Startup valuations not crazy: TV Mohandas Pai, Infosys veteran & Aarin Capital's co-founder

After hanging up his boots at Infosys, where he held several key posts including HR head and CFO besides being a board member, TV Mohandas Pai has become an active investor in startups. He partnered with Manipal group MD Ranjan Pai (not related to each other) to float Aarin Capital, which has so far invested in five venture funds and has committed money to another five funds. Pai also plays the role of an angel investor and is bullish on the Indian startup ecosystem. Here are edited excerpts from an interview in which he talks about startups, venture investments and internet companies.

We have started seeing increased angel activity and HNI interest in backing startups. But venture investment still appears a foreign VC fund-dominated game. What is your view?

There is an increased HNI interest in India in investing in startups. Still it is not enough to meet the requirements. The people with investible surpluses in India need to understand the transformation that India is going through. India is seeing an upsurge of startups—every year 3,500 to 4,500 startups are coming up. In various industries, technology becomes the differentiator and HNIs should look at startups seriously. If not directly, they should invest through the people they trust. It should not become another FII story wherein FIIs came in and they are now sitting on about $150 billion of profits. They came in, they put in money and saw 2x and 3x returns. In every market, local investors with investible surpluses should also invest. For example, in China, 60 per cent of capital in startups and other businesses are coming from Chinese themselves. In India, it is a very small number. HNIs in India are sitting on a lot of money. They should productively invest part of it in public markets and part of it in VC funds or join with the angel networks. They will get good rewards because we are in a growth phase.

It is the same case for domestic institutions. Look at the stock market—Barring LIC, mutual funds and a few insurance companies, our own institutional funds are holding only a small share of equity. Provident fund has got Rs 7,50,000 crore but it holds almost nothing. If they had put in 10-15 per cent of it in the stock market in the last 20 years, the corpus would have been Rs 15,00,000 crore now and millions of subscribers would have benefited. Some communist mindset people on the board prevented subscribers from doing well. It is an anti-growth, anti-subscriber attitude when other countries have done well in this area. India has suffered because of this. At least, in this (startup) area, we must make sure that Indian investors don't miss the boat again.

For example, how many of the investors in Flipkart are Indian investors? They are all foreign investors. Look at Ola or look at any other company, it is all foreign money. There are many such companies. They all got good valuations. It is sad that foreign investors see greater value in our companies than Indian people do themselves. May be we have a money lending mentality. We lend money and look at getting 14-15 per cent return because that is easy. We don't want to take greater risk. If you should get a lot of money you must take some risk. You will get great rewards—the market has shown that.

But the other side of the coin is that huge inflow of foreign venture capital is triggering crazy valuations in the startup space and a bubble is building up. What is your take?

Valuations are not crazy.

(Edited by Joby Puthuparampil Johnson)

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