Avnish Bajaj, founder and managing partner at Matrix India, has seen economic downturns from close quarters before, first as an entrepreneur and then, as a venture capital (VC) investor. Bajaj survived the dotcom bust as a co-founder of Baazee.com, which was sold to eBay in 2004 for $55 million, a princely sum in those times. In 2006, he launched Matrix Partners India, and sailed through the recession in 2008-09, triggered by the sub-prime crisis. With $1 billion in assets under management, Matrix Partners India has backed the likes of Ola, Dailyhunt, Five Star Business Finance, and Mswipe, among others.

In a freewheeling conversation with Fortune India, Bajaj talks about why it pays to be founder-friendly in times of crisis and how the VCs and startups could look like in a post-Covid-19 world. Edited excerpts:

In such times, how do investors and entrepreneurs see and respond to each other’s challenges? Do differences crop up?

In this environment, there is zero divergence of interest. If there ever is divergence of interest with the founder, I would argue that it is in a very different situation and not when a crisis like this happens. In such times, everybody understands each other really well. Everybody is in this together and in fact, a lot of convergence happens.

When does divergence of interest with the founder happen? It happens when you are on opposite sides of some issue. Here, we are on the same side of the issue—both sides are in crisis mode, both sides are trying to figure out how best to navigate the situation.

In fact, this situation in India is unique in how even the VCs have come together. It was building up towards it because India has a very small VC community. Key VCs were doing a lot more deals with each other over the last two-three years and came together when the crisis happened. As far as helping founders, we are doing a bunch of sessions as well as one-on-one interactions. We are not even restricting those sessions to our founders.

If a company is in real crisis as a result of Covid, the VC knows it’s not the founder who has done this. The founder knows that it’s not that the VC hasn’t supported them, and they got here. In such situations, it is much easier to navigate because everybody is dealing with a serious crisis.

What does being a founder-friendly mean?
I believe, and this is my personal view, that character is strengthened as well as on display in tough times. It is very easy to be nice when everything is going well. Leadership is tested in times of crisis. I would say that the leadership of VCs is absolutely tested in these times. The leadership of founders is being tested; we all know that. They are dealing with problems effectively on a daily basis, at a whole different scale. As a VC, we are on the outside and we are watching. So, there is more responsibility on the VC than on the founder in the VC-founder relationship.

The founder is already getting pounded from different sides. Obviously, the founder has to show leadership within their company, which, as a VC, I can’t do much about. What I can do is, I can show leadership as a venture capitalist by being there. Every day, I have three to six interactions with different portfolio companies, irrespective of whether they expect it or not. That is what I expect of myself. One is, you understand the situation that a founder is going through—they may have to let go of people or they may have to think whether the business still has the same value proposition in a post-Covid world. There are a lot of such things to think through. We can help them by being a thought partner, a shoulder to cry on, as somebody to vent at, a strategic sounding board, and somebody who can give them a broader perspective of what is happening in the world.

I was on a call before this and from there I learnt how different sectors are rebounding at different speeds in China. Some of them are surprising. Even though people think e-commerce is picking up, e-commerce in apparel is not picking up. Grocery is well known. Even e-commerce in electronic-related stuff is doing better than apparel, which I couldn’t understand. So, bringing those perspectives and inputs are obviously something that we as VCs look at.

How difficult is it to be founder-friendly, because you also have a fiduciary responsibility towards your limited partners (LPs)?

This is the best time to be founder-friendly. Founders are not asking us for money. No founder is right now saying, ‘Oh, there is such a big crisis and I am not going to do anything about it and hey VC, give me more money’. Nobody is saying that. No founder in our portfolio has asked for it. I don’t think any founder worth their salt is going to ask for it.

Because people are realising that this is not a crisis of non-availability of money. This is a crisis of non-availability of demand. This is a crisis of non-availability of supply. If I am going to put in more money, will it solve either of that for you? No.

At this stage, it is not about VCs putting in more money. Contrasting this with the different crises I have seen, 1999-2000 was the dotcom bubble, while the 1930 ballpark period in the U.S. was the Great Depression and the 2008-09 period was the great recession. I have heard this one being referred to as the great cessation, where everything just stopped, whether it was demand or supply. There is another word, the GCR, the great Covid recession. Whichever word gets used, the impact is unforeseen. Nobody had seen their business going to zero, which a lot of people are seeing now.

