Forest fire blazing through Indian startup ecosystem: Inventus' Kanwal Rekhi

Kanwal Rekhi, co-founder and managing director at VC firm Inventus Capital Partners, has been a known sceptic of the capital-intensive model of India's e-commerce companies.

At the News Corp VCCircle LP Summit 2017 in Mumbai, he was in sublime form, mincing no words when quizzed about issues plaguing the country's leading consumer internet companies. Speaking on the sidelines of the event, Rekhi said that Flipkart, Snapdeal and Ola were not making business sense.

"They raise money, ship the product at below cost and they are into 10 different businesses and showing no improvement in unit economics. There isn't any value-creation at any part of the business. Flipkart has raised over $3 billion and it is still not able to get a unit economics model that works," he said.

But he also sees a silver lining in the volatility triggered by events such as the recent massive downsizing at Snapdeal, valuation markdowns at Flipkart and the potential down round at Ola—these, he thinks, will help the ecosystem become healthier in the long run.

"I guess some of these guys will die. It is like a forest. When a tree dies, a lot of new growth happens underneath. There is a forest fire right now. It will clear up some of these guys...There is a lot of learning in the system," Rekhi told VCCircle.

A prolific angel investor in Silicon Valley and a venture capitalist, Rekhi was co-founder and CEO of Excelan, a manufacturer of smart Ethernet. He took the company public in the US three decades ago and later merged it with Novell, a software and services company, and served as CTO of the combined entity.

Inventus has 27 active portfolio companies in US and India, and it has made seven exits so far. Its exits, following successful acquisitions, include RedBus and Instahealth in India and Espresso Logic and Sierra Atlantic in the US. One of Inventus' portfolio firms in the US, women's social commerce site Poshmark, raised $25 million last year.

Clearly an advocate of lean companies, Rekhi feels Snapdeal should have taken corrective action and optimised its workforce long back, given venture capital is expensive and limited. "They have delayed the action. If they were real smart, they should have done this long time ago," he said.

He also feels that a lot of companies have been flirting with ideas they barely understand, the price of which can be steep.

"If you are a startup you cannot be investing in every asset, you [have] got to leverage what is out there. If you start to set up your own infrastructure, your own logistics, you [have] got to monetise that by offering it to other players in the business. They were doing things that they had no business knowledge [of]," he said, referring to the country's leading consumer internet companies.

Rekhi said Inventus had passed up opportunities to invest in some of these companies. "When somebody told me these guys are worth five times their GMV, I told him: Wait a minute, their GMV is loss-making GMV. How can they be valued six times their GMV when there is no underlying margin in their business? And I see no prospect of their turning profitable."

I don't blame the entrepreneurs, I blame investors for this, Rekhi added.

Inventus is in the process of raising capital for its third fund while it continues to invest from its $106-million second fund. Rekhi is, however, not very optimistic about the investment climate. "It is very hard to get money from limited partners for investing in India. They haven't made any returns out of India, and the reputation of India as a VC destination is very poor. Around $20 billion have been invested in India, mostly in VCs," he said.

Rekhi believes this poor investment sentiment will improve only when there are some good exits.