Digital Industrialist
Rajinder:
Hi, and welcome to Matrix Moments. Avnish, fantastic to do this with you again. I'm very excited about today’s discussion on digital industrialists. So to start with we’ve spoken about experienced founders and we had the discussion about Anurag and the OneCard journey at one point. Then we spoke about infinity entrepreneurs and now it seems like we have one more new term to add to our lingo which is digital industrialists. So tell me a little bit about how this is kind of playing out. Like our lingo seems to be expanding even faster than our portfolio and frankly the market.
Avnish:
It’s great to be back. Well, we have the – what do they say – largest or fastest growing large economy in the world so we’re also growing, we have to keep pace with some of this. But actually I know you're putting it on me but the word came from you. So do you remember what context you had brought this up in?
Rajinder:
Vaguely. I think we were having some conversations with later stage investors including some public market investors and they were actually pushing back saying hey, some of these digital companies founders seem to be getting into multiple businesses, now how do we think about that and frankly it kind of flipped a switch for me saying they’re investing in these companies.
Avnish:
They don’t ask that question of Reliance, Birla, Tata.
Rajinder:
Yeah, exactly.
Avnish:
Why is digital held to a different standard?
Rajinder:
Exactly, why is digital held to a different standard and so that kind of sparked the thought.
Avnish:
Yeah. Fantastic to be back, very excited about this topic. We are in every possible way -- I guess it’s known to everyone, we think about founders a lot. We also think of markets, it’s our job, but we think about founders a lot. You know, the digital world actually again to set context, Rajinder, why don’t we do our usual digital evangelizing. How big is this going to be, where are we today, where are we heading?
Rajinder:
Line of sight I think India digital today is ballpark 120-150 billion.
Avnish:
What does India digital, what does the number mean?
Rajinder:
India digital means your classic internet, software.
Avnish:
Evaluation of 120.
Rajinder:
Cumulative across all large companies at Flipkart, Phone Pe, Ola.
Avnish:
Implied value of Google, some of these also probably.
Rajinder:
Maybe. Those actually I hadn’t thought of, but definitely the India startup --
Avnish:
Google has billion, 2 billion of revenue in India.
Rajinder:
So you could add them as well. I think we’ve spoken about it internally, we think that number is somewhere in the 1.5-2 trillion, probably 2 trillion range a decade out. And the map on that is also fairly clear. If you look at digital today as a percentage of total market cap in the US that's 50-60 percent. If you look at China that number is 35-40 percent why will India be any different in a decade out.
Avnish:
So we have to call it up to 2 trillion of market cap coming. My view is more optimistic, I think it may be larger. The fact that this is – and one thing we’ve spoken about a lot is also that this is being built digital first. We talked about our digital public infrastructure now with all the things we all know, UPI, GST, everything. So large market cap coming, so the reality is that we’re going to go from a cottage industry which nobody cared about and often it gets covered in a light which is not necessarily flattering like the same yardstick is not applied. I was just reading this morning or yesterday unicorns have their come uppance and valuations crashing because of poor performance. When the stock market goes down people say oh, multiples have contracted, not that the companies are performing poorly. So the point is I think we’re in the middle of building an industry when it becomes 20-30 percent of the GDP by value or by various measures. You have to start thinking about how do we look at this world of traditional GDP and how do we look at this world of digital GDP. And we look at the traditional world with industrialists, right, so the good news is you walk through various phases of our podcast or various – so what are the phases of entrepreneurs we’ve seen. We’ve seen – we spoke about inexperienced founders, they’ve created tremendous value. The most valuable companies today in India in digital are actually created by first time founders so let’s not call them inexperienced, the fearless first time founders.
We have spoken about the fact that there’s a trend of experienced founders coming, we have seen some of these founders whether it’s Bhavish, DP, Harsh and all of these guys at RazorPay we have seen Swiggy, bunch of them, how they’ve grown. So then we spoke about infinity founders, so we went from first time to experienced to infinity, these all co-exist. New are coming in each of them and now we’ve started seeing the trend in my view which is digital industrialists. People are actually starting to think wait, I'm here, I'm early, I’ve built a very good successful business, I think either they’re adjacencies, sometimes they’re not adjacencies but there’s some right to play, right to be which we’ll come to, that I think I can do more. And we will come to the instinctive used to be no, you know, you have to do one, but I think that's what is digital industrialization. It’s the infinity entrepreneur taking a step back and thinking there is a lot more to do. And I know you will probably cover some of these global examples but this is not new. But I think that's what we need.