To me, what is happening a lot in collaboration with the founders is, scenario planning. In this kind of a situation, founder-friendly means you are there for the founder. If you are saying, there is a divergence of interest in this situation, I am telling you, this is the opposite. It is when things are a bit more normal, or may be a bubble situation, then there may be a divergence of interest. Nothing now. Now, six to nine months out, if this plays out long, there might be situations which are a bit trickier to deal with.

Net, net, right now, founder-friendly means being there for the founders in what they are dealing with.

Take us through the situations that you foresee?

The V-shaped scenario, where there is a lockdown, and that has happened. Lockdown for two weeks and the virus doesn’t get much traction and when the lockdown is over, things come back very fast. Then there is W, where there is a lot of back and forth. L shaped is we go on the same curve as the US, but, the death and destruction in India, if we go on that curve, is much more. We said it is most likely to be a U, except U with a full lockdown. People are still debating. Would I plan for an L-shaped recovery? No. Then I might as well shut shop. Would I plan for a V-shaped recovery? No. because I think that would be too optimistic. I would plan for a U, with a little bit of a W kind of a situation thrown in with a bit of start and stop if things flare up post lockdown. That’s the discussion that we are having.

This, in my view, is the defence strategy. I am also spending a lot of time with companies thinking about the offence strategy. The reality is, e-commerce has gone up. I don’t want to overuse the word ‘demonetisation moment’ but it can be an inflexion point for digital. The first was obviously the launch of Jio. People have digital access at cheap price points, but the network effect of the usage didn’t kick in until 2019. On top of that usage, you have a moment where you cannot go out anymore and you have something in your hand that gives you the option to achieve the same things differently, rather digitally. If this had happened two years ago, one would not have seen as much ease with which people can switch to digital. Maybe in our strata, which were using the Olas, Swiggys, and the Zomatos, it was fine, but if you look at the [next] 300 million-400 million users, their readiness for digital was never greater. This will be a jump, and this will be a demonetisation moment.

We are spending a lot of time with our companies talking about their product and market fit. Where in the recovery curve will that industry segment or product market fit lie when things come back to normal? Or, are there other product market fits which they may be very competent to do, that they should?

Businesses have to think differently. Some are obviously benefitting immediately. It’s no rocket science to know that travel and the likes of Ola, Uber, or OYO will have very little business right now. When they come back, will business travel come back first, will leisure travel come back first? How do you make sure that when businesses start coming back, you don’t start from zero? And, different businesses within the same sector are going to come back at different speeds. There has to be a way to build demand before so that you don't start from zero. People have to be smarter about these things.

Going forward, do you see the business of venture investing being reset somehow?

This is nothing new. If VC investing and the startup world were linear, then everybody would be doing it, and everybody would be making a lot of money. It is very normal for the industry to be going from a bubble to bust and again to bubble—rinse and repeat. Maybe, this level of bust last happened after the great recession and then the dotcom bust. If you go back and look at the IRR [internal rate of return] of the VC funds, in the last decade, the highest IRR funds would be between 2009 and 2012. And the funds between 2017 and 2019 might be lower given the bubble.

In my view, yes, there will be an adjustment. What I mean by that is, let’s say the steady state was a 100. Coming into this bust, we were not in a steady state. We are at a very inflated state in the VC world and obviously it started correcting after WeWork. If the steady state was 100, we were at 150-200. Now we will be at 50-75. That will look like a very steep correction because we started at 150. But, if you look at it from the standpoint of the normal statistic, there is a correction, but it is not steep.

My prediction is, we will start inching back to 100 one year from now. Early 2021, the VC industry will start normalising. It will be normal for two-three years and then, who knows, there might be a bubble again. That is just normal. I don’t see any fundamental shifts.

