is that we're just an under penetrated under penetrated market in financial services. There may be 40, 50 million people who really have access to whatever financial services that they want. 100 million people who have access to more than one product in in financial services and 400 million people in UPI at the stretch rate of the single most penetrated product and so on. So, for most of these companies if you generate 10 million more real users who live their financial life on your platform and we've done different cuts of math in different businesses between 1 to 5 million more new users generate a generates about a billion in value.
13:00 Right? Credit card if you used to be 1 million credit card generates a billion now it's 2 million credit card generates a billion, right? So, actually there is an organic growth that is leading to the compounding of this 100 billion to 200 billion. put Vikram. So, if I could just ask one interjecting question and let you continue. In that context, are you saying it is going to be more of the same for essential products and services in financial of the hits more loans, it's more insurance, it's more lending or are you saying that for this next set of people it needs to be maybe bundled delivered differently?
13:42 The the good thing about financial services is that it hasn't changed since the days of you know, Shakespeare's the Jew and there there is a at the end of the day, right? You you have a relationship right? You want to figure out how to make it, right? That financial services firms don't help. After that once you have some, you need a way to save it. You need more so, you need to lend you need access to it whenever you want to spend it in some way or the other and you need to invest it, right? So, that's the gamut of things that you do. So, that's not changing. That's a core need, right?
14:15 Now, how you do each of these things with sort of each wave starts changing. And so, and in India we are at these basic needs, right? How do I save it? How do I get more out of it? How do I invest it? How do I get money when I want, right? How do I So, it is about penetration of each of these financial services. Now, I think the innovation to your going back to your point, the innovation comes in each of these and I think the first innovation comes in how do I get to the next 1 million customers at the lowest CAC.
14:47 Right? Which is how do I serve the cost to serve these customers at low CAC? I have this equation for every company which is low CAC high financial trust. At that low CAC, right? Without building this big bank, right? Big bank branch, without building all this, you know, sense of solidity with you know, bank branches and thing like that. Can I deliver some experience which suddenly causes high financial trust with that user such that they give me some peak into their financial life after which you can build a company around it. So, low CAC high financial trust. So, each wave affords you something, right?
15:24 Mobile afforded you some the mobile wave afforded you something. UPI afforded you the this next thing. AI is going to afford afford you this next thing. Look at the market where 55% debt to GDP it's one of the most under lent under credit starved country all that we know, right? Who are going to be the institutions that meet that gap going forward? It's going to be the largest banks. It's going to be a central bank that defines everything in how that will happen.
15:48 Every rule is micromanaged, right? So, better off of us. That's fine. That's how it is. New institutions that want to be institutions over 30 years who are willing to go through this turmoil who are not in the frame of mind of taking shortcuts and will treat equity with respect that equity can't be lost because equity literally contributes to net worth, right? You've seen how especially NBFCS are regulated now. I think those are the kind of founders who will make it.
16:13 The non-domain founders who think of this like any other tech play move fast, break things, I can you know, change my tech stack tomorrow. That thinking does not work in building a financial institution. And that's why we make a lot of mistakes as an ecosystem. So, I just want to ask you that question and because what you're really saying is and this road map I think I totally agree with, but this last point about who can really navigate that do you have to be somebody from the space? Not always, but so some of the biggest fintech founders we know, right? Our most successful founders in all of our portfolios are not financial institution guys, Yeah, yeah. They're all the great product guys. They were thinkers. They all did the same thing. They when when it came to regulation building an institution, they took an important decision institution organization wide that we will not take shortcuts. We will make sure we do the right way.
17:03 So, your point is you have to align with the way the regulator like it. The price being worth it, right? I think in India again there's a lot of lack of clarity on what are you building towards. Before the IPO stuff was fixed 4, 5 years back, that wasn't an exit option available to all of us. It was still Flipkart being bought for 20 billion whatever. I think now it's very clear that yes, other kinds of businesses can go IPO from logistics to brands and whatever. But financial institutions always were desired by the public markets.
17:33 What's changed is now even the public markets are willing to buy institutions built by not from the network. Correct. That's a very interesting change in mentality and I think that therefore leaves us a larger surface area to work with. So, one of our portfolio companies is Credit Bee, right? So, Credit Bee's CAC the first time we saw him was 250 rupees with Madhu and and today it's about 800 rupees. But I think what always strikes me when I look at them which is true for Laura I think even Shashank from Razorpay once told me that hey, this is why in India you have to be a multi-product company. But I'm asking both of you that question which is that in financial services the markets like breadth of product, right? So, even a Credit Bee will be a you're now getting into SME lending, you're getting into loans against property or is it changing now where you can It's a it's a bit nuanced, right? Like for example, I was on the board of this highly successful lending company called Five Star which went public and so on.
18:27 Single product, right? SME SME lending play, right? We do secured SME lap three to five lakh loans. That's it. Right? For 15 years and that's it and build a billion and a half book. it is a chunky product. Yeah, so that's why that's where I was coming to that actually the CAC and financial value equation has to work. So, there they spend a lot more on CAC because they're saying I'm going to underwrite this customer very physically, know where they live, right?
18:58 What kind of assets have they created? And because I'm going to give them a 5-year loan, right? Or a 7-year loan and then collect over them over 5 to 7 7 years. So, I need a very good sense of their stability that they're not going to go anywhere. They're going to be living there all the time. Very high stability and very high forecast on their income. How how many years from investment to IPO for them? About 10 years. About 10, 11 years. Yeah.
19:27 Yeah, it's been a it would have been shorter if not for if if not for demon and COVID, but yeah. So, but I think again the other thing with the India is that you're going to have these black black swan event black swan events more more frequently than you would like, but you need to find resilient founders and teams. Just in terms of that innovation, right? It's the each of these companies has a story around sort of a nuanced GTM, right? Which gives them the right-sized CAC, right? So, we have a company for called One Card, for example, is a digital credit card company. So, they wanted to figure out who to who are the next set of users to give cards to. So, they went with One Score, which was essentially a credit score product, which essentially, you know, it was a very viral credit score product, and that created the top of funnel for them to figure out credit card CAC because otherwise credit card CAC is very, very high. Right? Then, they figured out how to actually give them a metal card, which made them feel very good, so that they would come through the funnel, and and and so on. So, I think if you have this nuanced GTM I think that's well put. I would agree with that. Do you get a feeling that, given where we are, if you look forward 10 years, different types of companies will get built addressing more and more population that coming into formal financial services, or is it going to be you end up building more of a digitized typical financial services company, but with innovations like what he talked about, product segment, CAC, etc.? I think that's a good question. So, even with Five Star, right, a lot of the startups that pitched to us today are looking to Five Star as a comp now because they've been through 10 years, IPO, but they were in a category, SME loans, which is always in priority sector, has always been protected by the Central Bank. So, to answer your question about multi-product, right? I think it makes sense for someone who's building a financial institution to say I need to be able to hedge across multiple product cycles. So, that at any point in time, if P&L is pulled back, I have another product I can push, right?
