A glut of capital

June 7

Hello folks, picking up from last week, it's good to be back to more regular programming. We got a lot of positive feedback on last week's update - thank you! - with some suggesting that a weekly or monthly update might be more valuable. We know everything is content these days, and newsletter fatigue is a real thing, so we are also thinking through what's a good cadence of updates that's valuable. More feedback on this is very welcome! While last week's newsletter was a recap of May, this week's is more of a survey of some of the more interesting stories we saw this week.

No shortage of capital

In last week's newsletter, Anmol touched on the state of the Indian venture market, which despite the broader economic malaise and COVID-19 setbacks is as hot as ever. We specifically talked about the role Tiger Global has been playing in the ecosystem [side note: the FT had a good piece on the legacy of Julian Roberston and the role Tiger cubs, of which Tiger Global is one, continue to play in the investing world]. This past week Manish Singh of TechCrunch basically scooped the entire ecosystem, giving us a rundown of the major deals that are in the works at the moment. Overall, some 70+ early-stage Indian startups are currently in various stages of talks to raise money. The companies span sectors - from fintech and agritech to social media and SaaS. Deals are now more competitive, and valuations are richer.

As we've written about before, some of the bullishness is not surprising given the increasing depth and maturity of the Indian ecosystem. Second-time founders, in particular, are finding it easy to raise. And, of course, the upcoming IPOs of Zomato and Paytm signal that unicorns and start-ups in India can now offer investors a path to exit, though it's to be seen how these listings perform in the public markets. Despite the tailwinds the economy as a whole is facing, I also think that start-ups in India continue to remain an attractive proposition for investors. Some of the trends that COVID has fanned - more online transactions and commerce, the need for better supply chains, more formalization of the economy will continue, and start-ups are well placed to capitalize on these.

That said, this glut of capital will not last forever, and start-ups fundraising right now have to think through what building a sustainable business model looks like. One result of the glut in funding is an explosion in start-up salaries. I do not at all think that salary increases are a bad thing — if it's actually a result of real talent shortage and because of an overall increase in productivity. However, if VC dollars are just pushing up compensation to unsustainable levels, that's an issue that will correct, with associated pain, in the future. Ashwini Asokan wrote a great article on how to think through sustainable hiring and employment practices in the tech sector. I hope more folks follow her play book!

Softbank investing in Flipkart (again)

Even at Zomato and Paytm plan their IPOs one of the ecosystem's top contenders to go public is likely to remain private for longer. Apparently Flipkart is in talks with Softbank, with the Japanese investor likely to invest $600 - 700M in the retailer. Softbank had exited Flipkart three years ago when it sold its stake to Walmart.

The Economic Times is reporting that the investment is likely to be part of a larger $2 billion round which could see the participation of a group of sovereign wealth funds like Abu Dhabi’s ADQ, Canada’s CPPIB, as well as existing investors such as Singapore's GIC and Qatar Investment Authority.

We have covered the online retails pace in our newsletters extensively. Post COVID, there has been a real push by other players to build out their operations and consolidate positions, especially in the grocery segment. Flipkart, which has an edge in fashion and electronics, competes with Amazon, Reliance, Tata (which recently entered the space through its Big Basket acquisition) in this segment.

The battle for online retail is in some ways just getting started, and it perhaps makes sense for Flipkart to stay private to shore up its position rather than going public, with the additional scrutiny that brings, at this point.

Paying attention to Bangladesh

Not start-up news per se, but news that we think is worth paying attention to. Last year the IMF predicted that Bangladesh would surpass India on GDP per capita. This month the country announced that GDP per capita had grown by 9% over the past year, rising to $2,227. In contrast, India's per capita income in 2020-21 was $1,947. Of course, GDP per capita is only economic metric, and India still has higher purchasing power parity. That said, there's often a lot of hand-wringing in India about Bangladesh performing better on economic metrics as if how could it, which I honestly think smacks a bit of racism. This is the 50th year of Bangladesh's independence, and the country's achievement is pretty incredible, and something for India to pay attention to. It's getting well deserved recognition this week. Mihir Sharma had a good article in Bloomberg, and Noah Smith wrote about Bangladesh being the new Asian Tiger on his blog (the comments are good too).

I generally believe India tends to believe its own hype a bit too much, and the country's first recession in forty years should be cause for a bit more soul searching. There's no guarantee that the country's growth is predestined, as the last few years should indicate. And no matter how well funded the country's start-up ecosystem, it's not a measure of overall economic progress. In fact, it will at some point bump up against reality — whether that is ten years or twenty or earlier is an open question — if the overall economy doesn't improve. I am revealing my age here, but in the 1990s Pakistan was considered more "developed" than India, not only because our neighbour was tighter with the US and more open than India, but because GDP per capita in Pakistan was actually higher. 9/11 changed this in many ways.

The Bangladesh example is interesting because the country has grown following a more conventional manufacturing-led approach than India. I think we fooled ourselves into thinking that we had leapfrogged manufacturing, I don't think the problem of unemployment can be solved without manufacturing, and this might come back to bite us. More importantly, Bangladesh has better social indicators than India - it has lower infant mortality rates, higher life expectancy, better youth literacy, and better female labour force participation (a metric on which India performs utterly abominably). A few weeks ago, Patrick Collison, retweeted a link to a Lant Pritchett working paper that argued national development is extremely correlated to measures of social development. It is interesting reading, especially in light of the Covid crisis in India as we think about what the Indian state's priorities should be.

Anmol and I have been following the Bangladesh story for a while and are also interested to see how the start-up ecosystem there develops. Bangladesh's infrastructure and internet penetration is still poor, but this is going to change. The country is urbanizing quickly. And foreign investors are also looking at the country. Last year kirana-tech company Shop Up raised a Series A from Sequoia India. It was the VC firm's first investment in the country. Earlier, Gojek had invested in motorbike-hailing company Pathao, Ant Financial in mobile payments company bKash, and on-demand grocery delivery platform Chaldal was part of YC's 2015 batch. It's a trickle, but I'd be interested in seeing how these trends change. I imagine this will happen at a very slow pace. More interestingly, I wonder if we will see any Indian start-ups expand ops to the country. Worth thinking about, I think.