From Discourse Magazine, April 27:
Shruti Rajagopalan and Sajith Pai discuss investing in the Indian economy and the different approaches that are needed for different markets
Ideas of India is a podcast in which Mercatus Senior Research Fellow Shruti Rajagopalan examines the academic ideas that can propel India forward. You can subscribe to the podcast on Apple, Spotify, Google, Overcast, Stitcher or the podcast app of your choice.
In this episode, Shruti speaks with Sajith Pai about the various sectors of the Indian market, unique payment systems, public versus private investment, the role of artificial intelligence and much more. Pai is a long-time media executive turned venture capitalist. After working in media and entertainment, much of it in The Times of India Group, across strategy and corporate development roles, he moved to Blume Ventures, one of India’s leading early-stage venture firms, in 2018. At Blume, he actively focuses on and support its investments in the domestech space, including consumertech, smb saas, b2b marketplaces and more. He also writes on tech, business, culture and their intersections.
SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University.
Today my guest is Sajith Pai, who is a partner at Blume Ventures. Sajith is a long-time media executive turned VC. At Blume, Sajith supports investments in media, ed tech and e-commerce, while simultaneously helping Blume building a research and knowledge platform.
Sajith has an MBA from IIM Ahmedabad and a B.A. in economics from Chowgule College, Goa. He is also a writer, and you can find his writings on startups, e-commerce, venture capital, culture, political economy and education on his website, https://sajithpai.com.
We spoke about the 2023 Indus Valley Annual Report written by Sajith and his co-author, Amal Vats, at Blume Ventures; the many countries that make up the country of India; artificial intelligence; the venture capital community in India; manufacturing growth and more.
For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit Discourse Magazine DOT COM.
Hi, Sajith. Welcome to the show. It is such a pleasure to have you here. I’ve followed you and your work for a long time, and I’m very excited to have this chat.
SAJITH PAI: Hey, thanks, Shruti. Thanks for having me over. Likewise, big fan of your writing and the podcast. It’s probably my favorite podcast.
RAJAGOPALAN: I’m so thrilled to hear that.
PAI: Don’t tell Amit Varma that.
RAJAGOPALAN: I know, I won’t. I’m not giving Amit Varma any free publicity if I can help it. I think he has more than enough. I want to kick off a conversation with the latest Indus Valley annual report. This, of course, is all written by you and Amal Vats, who’s both your co-author and also your colleague at Blume. This is also a continuation of the same effort that you have made last year. The lovely thing is, you’ve made it almost a pedagogical exercise that goes viral in the Indus Valley, which is the Indian startup pun on Silicon Valley.
The Many Countries That Make Up India
RAJAGOPALAN: There’s just so much to learn, I feel, in terms of the broader narrative of what’s happening in India from this report, not just the startup scene. I want to start with this lovely classification that you and Amal have developed, which is India 1, India 2, India 3, where India 1 is the very elite, about 120 million in size and per capita of Mexico roughly, and perhaps more elite in education than what is signaled by Mexico as a country. Most of the startups operate here. This is the base of the most sophisticated consumers, the most mature users who spend a big chunk of their consumption expenditure in the space.
Then you talk about India 2, which is about another 100 million people, and then the rest of the country is India 3, which is really sub-Saharan Africa level when it comes to GDP per capita and consumption expenditure and so on. My sense from this when I see the overall startup market is that perhaps it’s a little too hot. What I mean by that is, you know especially e-commerce and fintech, they are growing much faster than India 1 and India 2 are growing in terms of GDP per capita.
Is that a fair way to think about it, in the sense that it is the GDP per capita of $2,200, which is the absolute concrete ceiling for the growth of many of these startups, or am I missing something else? There is some unexploited consumer base, which is not that tightly linked with income, and all the money flowing into these startups is not really just hot money ballooning into something else, but actually genuine growth?
PAI: Thank you for capturing that so well. You’re absolutely right, in a way, that there is a—I want to choose my words very carefully because I’m both an inhabitant of that world, yet I aspire to be an observer and critic. I do feel there is a disconnect, if we can say, between the funding that India receives and the fact that the economic engine, and pretty much sometimes the sole market for many products, is really India 1. I daresay there is perhaps a smaller market tucked away within India 1, which we refer to as India 1 Alpha, which is the world of iPhone and Starbucks and Netflix and all of these DTC, direct-to-consumer brands that pop up.
That is like a Taiwan, you could say, 25 million people, 8 million households, $35,000 per capita income. That’s tucked away within India 1. I think a fair way to look at this disconnect is to say that the Indian startup ecosystems solve a certain problem for the West, which is it solves the capital allocation problem for a tiny set of managers sitting in the U.S. and Europe, worried about the fact that they have to pay those pension bills which are due and looking at all of their investments.
These are folks sitting in the large endowment, the university endowments, sometimes in organizations such as CalPERS or Ontario Teachers’ Pension Plan. What they do is, they look at this large Excel sheet and say, “We’re not getting terrific returns on the market. We need to get even better returns. Let’s look at alternative assets.” Within the alternative assets, venture has been the hero category. Really within that, we’re looking at India as a market. Clearly, what I think India does—in some ways, we are solving a certain capital allocation problem, to put it bluntly, for a certain set of managers.
I do feel that if you look at actually the Indian venture market, which this last year, 2022 calendar year, was about $24 billion—$24 billion consisted of broadly. There is a very early stage, which is where the fund that I work out of, Blume, operates—barely 10% of that 24, not even 10% of that 24. The bulk of that is growth money, which comes from large hedge funds, crossover funds. They’re investing in startups because of a very unique problem or unique situation that is arising.
Historically, venture funds are used within startups, and those startups go to IPO [initial public offering] in three, four or five years. Amazon, four years; Google, five years or six years. As tech started giving great returns, more money started going into tech, the elongation of the journey from the first funds received till IPO, it really got elongated. What happened is a lot of these larger funds saw the pre-IPO funding or growth pre-funding as a viable proposition because it said, let’s suck out more value out of this instead of leaving it for retail investors to grab.
I think a lot of that is happening in India 2. For example, boAt, which is one of the most successful direct-to-consumer brands in the consumer electronics space, got money from Warburg Pincus saying, “Do not go IPO. Here’s the money; take it and build more.” Similarly, Lenskart was able to stretch out its IPO. I’m probably bringing in too many items and probably stacking arguments a bit much, but fundamentally, you’re right, it is hot. There is a disconnect between the actual market as well as what is coming into the venture market. A lot of that is coming from U.S. larger investors seeking to solve a particular problem, and that might be creating certain problems of indigestion, if I may put it like that.
Elite Imitation: Venture Capital Edition....
....MUCH MORE