21:25 So, I think the evolution of the market has showed us that some things are fairly nuanced, important, consistent strategies. You have to be multi-product if you're not in certain protected verticals. That makes a lot of sense. Uh second, going purely digital has had its risks. So, there are gatekeepers digitally, globally now. And now, most of them are not Indian companies. Um the nuances of the geopolitics behind these companies now are factoring into CAC. Right? Um a rule change uh how cookies work in the US has deep implications in how app store tracking will work in India. So, I think the reason for variance now for fintech founders in how to build an institution, it's more complicated, right? But the good news is, again, I'll come back to this. Um The sickest bank of India at one point was State Bank of India. It was the Air India of banks, right? Always lost money, the white elephant, you know, horrible institution. Uh today, I think this year SBI should do 75,000 crores of PAT.
22:20 It's one of the most profitable companies in Asia, right? Unbelievable transformation. And it comes down to good bankers, good people cuz there are very good people in SBI, very smart. They know how the country works. Less interruptions, being allowed to just do the job, do it right, serve the customer, don't take unnecessary risks, and focus on discipline, right? Even that company can become hugely profitable. So, I think they had different challenges in building what they've built over 30 years. I think startups today have more tailwinds, but it's not less challenging. I met a founder last week, and and suddenly now, thanks to you, Vikram, there's a lot of VC activity around traditional NBFC. But let me ask you this question, right? Which is if we didn't have COVID, and we didn't have demon, the claim this founder was making, which I tended to agree with, was that, "Hey, Bala, two things have changed." He says, "One is there is more access to capital today if I want to build a platform and a book, and, you know, whether I'm tech first or I'm tech enabled, I and that is second, and actually, he said a third point, which is I can reach more people, and more people are available today who are in a position to use the money."
23:29 A, do you agree with this? And B, do you think that shrinks the time frame of somebody starting in a nice new category, let's say, transport finance, and being able to build an IPO-able business in 5-7 years versus 10-15? Theoretically, yes, when it comes to lending, I think overall, we took this call very early that lending is more fin than tech. Right? And that's So, it is more tech enabled, and the core is actually risk and then collections. And that's the core of of the kind of founders that we that we look to back.
24:03 Uh and you will find that those founders, when it comes to like this year has not been a great year in terms of credit cycle. And the best founders knew what was coming at the beginning of the year, and they were already toggling their levers, and they were slowing down. And you can see that that slowdown is reflecting in their books today, right? I was chatting with Madhu, for example, at Credit B, and he and and he was saying, "This coming, and I'm starting to do this very quickly."
24:29 And, you know, he was going towards more long-term loans versus short-term loans cuz he was seeing stress. So, he was reading the tea leaves much faster, right? And so, you're going to have these ups and downs. So, yes, if you have a theoretical good run where, you know, there is just a Firstly, I don't think you're going to have a great credit cycle for 5-7 years. It just doesn't work that way. Uh so, So, it just doesn't work that way. So, so, you're going to have to ride these out.
24:53 So, you're going to have a year which is a 20% growth year versus So, like if you take Five Star CAGR, right? It's about 45%, 40-45% CAGR for for a 10-year period, and build a huge company. So, when, you know, some some people, uh especially investors, say, "This thing is not growing more than 100%." I usually tell them, "Just listen, this is one of the most successful companies around. That's the CAGR. Yes, one year they grew 100%, one year they grew zero, right? So, but the founder knew which is the year to grow 100 and which is the year to go to zeros, right? So, that's one. And therefore, I think there is a rate limiter to how fast these companies can grow.
25:28 That's where I was going with that that answer. The other thing is that I've invested in three NBFCs this year, right? Now, all of those NBFCs are deploying tech in very interesting ways, and it's not just sort of top of the funnel, and I think one of the mistakes um both founders as well as us made was to throw a lot of money at the top of the funnel on the problem and saying that digital CAC is lower. Digital CAC is not lower. Most of the time, digital CAC is way higher, and it doesn't build the trust, and you don't actually own the user, and so, it has a lot of problems with it. So, all of these companies are not technically just doing digital CAC. And one of these companies um is is an SME lending play, very similar to Five Star, but in the north.
26:10 And their entire tech is fraud tech. And this is essentially micro loans, 1 lakh or lower, and the founder's grown up in the microfinance business, and his entire thing is that, "Hey, listen, I'm okay taking the risk of underwriting. That's credit risk of this market. I know how to underwrite it, and I I know how to collect. There there is a cost of that, and I will build that cost into the model. But I can't build the cost of fraud into my model. So, I'll have zero fraud, right? And you know, and he's operating in all these markets, UP, Bihar, Jharkhand, and all these markets, which are tough markets, and which are not actually traditionally the best NBFC credit markets, but they're doing a phenomenal job, and it's just that they've they've used tech to cut out fraud. Do you when you guys look at it from a 314 perspective, is it along similar lines for for NBFC?
26:59 Yeah, so, I think all of that applies, but there are two or three things that we started doing differently from 2018. Uh one is the ratings cycle of how our company evolves, right? From unrated to triple B minus, and then so on and so forth. So, to to answer the question, can we do it faster? One way you could do it faster is if you find a co-founding team of three people. They've built a book over the last 15 years, they've seen the market. So, no one's learning on the job. They're serious about it. I think Roopa at InCred is a good example. Like he came with that very important pitch, and the first round was like 250 crores, okay?
27:31 And instead of taking 5 years and raising 50, 20 crores seed, and then 50 crore A, and then 100 crore B, he's given 250 crores, get the net worth to a certain level, get rated in 2 years, turn profitable in three, and then, hopefully, you you'll go through a bad cycle, but you have enough of a stock to manage it. Hopefully, you're not lending to people you didn't know how to collect from. You can squash 10 to 12 years down to seven. You could. This you worked on in 2018 itself. The problem is those kind of founders are rare. Those kind of investors are even rarer, and there's still no certainty that the same rules that we had in 2018 would just stay consistent over those 7 years, right?
28:06 Because you're aiming for like this avalanche of progress that if regulations don't stay stable, you can't do. It's going to be a running into a brick wall. So, I think long story short, in in institutions, I come back to what I said before, there is there seems to be this you have to be patient, you have to go through the grind, you have to deal with black swan events. You have to have years where you don't grow.
28:27 And you have to be able to run new products when the market shifts, right? But if you do it, it's worth it. And I think therefore, the financial institutions will be the only sector where the same fund will have three or four of them, and he will tell you none of them compete. Right? Uh if he was doing HR SaaS, he had it for that eventually they all compete. Right? Because it's not a zero if he had four of them and he had four of them, he said three or whatever, and none of them compete. They're in different parts of the country, or there even one state is a huge market enough to go IPO on. So, it's still a very strange and outlier type treatment you give to that sector.
29:03 But that's why that's why it's not as easy to do it in 7 years. So, knowing everything that you know and now know, experience of doing your companies, 10-15 years of the Indian ecosystem, what what would you not do if you take uh Khatabook, or you take a lot of names, and we have also invested in a bunch of them. There's some work, some don't work, but has your mental construct changed today in terms of, "Hey, certain things are just overhyped, and they don't work"?