Rajinder:
Good point. I think a founder I wouldn’t say quality but just overall founder mindset has significantly evolved as well and that's something that you actually had covered as well which is every cycle we’re seeing the quality of thinking, quality of execution, quality of ideas just continuously improving. So whether it’s first time founders, whether its experienced founders, whether it’s infinity founders, we’ve covered even with digital industrialists the journey at every stage seems to be kind of with better quality more with depth of market going up there’s certainly opportunity.
Avnish:
And also I would say one of the mindset shifts specifically with the infinity founders just to try to put little bit more framework around it is we have all seen 15, 16, 10 plus, 12, 15 whatever years of a tough journey on digital. So it was about survival, now digital is here, India is here. We’re talking about where India is going to a trillion economy, so India is about thriving. And then when you say okay, up to 2 trillion of market cap is coming why should this founder is now saying the infinity founder has tasted blood with success. And so they’re saying why I want to capture a lot more of it, I can't – maybe the market I'm playing in is limited. Maybe the profit pool is limited, something is limited, why should I just limit myself to this. And I think that's where our mindset also needs to flip to say that's a good thing not a bad thing.
Rajinder:
Yeah, exactly.
Avnish:
And there are global examples which I'm sure you can.
Rajinder:
No, I think the infinity founder especially is certainly asking what after infinity, makes sense. I think one thought – you know, I was crunching some numbers and I looked and I was – there are almost a thousand listed tech companies globally like software, internet, cloud, there are almost a thousand. And cumulatively they total to about 23 trillion market cap and the next data point was where the penny dropped. The top seven which the magnificent 7 guess what percentage of that 23 trillion they constitute.
Avnish:
I don’t want to think, that will make me sad.
Rajinder:
But it’s 50 percent.
Avnish:
I thought it will be more. Okay.
Rajinder:
Seven companies are 50 percent of 23 trillion and we know the 7 it’s Amazon, it’s Facebook, it’s Google, it’s Microsoft, Apple – but if you go into each of them and then you think the way they built that business so between Jobs and co they’ve got devices, they’ve got iphone, they’ve got wearables, they’ve got cloud, they’ve got content, they’ve got payments. It’s just very, very different businesses made into one. Now some of them have built it within one company and there’s the examples like Musk where he’s Tesla, Space X, Boring Company, Twitter and so you have all of these founders who are these magnificent 7 founders who’ve gone to build incredibly large companies. So there’s clearly a path after infinity and there’s lot to learn from here.
Avnish:
Yeah, and multiple businesses are embedded in them like you just said but even if you look at Microsoft, well, Amazon is well known, AWS is a completely different business and we’ll come to how different approaches when Microsoft acquired LinkedIn and they’ve been acquiring, they’ve been making some very big acquisitions. So absolutely.
Rajinder:
The opportunity sounds very exciting, let’s flip to the reason to not do it. And it just feels like it’s a or at least we’ve heard that it’s a first principles violation of everything that you’ve learnt in building a startup, investing in a startup. Anything that founders and VCs and investors have kind of been taught through this first generation of internet in India is now a playbook that we’re seeing revisited, why?