Coming into this particular bust, there are a few things which are different. One is the strong funds have become stronger in the last decade. So the dispersion of venture capital has gone down worldwide and even more so in India. So, the strong has become stronger, with more capital concentrated and people have more dry powder coming in. Finally, unlike in the past, technology businesses have become much stronger and a bigger part of our lives. So withstanding the landing wouldn’t be as deep as it was after the dotcom bust. Obviously, the problem is that this is the great cessation, so obviously, there is no demand or supply. But, when it comes back, it doesn’t mean that people will stop using Ola or Swiggy. So, my view is, for six months, even the investing side will look a little bit frozen, then it will start easing up for the following 12 months and post that, it will start looking like a normal situation, but it will not be a bubble situation where we were six-eight months ago.

For many funds, an attractive portfolio mix might look vulnerable at this juncture and going forward as well, because there is a lot of uncertainty about how businesses will pan out. How do you cope with that? Also, some of the portfolio companies might need a disproportionate amount of capital that might upset your overall investment strategy.

That’s always there. The first thing the VC does in a situation like this is a portfolio assessment and see which ones need more capital. Which is why, when I say that fresh investments will be much lower in the next six months, one of the key reasons is VCs will look to back their existing portfolios. Also, in investing, there is a saying that never catch a falling knife (because you can cut yourself). Basically, the point is, you wait to let the knife hit the ground and then you pick it up.

There are two things at play here. Get clarity on how bad is it going to get, and two, what is the impact of it on the portfolio companies? Whether there will be a structural shift, whether demand will come back or not, that is a classic scenario planning that we do with these portfolio companies, and typically, most companies have three to four scenarios, which are very industry-specific. Some industries will be at 20% of their business in the next three-four months, and some will be 120% of the business. That is very specific to the industry.

The scenario planning is done so that the portfolio companies are able to navigate the situation with the cash they have on the balance sheet. It is not that this exercise is being done to say how much more cash we need. Until somebody was already in fundraise or running out of money, most portfolio companies have money on their balance sheet and the goal is to make that cash last for the longest possible time. We have given guidance to our portfolio companies that you should not be planning to raise money before mid-2021. Some VCs have given guidance that they should not be looking to raise [money for] the whole of 2021. These plans will be revised every two-four weeks until we get more visibility.

How do you see the exit scenario playing out for VCs once things settle down? The valuations will be sober, which makes it a very good scenario to invest, but possibly not to exit. How do VCs respond if the exit timelines are reset?

A bubble is always the best time to exit. But that doesn’t mean that exits don’t happen in other times— but, of course, valuations might get affected and processes take much longer. As far as M&A exits are concerned, businesses are bought, not sold, and good businesses will still get bought. However, if the business has been affected materially by the crisis, then the buyers will wait for the dust to settle or the price will get affected. IPOs in India, unfortunately, have not yet become a realistic exit option for venture-backed companies, and might be two to three years away, by which time, hopefully, this crisis may not be relevant.

Overall, yes, exits will get affected both in terms of timeline and pricing for the next few months. For quality businesses with staying power, exit windows should start opening up by the last quarter of the year, both in M&As and secondaries.

The biggest change in the Indian venture world that has started to happen is that venture-backed IPOs can happen in a window of two to three years, given the scale the businesses are getting into in a deepening market. One could not say this a couple of years ago. That is the ultimate exit and would indicate a full maturation of the India venture opportunity.

How do you see the LPs responding because if the goalposts get inadvertently shifted, their returns and plans might get impacted?

I would say the LPs that the most of us have are the most patient capital and we are lucky in this regard. Our memories go back a decade or two, their memories go back multiple decades. They have seen multiple cycles. LPs have an allocation methodology to private markets and public markets. They think at a very macro level and with a long-term view. Most high-quality LPs don’t overreact to such situations. At least, my thought is, most LPs are much better placed in this situation than they were in 2008-09. Forget India for a second because India is not a source of a lot of our LP capital, but, if you look at this globally, there are some indicators. The U.S. banks are much less leveraged, they have a better balance sheet, there are much more technology stocks in people’s portfolios, and they have held up better or will come back faster.

My understanding is, obviously, all LPs will go through some pain, but people have seen multiple cycles, people have done portfolio construction and allocation for themselves keeping some of these potential scenarios in mind. The bottom line is, the LPs are very long term in their view, and I don’t expect that this is going to change unless it is that L-shaped scenario, where it takes a lot of time to recover.

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