29:30 I'll go first cuz I've been around for shorter time. Um we we had a hard no on every wallet that came to us when we started. And wallets were the rage, like you remember, like just white hot, like everything was getting funded. Uh I think there was a wallet for food at one point, wallet for this like became category-wise wallets, right? Um you could tell everyone knew and the investors knew that the business model here is is a little bit shaky. We have to hope for the best. If you diagnose what's wrong with wallets today in hindsight, right? Back then of course you gave it a try if you were around, but we said this is not something we want to try.
30:03 But if you think about that wallet business model and what obviously looked like a problem, you see the same problem happening in certain other fintech verticals today. One interesting example is supply chain finance, dealer finance as it's called. Certain verticals, bad idea to go in, you lose everything, right? And including what you didn't put in the company. Um certain other verticals, of course you should go in, but at the right level, right? I think Vikram's team has done a good job of diagnosing all of that. The fintech reported a great job actually. They did the one earlier this year. I read that by the way. It's very good. Yeah. So I think if if you're thoughtful enough, you've been through this, right? Uh investors and founders are not struggling to find the areas of opportunity. It's just that sometimes the tectonic shift a little more unpredictably. And that's why it makes some areas unviable very quickly, right?
30:49 That's been our only problem and that's why when we look at models that say for example wallets again, um there's nothing wrong with the wallet business model. It was just that the way the regulator would treat them and what we expected happened. It just happened a little bit later. That's what we don't want to happen. That's the worst reason to be wrong. I think the second reason um what we're going to avoid, there are some places that uh deeply capital intensive. Uh for example starting an NBFC, right?
31:15 Capital's almost the only moat. It's a raw material. It's the moat. It's what you need to get to the next regulatory level. Uh founders who don't enjoy raising capital or don't think that's part of the job, uh when we see that in that market, we say thank you, but first of all it's a tough market, but secondly, maybe not this team. So capital raising ability of the founder to be raising 24/7. And I come back to InCred and Bhupi, I credit him for that.
31:36 I'm not a shareholder, but I've seen him grow from nothing. InCred right? And he's going IPO soon, so the red herring will come out, you'll see it. But I think you also need that a typical type of person that enjoys that kind of being that kind of flow. And third, I think maybe the most uh scary lesson I learned early is you have to as a startup in this space, you have to work with other institutions. And now with co-lending and the deposit rules and so on, they become tighter. You have no choice, right? If you're not a kind of guy that the institution respects and gives some kind of early handshake to, right? Uh you're you're somehow on an ego trip that you want to be an outsider forever. I think those are again going to be narrow wedges that closed on your opportunity.
32:16 Uh so you have to work with institution builders who can work with bigger institutions. And I think therefore it's not the sectors that uh tune themselves out, it's more the people in the market meeting where that convergence or lack of convergence you'll be able to assess. So I had this view of this, you know, the these are things that I will not invest in. Like like wallets is is sort of in that same and we never ended up uh doing it. I know I did. That's why I used wallets. So over No and but over a period of time, I've realized actually that I should not have these and these created create biases for me and I end up missing some of the largest opportunities. And if I take my largest misses, it is, you know, one of the things we often say to each other within within our firm is have strong views, but weakly held. Often if you have very strong views, uh we miss what is our core thesis, which is to invest in the best founders. And the best founders usually figure out an edge case in the thesis, right? Which is which they make a strength and they essentially disrupt the market. Right? And so our best investments have been in that. I like even if I take something like Razorpay, it was like the 10th payment gateway, right? They were like at this at that point of time they said payment gateways are uh are is a is a is a dead thesis and so on, right? And and even today people are funding new you remember your first meeting with with those guys? And so what did they say as the 10th gateway provider that made you feel, "Hey, this is it."
33:41 I go to that success, I'll tell you about the two failures with this bias view, right? So when I look at uh you know, a couple of companies that I ended up having too strong a view on my own thesis and I missed. One of them is Grow, right? I I met Lalit Lalit Keshre very early uh out of Flipkart. I used to know the Flipkart ecosystem really well. They introduced me. They said Lalit is one of the best guys that we uh that to come out. He was in this co-working space, which is where MoEngage and all our other companies were there. So I used to keep going and visiting him and I just couldn't make up my mind. I got caught uh in my own modern thinking around this and it was essentially I couldn't figure out how does he make money.
34:19 That's why I go back to today what anchors my thinking, which is with low CAC, can you actually get to large financial trust? And his CAC on content was really very low and he was getting he was becoming the trusted source of advice, right? And then it would expand in the market. So I if I had, you know, seen it through his eyes over a period of time, I think I could have made that invest. Similar with Kunal at CRED for example, completely different because uh but he used user experience to build financial trust, right? And I didn't I tell Kunal all the time that I didn't see it, right? And the kind of founder he is. So the way I cut it is much more founder-centric in terms of can this founder see the world in a different way that gets them to this low CAC financial trust type equation in some way, right? Because if you can get that from enough users, you can actually build a a financial services company. So in fintech, what stage do you make the call? Do you want to see some product understanding, product market fit or you're still all in on just the founder?
35:20 I think for for us it has much more been founders like Jupiter, we we you know, we did it we did it right off the bat at seed together. One card we did it right off the bat at at seed together. Razorpay at didn't do it at at Grow. Exactly. So neither of us did it at Grow, but we both missed it. So but you're saying it's an evolution where that's really been your takeaway that So so for me the takeaway is actually at early stages uh if you see founders that are, you know, seeing the world in a different way and are building large institutions uh are have the capability to build these large institutions, they should actually go for it. Now, if uh in Grow's case, he was not going to make money for a long period of time. Then I would have right-sized the check. You're essentially saying how do I actually price the risk in? I would have right-sized the check. And by the way, Lalit wasn't asking for a That's why it that that investment haunts me. Because he was actually it was he was not asking he was right-sizing the check. He was very frugal and therefore, you know, should have made should have made that investment because he was he's going to make it last long till he could make till he could make money, right? So you right-size the check, right? And then if you find somebody who has figured out how to deploy money in a lending company and be able to collect, then you will do a larger check. Like this year we're doing a 15 million round 15 million check in a 30 million round where they have now proven through cycles, then I would just right-size the check at at that point point in time. Um I think you asked me about Razorpay, I would say, you know, in some ways there the thesis actually helped. Having a thesis helped that we were open-minded to say, "Hey, we are we have a bunch of payment gateways, they just don't work.
36:53 The failure rates are just way too high and we were having this mobile wave coming and it needed a way of doing mobile commerce and failure rates with mobile because the hops increased were going to be even higher. Uh and therefore we needed a new way of thinking about it. And so we were just looking at folks who were taking a very technical view to reducing failure rates. And that's what they said in the first meeting. They were And by the way, that was the company for the first three, four years obsessive about failure rates and even today they just obsess about failure rates.
37:24 And and how was your meeting with Jupiter, first meeting? What did you walk away with? actually very famously inside 314, I had to fly to Bombay that evening to make sure that I'm we're part of that round because this was I still remember um he's one of the best fintech founders in terms of having delivered an exit back then. So Citrus Pay was one of the largest sales. Um second, Jitendra is an institution builder, right? Um he's very clear. His style of working, his ability to make decisions and we knew his um reputation in the other institutions we work with closely, the the banks and so on.