Avnish:
And this is where, you know, if it wasn't breaking rules then everybody would do it, right, and if you look at again going back to history John D. Rockefeller, UST, like if you look at the most objective mode, look at the most storied business people of the world it’s always been people who have built a conglomerate. So like I said first let’s go back in history globally, let’s go back in the present in India, this is long. Now you’ve also given examples of why it’s normal even in digital in the US. I will tell you even in the US over the last 20 years I have seen the narrative change from being one of the companies, markets, whatever to founder led companies. So I think the few is now much more founder backwards. What is the ability of this person? If you look at when Elon Musk bought out Twitter lot of the VCs have put in money. So this is now normal, I think what we’re trying to do here is actually sharing our point of view that we think it is a normal event here. But I agree with you, I expect to actually hear from people that what are you guys talking about here because this is the evaluation of first principles. I think as a venture capitalist what is our job, our job in addition to backing innovation is to create value for our investors. I think this is a better part of creating because a tried and tested entrepreneur now we will talk about right of passage what do they need to do to get there. But assuming they have built a successful business, they’ve created value, if there’re building multiple successful businesses and you’re getting an opportunity to invest in that you're stacking odds in your favor and therefore creating better returns for the investors. Now whether how those teams should be built all of that that's first the conceptual buy to me this is better for VC investing. You know, once it came up even in our internal team meeting where people said, hey, because we’ve tasted success with Asish at OfBusiness and Oxyzo we’ve tasted success, we’ve had the privilege with Bhavish at Ola Electric and I remember in one of the meetings people said why don’t we just replicate this one. It’s not that easy because again there’s a right of passage. But I actually think it’s better for – this is again this will be 20 percent of the playbook but so far people just by definition assume it should be zero percent. So 20 percent of this playbook this is a good playbook for the VCs. I obviously think, I think it’s really better for the founders because what you also find – I sold my company, right, I sold because I also wanted to do something else. At that time the opportunity wasn't there, the thinking wasn't there but for a founder who loves the 0-10 journey in the perfect world they would create value maybe 0 to infinity type of journey, hand over one business where a professional team is running and keep creating new ones. And like I said it’s great for the founder because then they can keep doing it lifelong. It’s great for the VC but there are other consequence so what do you think?
Rajinder:
No, actually other constituents also like I'm thinking it’s a win, win, win because if you think of capital allocation the biggest question is if you're entering a new business as an infinity entrepreneur or as a mature company should you be allocating more capital to this new business, should we be optimizing profitability in our existing businesses or to shareholders. Even for a later stage investor or a public investor in a company I can perfectly well understand the argument if they’re entering a new life of business it might just well be the right answer that you capitalize that business afresh and set it up to the cap table where of course there are different ways of incentivizing the existing shareholders which we can come to. You’ve spoken about this right of passage and right to win a couple of times, are we saying that all founders should start thinking about being digital industrialists, when should they start like founders start multiple businesses?
Avnish:
They can think when they should do it so, no, I actually think – I just want to be very careful with what we’re saying here. This is more likely the fail than succeed, so I think therefore they have to be serious guard, a lot of value has been lost by doing random acquisitions, M&A, 85-90 percent fails. Unrelated diversification of businesses, all of this that we’re talking about somewhere falls in that realm. So this fails 85-90 percent of the time, that should be the understanding. Now where can it succeed and when it can succeed it can create a lot of value I think there have to be a number of guardrails. The first guardrail is have you created infinity journey or value in the business you're in, do you have a highly profitable business? If you look at conglomerates history in the world and by the way including Reliance it is always that they have a cash power business, crazy cash generation business. They don’t know what to do with the cash, and therefore they have to find other businesses to invest in. Or you can return, you know, in the US companies like Apple have been doing a lot of share buybacks. In that context by the way if you look at what happened with Facebook when they did Meta I think I may be getting the number wrong but somewhere in the reach of billions of dollars was invested in Meta and stock just tanked. And it was a highly cashflow generating business and in the last six months the narrative has completely changed, they stopped and all that. So, Meta, I think and they obviously changed their name also. Now by the way same thing happened with Google and Alpha, so this can go wrong a lot, you have to have an absolute cash generation machine. Getting to that cash generation machine is the right of passage for the founder to become an infinity founder and to start thinking about being a digital investor. And I think that’s very key. When they have reached that stage a number of muscles have been built which I think will set them up very well for the next stage of the journey. But until that point those muscles are not in place. And I’ll give you one – I had this debate with a founder who was saying, look, I'm almost break even, almost break even and highly profitable are very different or consistently profitable are very different. So again [0:16:50] [Inaudible] teaches you how you manage the business. Now what are the other thesis of it, I think in order to ultimately we have that classic Adam Smith thing, right, resources are land, labor and capital. The founder has to in our world digital world land tends to be products, some kind of a 10x whatever. The founder has to be an infinite resource generation machine. Otherwise they will get taken down in trying to do these things and then the core businesses also. So human capital you got capital, actual capital. A founder knows or my view is they should know that they’re able to do this thing. When they’re getting signals that there are so many talented people who want to join me but I don’t know what to do with them and there’s so much money that I could actually potentially deploy and allocate currently or wealth but I don’t have that. So that to me these are the qualifying criterias, beyond that like I said before lots of failure have happened so what is the founder should have a true introspective view that ultimately their bandwidth is limited, you know, people like Elon Musk, someone like [0:18:09] [Inaudible] in our portfolio who are infinite bandwidth they’ll sleep in the office even now. But are they really ready to hand over because you can't be 0-1 in multiple places, you can be 0-1, 1-10, 10-infinity, infinity-plus, your different businesses should be at different stages and you should be on the 0-1, 1-10. Are you ready to let go and hand over that. Finally do you have a key good strategic insight that you're deriving from your existing business that is giving you a right to play or a right to win. So I think it’s like I said I don’t want this to come across as this is the right answer for everybody, I think lots of guardrails and filters but if it works and when it works it’s tremendously value creating like you’ve seen.