37:57 And third, I think he had a fairly straightforward methodical pitch on what Jupiter is going to be, right? There are risks. There are certain things that are not allowed, he won't do them. And you wanted to bet on a founder that in this like I said, the institution building part that is quite cumbersome, will not make the mistakes that everyone else may generally run into, right? Because he's been there before, he's done that. So there's this corner of the market where in terms of founder quality, you trust the founder's judgment. You don't have the answers. He doesn't have the answers, but you know that this guy is kind of guy who'll figure it out. I think for most other founders and there's a classification here obviously, you can decide the percent. Um there are some investors who if you don't have the answer yourself as an investor, you're not willing to invest, right? So again, Grow, fantastic founder. I totally mirror Vikram's sentiment here. But none of us knew how to monetize that, right? And we've taken bets before where we said, "No, forget it. Okay, we'll just trust the founder, whatever." But in mutual funds, we said, "Don't uh there has to be something else, right?" And remember this is back when Zerodha also was not as big as it is today. They were proving things out in brokerage and so on very early.
39:02 If you zoomed out, you would have seen that there's this whole class of companies that were all proving out something at the same time and they all became quite large, right? Um but you couldn't have zoomed out back then. It was very complicated. As a VC uh especially in fintech, most of us, you know, you're listening to 20, 30 deals, you know, a week or every two weeks. Have you had situations where you have rethought that Oh, yeah. because of something the founder has come back and said? So in the line of Grow, um we had done a lot of work on brokerage and we'd said mutual fund is that no for us, but there was this huge huge huge TAM that became profitable very early on if you build the right product, which is where I think Zerodha's done excellent work.
39:46 Uh we met a guy called Pravin Jadhav, PJ as he's known, Paytm, uh before that FreeCharge with Kunal. He had not taken his product live, but he was raising a 15 million Series A. Um the kind of firm 314 is we normally Okay, okay, it's fine. 15 million, let's take the pitch, right? Um Anurag took the pitch, I will credit him fully. He came out of that meeting saying, "Dude, I've never heard this pitch before. Just make sure I didn't misinterpret it, you go take the pitch."
40:12 So I also spoke to Pravin on a phone or a Zoom or whatever. Both of us came out of independent first meetings with Pravin saying, "We can't believe this is true, but we can't because we've done a lot of work on this market, right? Like brokerage, we're very close to that that space. Um and we're big fans of the commerce and so on. We've diagnosed this in and out." But what he was saying back then was ridiculous, and we didn't know it was true.
40:35 It was so ridiculous, we said, "Both of us have to take independent pitches to make sure we heard it right, right?" Then I think we did 2 days of work, and we came back saying, "He's actually right. It could work." I won't say what he said, but um he was right. Uh we ended up doing one of the largest checks we've ever done in a company that has no product live, no revenue live. It's still on record one of our largest checks.
40:54 Um this guy 2 and 1/2 years in is doing 80 million of EBITDA positive. He's at 130 million in revenue. Um it's the fastest company to get to this level of profitability, I think, in recent memory. And um if you just give him a 20 PE today, he's worth 1.6 billion. Right? Absurd. Now this is you There's no portfolio construction plan for a company that goes up on the upside like this. But it came down to both of us saying, "Make Making sure we heard it right." And then doing the work to say, "Let's give this guy's view a shot.
41:25 Let's test it, But I What are you saying though? Are you saying then for a founder he needs to go talk to two partners? No, for a founder to have an insight that even in a market everyone's diagnosed in and out, right? For a for a crazy guy, in a good way, to have a weird insight that we've never heard before. Oh, okay. So you So if I were to summarize, you're saying for people who understand the market, can you come in and provide insights that makes them think a bit more, right?
41:51 Because we are fintech investors, we've been doing this for a long time. Pravin's not a new guy to this space, so we speak the language. Uh both Pravin and us know the same people, so it's not like he's coming from some new universe I don't know. But he's got a way of thinking about this time that we've never seen before, right? So the takeaway is you have to be willing to be surprised. I think Vikram made a good point. You can't hold on to negative theses forever, most of them, right? Um proptech for for instance is I'm still the last guy saying no, but someone will change my mind, I'm pretty sure one day.
42:20 But for now it's in that area. But in this case, the founder was able to He knew something. He knew something. So we have to be humble enough to say we're not going to know everything, no one will know, but open-minded enough to say if someone comes with that change of insight, you're humble enough to say I need to validate that's true or not, right? It just It could just work. See, as a as a VC, today I live in the in the headspace that most of the time I'm wrong, right? And most most that most of the time I'm wrong because, you know, you have such little information to make decisions, and you're trying to make as many good decisions as possible in that, but most of them you get wrong, right? So I live in that space, and my headspace is most of the time I'm wrong, how do I make this one good decision in this 15-minute window that I have at the end of the Zoom and and and so on, right?
43:05 I think most VCs don't live there. I and as VCs overall we have this problem that we think we're right. Actually actually we're not, right? Most of the time we're wrong because if I take my decision, then I I would say I have a reasonably successful portfolio and track record and so on, but that's come from saying yes to 10 out of 100 companies. Of the 100 companies that I said no to, The classic power law of the 100 I said no to, by the way, 20 have become very successful. That means that at best I made 10 good decisions, 20 bad decisions, right? So my decision On the upside So yeah, so I I overall I'm wrong in that in that 100-company portfolio, right? Um so I actually look for people who are going to prove me wrong. And so and usually the investments that we make is when the founder says something that changes their mind. Right? And and so that's actually the best investment.
43:51 When the founder says something that makes you change your mind. Yeah. And so you go in with a point of view, which is usually a negative point of view, and the founder says something, and as soon as the founder says something that is against your view, and you start seeing what you what you saw, those are actually the best investments. Uh and so it's hard for to train younger VCs, especially just on this, right? Because they want to be right, and they want to be the smartest person in the room, but that's actually where the magic uh sort of happens. Now today what I do is actually when I when I'm in that situation where I'm saying seeing something with the founder, but he's not able to convince me, then I actually say this is my bias.
44:27 This is why I think I'm not going to make this investment. I actually put my cards on the table today and say I have a negative bias. This is what happened in this investment I made, so that makes me biased negatively. I have some scars, it makes me So I put my bias on the table, and then actually it creates a an avenue for a conversation. Now if and again I have you know, if you're if as a founder if I see the VC is not willing to have that conversation, I would actually probe saying, "What is holding you back?" Right? And usually some of the best pitches that founders have made is say, "Okay, you know what? These are all the risks with this company, right?"
45:01 I remember Anurag at OneCard had said this, "This is what is wrong, this is what is wrong, this is the risk, this is the risk, this is it." He actually came in He's a very sharp founder, by the way. The first slide was only risks, right? And he put all the biases we had on the chart. He said, "Okay." And he said, "This is why this is wrong, this is why this is wrong, this is why this is wrong." Right? And so it's a it's almost like a negative pitch. As a founder, what you can do is understand what the biases are, understand what the risks are on the other side, and actually address them head-on on that. And usually the best way to tell the story is from the customer or consumer that you are serving, and how do you bring them into the room to say this is how I'm solving the problem for them in a different way that mitigates the risks that you I think you're on.
45:45 There are some founders who do a pretty good job of actually reading the room, okay? And so since this is a generic question, I'll give you a non-fintech example. We are investors in this company called SpotDraft. So the first time we met Shashank, he could basically make out from all over my facial reaction that I'm just not thinking the market's large enough. And then he said, "Hey, why don't you give me 1 more hour?" I said, "What are you going to do?" He said, "We're going to go through ZoomInfo, and I'm going to walk you through Europe and the US, and we're just going to do click and go through how many companies are there where there is a GC." My whole point was you're saying you need a general counsel, and I don't believe there are more than maybe 10,000, 20,000 companies buyers, right? But his ability to come back and ask for 2 hours on a Saturday where all we did was sit there and go through ZoomInfo. Switching gears a real quick to the B2B side. Can India in the fintech space see a 100 million ARR SaaS company? With 100 million is tough today in a single category for a single company.
46:45 10 years? Yeah, tough today, uh but I'll I'll tell you what I think the early signs of what we're seeing. I think now uh just the way the regulators moving in and changing the boundaries, good and bad, but mostly good. Um it's hard for even the largest institutions to say business as usual is fine. So their procurement mindset for software has shifted completely after COVID. COVID I think was the biggest scare to everyone saying, "When When everything hits the fan, and everything hits a brick wall, what systems do I rely on besides people and institutionalized knowledge?" And the answer is we need software, we need agents, we need all these things, right?
47:22 Um so I think they've done a full tilt on procurement. That's number one. Uh number two, now they're willing to procure Indian software. Earlier they used to be Infosys, Wipro, TCS core banking in India, and then all this fancy AI stuff from Israel, Germany, whatever. Now um there are dozens of SaaS companies in India from fraud detection to customer acquisition, DPD management, etc., etc. Uh they're willing to do pilots with all these very young seed Series A companies, which is fantastic. That wasn't true even like 2 years before COVID.
47:52 And third, I think the problem here is still they don't pay as much as they should. Still right. So it's still a very "I'm your biggest customer, let me make sure, you know, I exercise my size in front of you." Um so your ACVs are quite low, right? Um so that's been that's been where the funnel suddenly contracts, and for the effort you're putting to land India's fifth largest bank, for example, the ACVs aren't showing that that customer matters in the long run for a SaaS-type outcome, right? Uh so here you make two branches. Either you say I need a thousand financial institutions as customers to make the first 25 million of ARR, and a thousand is too many, right? And therefore it's hard to build a venture outcome in that. Or I'm I need, say, 300, but I'll sell them four products, right?
48:36 Um and ACVs are four combined. Um no one's been able to build four products in the same company. No one's been able to onboard a thousand enterprises. So I think that's where the the founders the the best founders will run into a wall. Now what could change? Um I think if if, for example, this very obvious threat of AI-led cybersecurity becomes a real, right? And Vikram made a good point about India needs to prove its AI chops uh differently, not by building LLMs in, you know, Nvidia data data uh clusters, but maybe the best AI apps. Um there I think you've been seeing pricing very differently, right? The per seat or per ACV, whatever, that could completely change. Could be on transactions, it could be on frauds detected, whatever.
49:18 Second, uh if the MDRs change, right? Uh suddenly there's more margin to play with on the largest flows in India. And therefore the procurement budget for suddenly places where they didn't want to buy software, they're now they're willing to pay. Suddenly more products can be sold very quickly if you're in already, but that's number two. And number three, I think um today so we have three or four companies in the fintech SaaS vertical. They're all sub 10 million ARR. 5 to 10 is the range.
49:46 The rate at which they went from zero to five is three or four times faster than what I would have underwritten when I made the investment. Right? So I'm seeing early signs of 0.1 and two working. I would have sent them global much earlier now at least as if I was on the board, but now the board decided to stay here. There's enough room to grow, right? So I think 0.1 and two we're already seeing the changes.
50:08 But 100 million today I'm still a little bit unfortunately pessimistic. I think 40 50 100 is a big number. I mean 50 40 to 50 I would say in the right verticals I can see it. I I I think this is one of the every VC's favorite question, right? Which is you know 100 million dollars gets you to a billion in in in valuation and then you know that makes it meaningful for us to the fund. And I truly do think that it limits our thinking when we ask ask this question. And so so my answer to you know can you see a 100 million dollar company? I'm going to say is yes.
50:41 And if you ask me how I'm going to say I don't know, right? So but because I do think I need to take the leap of faith right now in order to believe it so that I make these investments in in some ways, right? And it's not blind faith. It's all of the things that Pranav was saying on on you know where it's anchored in. And I think you know when you over a period of time and you know now you know after having done it for enough uh uh uh time for a decade and a half I've just realized that when when this you know snowball on the top top of the mountain looks small you can't imagine how big it is at the bottom, right? And that's unfortunately how the the human brain is wired and therefore you know when you ask can you deterministically see the 100 million you can't. But uh you know do I think they will happen? I I think they will happen. Now how do I cut this problem therefore and make investments then and from there because I'm not going to just blindly you know throw money at this is essentially you know look at founders and my learning from you know the likes of ScienZe and Digio and things like that where I ended up passing and now I'm like why you know why didn't I see it, right? Is actually that they are uh the they were solving for point solutions. That is that they there's a very pinpoint pain that they're solving for and they're solving it in a deeply technical way and then you can't see the platform company that they're going to create. So if there is a large enough pain point like CAMS.
52:03 CAMS is a humongous company right on just one one small one thing, right? That's it. Uh which is just like if you might you could imagine how big mutual funds would be you could imagine how big CAMS CAMS can be, right? So I'm not so therefore I'm not dismissive of the point solutions company, but then I'm trying to figure out how large is that point solutions problem and if that I can underwrite 10 20 million then I'm going for it, right? I I'd say that's that's both points we would agree with. I think our view of the 100 is more about the fact that India as India goes beyond this 100 million users the category itself has the opportunity to become larger, but to get to 100 you're really looking to invest in founders who can be category creators, which means can you go outside in concentric circles whether you acquire whether you buy. And even now I think over the next seven years the 100 million is going to be a private equity led three companies put together, but that company could be a real force because the concentrated nature of this 30 banks, 15 brokerage firms you build a great sales team in India that's hitting everybody and you you learn how to sell at the enterprise class level you're going to be hard to beat. So I think that that kind of uh uh that kind of becomes different.
53:21 Wealth tech seems to be the rage right now. We we've done only two investments. I would have liked to do four. So what do you make of that in terms of so so what drove the two investments? Uh point in time. I would say Deserve was a founder bet. Um It is a founder bet. Sandeep you know senior from IIM Bangalore my neighbor in in in in in Mumbai helped build IFL into 361. Same for Vaibhav and Sahil as co-founders. So honestly that was a just a team that I'd been tracking forever and for us you know one of the best founding teams then starting up in domain going after something that they knew and they using tech to cut operating leverage in that in that business. So I would say it was just a very easy investment to make just on a founder bet.