Rajinder:
I think another kind of insight that I was thinking of was at least with the old economy or traditional businesses the way they thought about expansion was more diversification not so you have oil to consumer or whatever it’s called, you have retail, you have telecom, you have financial services. These are actually very diverse businesses and it’s not necessarily true that each feed off each other, they’re build more from a diversification strategy. Tata is very similar, hotels, steel, like very unrelated but class businesses. And the General Electrics of the world also built in a similar way. It seems like in digital people are doing it in a very different way. So the playbook seems to be that you expand but you expand into areas which actually strengthen the core and that I think is a much more interesting playbook for expansion.
Avnish:
I didn’t think of it like that but that's probably true because of also the fact that this is technology so you can actually stitch these things together which you may not be able to.
Rajinder:
And I think Amazon actually showed the way in many ways like first of course retail then from retail there was cloud, cloud actually reduced their own – you know, initially go set up because it reduced their own server costs.
Avnish:
Yeah, they were going to go bankrupt.
Rajinder:
Then they realized that oh, we can externalize this, then they realized oh, okay, this is a business on its own, then they created retail because retail created fresh supply. Then they created of course content and Prime because that again created loyalty and stickiness with the core. You can see how each of the expansion actually strengthened the core. And closer to home OfBusiness expanded into Oxyzo, Oxyso clearly from a supply chain finance standpoint strengthens the core. Ola Electric, EVs will absolutely one day strengthen the core of ride sharing and then of course the core itself may keep evolving. But all of these businesses actually strengthen the core and I think therein lies the reason for --
Avnish:
So that's definitely one framework. But let’s think of the Reliance framework, what as the refinery, as the core Reliance business what was the core thing that they brought to any new business.
Rajinder:
See, with refining they brought scale.
Avnish:
So they knew massive execution, execution at massive scale they knew and because of the scale they understood how to lower costs, excellent, then they basically converted the two into crazy cashflow. So massive scale, low cost, crazy cashflow, what did they go and do? Disrupted India’s largest growing industry at their time mobile because it needed these three things. So it has to be like a Lego block, right, now I think that – so what you're saying is that Lego block could be core business, should be maybe in digital core business but I'm saying it doesn’t necessarily have to be that defined because in Reliance’s case when you look back and say what were the three pillars and which industry does it disrupt it worked without necessarily staking --
Rajinder:
So capabilities are what takes you to the new business?
Avnish:
I don’t know, I'm just saying yeah, but I think that's another framework. When you're thinking massive, like if you look at Ola Electric they’re doing batteries also. Whatever they’ve done in manufacturing in electric is that manufacturing at scale is a skillset for battery.
Avnish:
Ability of the success is more complex. And of course in our case which we’ve discussed in MOTS as the ultimate MOT is the ambition of a culture, right, the founder MOT.
Rajinder:
That of course I also think in digital at least and maybe it’s also true for some of the Reliance examples you related these are also at the cutting edge of innovation and innovation and being that far ahead on product is also a MOT because it’s harder to replicate. Even after all the learning it’s not – I at least have not seen similar big B-commerce companies like OfBusiness replicate the success that OfBusiness has seen because there is not only a capability but also they’re so innovative on what they do in the Fintech.
Avnish:
Actually it’s an interesting point, I think in the digital world maybe one of the filters they should have the “digital industrialists” are are you doing something that is innovative and therefore some MOT is around that and it could come from your core business or because otherwise you’ll go and some incumbent who has got better data --
Rajinder:
Some of the examples that we started out with at the start of the podcast, the playbook of conglomeration and what structure they’ve kind of chosen to set these companies up is slightly different. Some have done it at once, some have done it organic, some have done inorganic, some have done in separate companies. How should a founder think about it?