54:13 Now over a time period of time hindsight the thesis also looks good. I I love that part though. After you say it out three four times suddenly it's flowing better. So the hindsight thesis looks very good on emerging HNIs and and and so on, but I will say it's it's not an obvious business model and business, right? Because it's a uh Now you know people look at Anand Rathi's market cap and where Anand Rathi has gotten or IFL has gotten and they're like wow so this is such a huge profitable business, but actually in the early years there is a lot of pain because you're actually spending so much on CAC, right? And you have to believe that you a large part of your clients' wealth is going to be on that platform and then they are going to compound on that wealth and give more to you and you're going to compound that wealth. So and so the power of compounding is what gets you to that end state business model. Now it's actually very scary to live through that there's a cash trough in the business model, right?
55:13 And so you have to live through that cash trough with the right set of founders and that's how we look at Deserve. part of but right now in the market I am there like there I think five six teams doing the rounds in hey we're going to go after NJ Invest. We want to enable the distributor. What do you think of distribution led businesses aimed not at the you know Anand Rathi clientele, but one step below because it's exponentially harder to aggregate value there, but if you do it it's amazing. Yeah. So on wealth we we said we'll have a barbell type approach. Um we have a few bets in manufacturers. The product guys like we're in Wind with you together. Uh they broke even October November. So clearly something there is working should grow into a larger company soon. So I think new products, new avenues to help people compound, right? I think that is going to do quite well. Um not from 314, but the guys at Marcellus are very good friends of ours. We know that it seed investors very well. Uh they've become 78,000 crores of AUM in two years. Again they're pseudo manufacturing, but they're managing wealth. Uh we clearly see a need. That's very apparent.
56:23 And on the other side we've done like brokerage execution with Dhan and so on. Fantastic obviously profitable huge huge stamp. In the middle is where I think like Vikram said um it's going to be founder led. It's going to be people who know to get through that cut. Uh it's not a straightforward path at all. People have earned their money the hard way in India most of the time. They are very very reluctant to to trust new new people, new teams, new companies, new brands. Um and today if you look at the larger wealth companies they've become violently territorial.
56:54 Uh they don't like it when you take that line. Violently territorial. Um and the extent to which they will go to protect their AUM because they they've built the hard way man. When when they started India's wealth was 400 families. Um I credit them with having built the scale they have and they're not going to let go of that easy, right? So there's a zero sumness somewhere. I think it it's a question mark on what it takes to win.
57:17 But like like you said like Vikram just said when there's new territory, right? It's going to need a new team sometimes to think of how to get after that profitably faster. I think that's why I credit Deserve. They saw that territory expanding. That was a very unprofitable segment for the larger wealth incumbents. They said we'll put in the effort to make that more affordable to take over. I think that's a good approach. Um there's a company of ours called VRISE which is in the pure small town 5,000 small towns.
57:43 those founders. Good founders. Yeah. they're they're again hugely profitable many millions of dollars of PAT. Uh they've gotten to 1,200 crores in AUM very fast profitably for the last two years. Um they use they pay zero to Google and Facebook. 100% of their distribution is offline. Right? And no branches zero branches. I just met Vishal right now. So this still stunned with the numbers. But there is clearly territory to win here and you're going to need some really orthogonal founders to be able to make sense of that. So I think barbell is so far playing out. Middle is where like Vikram said you can't be very thesis led. You have to be a little bit okay open to adventurism cuz that's what's going to win that market. And I think overall wealth is a distribution led game, right? I think the question is how do you actually bend the curve on distribution such that it doesn't take 20 years to build that distribution. And can you do this in a smart way where you can actually build that distribution in five years?
58:38 But do you guys think the wealth product itself for the outer concentric circles needs to be reimagined? I I think yes, but I I I'm and before in the thesis I I would have said yes and I'll look for that first and then I'll So let the founder design the product. So if if you are if there's a founder who wants to build reach and then back into manufacturing an interesting product for for right size it's it's an We've invested in stable money. It's still early, right? And that's one of those situations where I was looking for more I would say the thesis was most more alternate investments and you know looking at companies like Wind that you guys have invested in and so on. And he said actually the best best alternate investment product is FD. Uh so I and I said and I was like really?
59:25 You have turns out to be true. Yeah. And so and then he's backed into other products, right? Because he's used that as as a as a GTM in which So, absolutely, I think distribution led plays will will will work. I think many people will have different ways of doing it. And I hate to come back to the same point again, but I think you as long as you keep that CAC low, right? And you're right sizing that CAC for this for that next 10 million, 20 million in in I would say what we think is non-wealth India, which is not actually non-wealth India, but smaller towns and cities. You know, we all love India's digital rails, UPI, falana falana. Everything is awesome, amazing. And whenever I go, I always tell our LPs when we go abroad that, "Hey, just come to India. Everybody is young. Everybody is beautiful. Everybody is digitized." And it's just awesome show. And also when you land land there in in in in all of these, you know, countries, you're like, "This is so slow."
60:22 Yeah, no. I actually have I mean, my my kids are there. And so, my daughter will tell me, "Hey, I just need to write this check to this utility." It comes to me. I'll say, "What check? What is What is that What does that mean?" But the question I have for you is like, "What else is there in India's digital stack that you feel unlocks a large problem, right? To some extent, even grow." EKYC is what's unlocked everything for everybody along with understanding the customer interface, etc. Um I think we've come a long way. I think a lot of the So, a lot of what makes fintech good and and difficult both in India is that a lot of the things that your companies are expected to build as moats and your proprietary, you know, competencies and so on are not moats, are not proprietary in any way thanks to the open India stack and so on, right? Um and therefore, a lot a large part of what you would charge for and where your margins lie are also now public property. Everyone has the same competence.
61:19 So, it makes for you to not be able to use a one-to-one correlation from Europe to India, even China to India or US to India for sure. And so, underwriting Indian fintech, especially for the globe as all of us have worked with them, they all have to pause and say, "Wait a minute. Wait a minute. Something's different here, right?" It's always like a wait a minute. "Slow down and understand it first." So, the fear globally has been, "What else will India make free?"
61:40 It just comes down to that cuz all of this free or whatever minimally charged. Um I think we've looked at it at two ways. We look We've gone and spoken to the people who built actually built these things. And in their head, there are two types of logic. You I'll just make it clear to the audience. One is, "Look, we understand businesses have to make money and MDRs to go up and this has to happen. We can't do everything for free, etc." There's a pragmatic realization there and I think that's good, right? On the other side, there's still some people who say, you know, "Look at Tencent. It's a trillion dollars monopoly. Look at Ant. It's a trillion dollars monopoly. Oh, too bad your VCs will not build a trillion dollar company in India. Tough. You'll make a hundred billion dollar a year company or enough, right? Why are you getting greedy?"
62:19 Okay. Okay, thank you, uncle, but okay, right? So, you're stuck between this barbell logic. Um so, I think you would be cautious. You have to say, "Companies that are trying to do too much in making interconnectivity and so on and so forth, maybe there's no point, right? Maybe just assume that's going to be part of the rails and so on. There are other margins to go after." Um second, I think they have also realized that they shouldn't do too much at once. So, now the shock absorption capacity of financial institutions has been tested to the point where it might break.
62:52 They've slowed down. They stopped pushing too hard. So, I think now you can expect less to become free in the future, which is great, right? And third, I think thankfully, this happened this this India India stack happened at a time when India was formalizing, not formalized. So, we're not in a mature market where um you can't take these things in the stride and just build around it. We could We all of us did that. All of us had to work around it. Um if this happens in 2035, for example, more things become free suddenly, it'll be catastrophic, right? So, I I I think that's why they rushed it. They said, "Do all of it at once. One-time shock.
63:25 Get Get it done with demonetization." Like everything was done at once, right? So, that's over. So, going forward, I would say we're expecting less to become free, less to become open. Uh I think for better or for worse, it's good it's that way. Um I think it's made launching products faster, which is great. I think it's genuinely made more Indians come into the financial system, which is fantastic. I think that's important to accelerate. I think now we need a mature approach to allow people to be to make money in the market, right? And that's where I think you will be all pleasantly surprised next two years.
63:53 Um this government this system is going to allow the financial institutions to take their margins up, which is fantastic. I think uh all around is good for the environment. Therefore, founders who are now willing to be institution builders, right? I think there's a bigger pot of gold in the end of this path. But it's been tough. I will not say it's been easy. It's not all rosy for sure. Um so, it's been a good learning for everyone. Uh especially the last part about having a greater share of the transaction or however gets priced by the regulator is really good news for everybody.
64:25 I think the overall there's a learning that if you don't let the largest companies that are built on this make money off their core business, let's say payments in this case and so on, they're not going to invest in the innovation behind payments, right? And the surface area that these companies have created, right? Whether it's the Razorpay and the PhonePe and so on is like a huge surface area of attack for the country, not just like the we come to it, right? Right? So, uh therefore, for them to actually continue to invest back in sort of fraud systems, cyber security systems and so on, they they need to make money off those, right? So, they're It is a They're providing a service. It's valuable and they need to make money.
65:02 And I think some of that learning is is feeding into the next wave and so on. Uh going back to your question which is a little bit more pointed on part of the India stack, I'll leave you with the part that I am personally very excited by is the account aggregator. And I was when it was sort of first launched and so on. It's just taken more time, right? As more and more stakeholders, right? Like SEBI is just starting to get all the uh all the wealth managers and everybody's now starting all the brokerage platforms are starting to share more and more now. Banks are getting integrated more on the wealth side. I think the account aggregator is an incredibly powerful tool and obviously also has to be used in the right way from a data privacy standpoint. But if used the right way, it gives me a complete picture. And some ways as long as Bala lets me, I can actually get a complete picture of who Bala is and therefore tailor very unique financial services uh to you in the end state. It's still three, four, five years away from this, but early, but are you guys seeing interesting ideas? We are uh and and that's where I I think, you know, if it all comes together, right?
66:09 Uh it it's it's not been possible anywhere else in the world, right? That's that full picture of that person is available, right? And if that is available, then I can truly uh with, you know, and then marrying it with the AI, I can really truly say, "This is the personal relationship manager for Bala, which who will all the time figure out how to actually get Bala the right price of financial services while making money for for for the company." So, I think it can be incredibly powerful.
66:37 that account aggregator area is like payments going to be two, three people cornering the bulk of the volumes? Because I can also see extensions of what you're saying. Yeah, I don't know if there is a PSP-like framework like PhonePe to take it to market or and so on. So, I don't know if I'm betting on a PSP-like framework, but that underlying trend having a humongous impact on the entire financial services ecosystem long term. I think that I'm betting on.
67:07 Okay, fair enough. Uh can't do anything without AI. So, let's go there. Hey, given everything we've talked about, right? We've talked about the market, how it's evolved. We've talked about digital stack, different sectors. What does AI do for India in financial services? There's clearly a B2B element which everybody and their brother is trying to do, the Khatabook and the OKCredit. As to what went wrong, it's a leading question because I almost feel what made it fail possibly could be solving it through AI going forward.
67:42 Yeah, it it's an interesting one. See, the uh analytical uh unfortunately, all my you know, training was analytical and you know, it's hard to get away from that thinking, right? So, then you think of what are the ways in which AI can affect all of our businesses. So, then the normal way of thinking is, you know, the way you acquire will change. The cost to serve will change. And the way you build products and will will will change, right? And so, that is the three fundamental things that that you do. And all three of these can change, right?
68:11 So, uh because you have a large set of users, suddenly you can build an, you know, right now you can only imagine a chatbot layer, but that layer can do a lot of education, for example, in wealth or for example, in education loans and so on. So, suddenly these areas where, you know, there is a big funnel from top of the funnel to middle of the funnel, which is actually servable, suddenly can be all handled by AI and that actually brings down the cost of reaching. Then there's the cost to serve because a lot of times financial services, especially, there's a lot of hand-holding required in different categories, right?
68:46 Uh ranging from, you know, complicated wealth category to like a complex loan to to even like a complex, you know, purchase category where you also need purchase financing with it, right? All of that, the cost to serve suddenly is it it has to be very high. And, you know, for example, relationship managers, huge cost in a in the in the in the wealth tech business. Uh and um you know, if a if one of the big arms walks out from Anand Rathi, he walks out with a, you know, 10 10 crores or so of clients and so on.
69:18 And so, there's a big problem that, you know, AI could uh solve solve that. And then finally is, you know, where I was going, which is ground aggregators can actually then feed into to AI which can design exactly the right product at exactly the right time potentially for that right. So those are all the you know I would say analytically you know broken down interesting ways of doing it but you know I I always think that you know as we see because we think analytically that's why I'm not I'm not going to make a great founder. I think a founder is going to figure out a way to stitch stitch together in in a crazy way that we we can't think of and I think that's what is important in these you know transitions that you that that we are going through which are sort of just the ground shifting underneath our feet. It's important to just keep an open mind to how the founder is stitching this together. I have this framework that I'm analytically putting coming together with to see if I can you know catch enough things in the basket but I think what I'm really looking for is a founder that stitches some journey some consumer customer journey together. All right consumer I think of B2C customer I think of B2B is just they're going to stitch an interesting journey together where there's a complex category suddenly made simple because you can do assists through it.
70:41 So I mean the way we're thinking about it now is we've been analytically wrong on a lot of stuff right on a lot of stuff so that that will continue I think. That's the curse of the VC. But we're working backwards from again 7 to 8 years in India. I think one of the biggest constraints in India that we have which is the constraint of human expertise. The best human expertise is not available to everyone right from tuition teacher to VC to anything everything is cast on the human interaction.
71:07 We're assuming AI removes that barrier and makes human expertise much more democratic right. So learning from the best R and Samrathi whatever wealth manager firm deserve can rebuild that experience for 100,000 customers life right. Second I think what AI can do is if account aggregator truly becomes fully horizontal supply chain financing suddenly is using real time fast tag data on a truck going through tolls to figure out when it's going to come on time he's been historically better on time underwrite entire supply chains differently right and no human intervention required.
71:41 Third fraud detection and so on we'll have AI bots running around trying to figure out your OTP or whatever so in real time and then we'll have AI cyber security working against that AI threat. So you'll have a different type of expertise that's totally non-human and that's going to be a big time to tap into. So I think all of this touches financial institutions in ways that no one's imagined. Right. I think the biggest shock to come is going to be this.