Avnish:
You know I don’t have a good answer because we started off talking about Apple’s example that you were giving, then you looked at what Ola has done. Now in Ola Electric definitely helps the core ride hailing business also. I think the way to – so founders will always have unlimited ambition so we have discussed Microsoft. Microsoft, so lot of these companies you either have the Alphabet and the Microsofts then you have the Elon Musk model, I think what we are talking about here is a little bit more Elon Muskish kind of digital industrialist but everybody has had different cuts at it. So Apple clear and simple clean never even done an acquisition everything is being built inhouse but generally surrounding the consumer. So the thread that binds is the one consumer. You look at Google when they were doing their moonshot projects that's when they became Alphabet and they said Google here and moonshot there. So they tried within the same holding company structure because they had control. Elon Musk wants five different companies. So I don’t think there is an easy answer, I think you can what OfBusiness Oxyzo did I think wherever either you're surrounding the same customer or there is significant overlap. It’s probably better off to be within the same product. You may spin off later but I think it’s better to have it and I know we were going to talk about examples later but speaking of examples here even outside our portfolio if you look at FirstCry, Xpressbees, Globalbees, I think Xpressbees FirstCry was clearly -- so Supam has done a fantastic job. He’s clearly a digital industrialist. So FirstCry I think helped them incubate Xpressbees because they did all the logistics.
Rajinder:
And lowest cost.
Avnish:
Lowest cost but he wanted to be – and then this Globalbees because they know branding and this, that. So completely different businesses, right, versus if you look at OfBusiness Oxyzo they were actually at one point highly overlapping so within the same [0:03:41] [Inaudible] spin it out later maybe. Bhavish is on record talking about now thinking about AI and compute and all of that. Now actually if you look at it who would be big users of something like that, Ola and Moba Electric and Swiggy and Zomato and all that. So I do think that's where the nuance lies, there is no single playbook but I do think thinking about it would help. To say am I surrounding the same customer, is there a lot of overlap. If there’s a lot of overlap then do it internally first and it’s actually a sequencing and what are you ultimately trying to do, you're ultimately trying to accelerate the 0-10 journey. You're basically trying to bypass the 0-10. And lately by the way on a slight digression we meet founders who are coming with GTM which is to acquire existing companies. Like we just don’t want to go through that PMF journey, so that's kind of with the experienced founders what you're trying to do here..
Rajinder:
Interesting. So we’ve covered why, we’ve covered when, we’ve covered under what conditions and guardrails and now in what structure. This sounds awesome so I guess what is the con from an investor side at all because otherwise this --
Avnish:
I think, look, it has to be first of all like I said before don’t do it is the right starting point. Really think about have I earned my right to this, do I have a business that's a cash flow generation, I’ve figured out whatever whatever and do I want the headache. If you meet all that criteria then you venture before and do it the right way. This is not a value capture business, this is a value creation business. That founders are saying there’s that 2 trillion out there, why should I also discuss before, why should I. Then apply all these filters whether it’s FMF, whether it is your right to win, right to play and then do it right. So the way Oxyzo did it, the way I believe bunch of them have done it, all existing investors are treated [0:05:50] [Inaudible] go give them the right to invest. First you replicate the exact shareholders, yes, there may be a slight top up for the management team separate but you're not trying to capture more value for yourself. You're just trying to create a lot more value for it and that is a very important difference. And then after that it’s like any other company, all the investors have a right to – but an investor should not be feeling that my value is being transferred somewhere else. So I think doing it right is what results in value creation.
Rajinder:
And I think we didn’t call out Flipkart and PhonePe and E-Cart as well but even they’ve clearly done the same thing.
Avnish:
But, you know, this was what I was thinking like if you look at Ola Electric, now Ola may have a small ownership in rumor is Ola Electric is 6-7-8 billion, whatever it is, that's hundreds of millions of payoff for Ola. Now Ola shareholders anyway have separate in Electric. Flipkart we just saw about 750 million dollar payout for. These are massive numbers, so like I said if and we didn’t even take Flipkart example but that's one of the largest examples. I just think if it’s done right it’s so exciting but it just used to be done within the because we’ve seen it benefit employees. It benefits the parent company, it benefits the other shareholders.
Rajinder:
Very exciting. And hopefully some of the founders who are listening in do drop us a note if there are interesting ideas that you're thinking about.
Avnish:
Super. Thank you.
Rajinder:
Thank you.