72:04 And I don't know if we're ready. I don't think any government has thought this through end to end. Now the good news is that I think there's a lot of benefit to people who in India who still out on the front on the edges of the financial system. I think they'll come into it in a different way. Right. It won't be through Google and Facebook it may be something else. It may be through YouTube it may be through something else. We don't know.
72:26 I also think Gen Z it's the largest population in India 387 487 million people whatever. I think they're already very different from me. I'm scared of what's to come. I don't know if you guys are scared but that We're not scared we're petrified. Yeah I don't know I delete everything I think. I think that generation is coming at the right time for AI. We'll have two very weird things hopefully keeping each other busy. And therefore time for us to exit our very anti old school and non-AI investments while that's taking care of itself. But I think there's going to be a generational leveling up. I don't think it's going to be continuous and that's what scares me.
73:05 I think a lot of things can go wrong fast. So we're hoping for the best we're optimistic but that's the downside of what's to come. There's two very weird forces like beyond behind that wall. What were you saying Vikram? You were going to say something. I thought he was the bridge to that generation. You're scared like he's the bridge and cut the ropes for us. But look we're majority Gen Z you know bunch of our teams inside 314.
73:39 The culture is radically different. Things that didn't matter to me and you know like I said it's it's a brutal job etc. etc. It matters so much more to different people in certain ways right and things that never mattered to me they think very highly of and that's a very super important. So the prioritization towards are very different and I thought we we didn't respect authority whatever we were a little bit you know guns rock whatever right. This is like a totally meme stock type behavior you just can't predict what what is important.
74:10 very interesting example that involves Karthik where he's often told me Bala whatever you think is important to you is not what young people want to hear and I said okay thank you Karthik. So he's done a great job of of because we try to maybe explain things in a certain sequence with a certain amount of human to Causality yeah. It breaks down completely. Can you say it in 10 seconds that I can flip through otherwise you're gone.
74:35 Last area um I always get confused funding winter funding summer winter solstice doesn't matter but how are you thinking about valuations in this market? I you know if founders are listening what should they be indexing towards and I know it varies Vikram by B2B B2C but Everything yeah so one I think as a founder it is a once in a country's lifetime opportunity right this these generations these decades this decade honestly is going to define the country.
75:13 Right and and so there is no better time to start a company as a founder right and that's what is important. Forget all this valuation we see like it just forget all of that think of where we are in the world's history and this country's history there's just never been a better time right. Now if you sit down at a cards table or a poker game whatever right you play the cards you're dealt so and the pendulum on this capital valuation keeps swinging right and you know it it'll and that's why it's called a pendulum it keeps swinging. So it will it keeps swinging and therefore which So where would you put the pendulum now?
75:52 I think I would say it's is more on the conservative end but reasonably balanced and and especially at the early stage markets right if you look at you know we have three funds here. Now there is probably like 25 funds that matter who are or doing things in the especially at the early stage investing in fintech financial services. See you've never had such a rich set of things at at the early stage. Yes it thins out stage after stage and it should thin out stage after stage and that's Darwinism that it will thin out stage after stage and it's okay but at the early stages I don't think there's any positive of capital.
76:31 Now depending on how good we are feeling off about latest evaluations which is driven by how good they are feeling about cost of capital in public markets right the valuations will go up and down but honestly in the early stages they don't go completely out of whack. Yes one founder who's you know been hugely successful has you know great right to play right to win might break the valuation mold but beyond a point it's there and and that's where when I get into very testy negotiations between you know 19 versus 20 versus 20.5 I'm like okay we're missing the plot and you're missing the plot and and the week but let's just not go through more of this fish market negotiation because it actually doesn't matter it's in it's in that zone it's not going to change anyone's anyone's life beyond beyond a point right. So I think it's important to remember just where we are in the country's context this pendulum will swing play the cards you're you're dealt more important to find the right partner and the right VC that you have this chemistry with because you know honestly this is one of those marriages it's harder to get get out of than your than your so so it choose carefully get into business with the right partner set where you're going to be able to live this journey on a consistent basis then worry about some of this.
77:46 Now the second part of the question is is capital available at data stages for the right companies it absolutely is available. There's essentially enough and more capital at at every stage right whether it is public market and now it's like so many different things. Family offices are coming in and and and doing stuff wealth managers are coming in and doing stuff so there's all sorts of capital available so I don't think capital is a joke. I think I I agree. I think I use this example often when I was in school sub 1 trillion GDP in college 2 trillion now early part of my career 4 trillion the last doubling is in front of us 4 to 8. I think it's a mad mad decade. I think we've suffered for generations to get here.
78:30 So all this funding winter and stuff I totally agree it changes. I think founders who didn't start out in the last couple of years or thought twice about taking risks I think they'll regret the last two years because the founders that did do the work and got through and we all have founders who did that they're going to be so well rewarded next couple of years. I think the US coming back will set a new tone next year. I think a lot of the old relationships countries have with each other are all going to be fundamentally rewired. I think wars have changed personality tremendously in the last six months.
79:03 It's more automated it's more robotic it's more drone led. I think a lot of the scary stuff that's coming out of North Korea and so on now is going to lead to a lot more variance in the markets going forward. I think the stress therefore on founders is not going away. So I don't think you should get shook by the last couple of years. In fact, it's good training. Um take away that India's always built huge outcomes in frugal conditions. Now, it's much more capital available than ever before.
79:31 Uh start those companies. Build them. I think the price is worth fighting for. And for sure, I think local capital is more courageous now than it's ever been. So, I think you had a good point earlier also that will there be more domestic capital and so on. I think for sure. I think uh our companies are beneficiaries of that. We're returning two funds through exits to domestic capital that wasn't possible when we started even 8 years back.
79:53 So, I think uh it's a much better environment. And therefore, the regret will be not starting or not taking that risk now. Hey, you know, I think both both were very well laid out. So, I just want to thank you guys. I have a great time. I learned a lot. And I've always wanted to have you guys over and talk. And I it means a lot to me that you made the time. So, thank you for calling. I owe you guys. Okay.
80:15 Can we have any other variation with your sitting position? I have very few smiles. I'm using them all up my intellect. We we will both look into Sorry, you want a podcast that's more like, you know, so we need to record this before. Good. All right, man. Here we go. Thank you. Thank you. Appreciate it.
Summary
- Fintech in India has seen significant growth, with 106 companies funded at Series B and above, indicating a robust ecosystem.
- The first wave of innovation focuses on acquiring customers at the lowest cost while building financial trust.
- Founders must navigate a complex regulatory environment and adapt to changing market dynamics to succeed in fintech.
- The account aggregator framework is seen as a powerful tool for personalizing financial services and democratizing access to expertise.
- AI is expected to transform customer acquisition, cost of service, and product development in the financial sector.
- The current funding environment is characterized by a conservative approach to valuations, but capital is still available for promising startups.
- Founders are encouraged to focus on building relationships with investors and understanding the long-term vision rather than getting caught up in short-term valuation negotiations.
- The next decade is viewed as a pivotal time for Indian startups, with significant potential for growth and innovation in the financial services sector.