Hemant Mohapatra on Lightspeed’s new India fund and pandemic playbook

Lightspeed India Partners, a unit of the Silicon Valley headquartered venture capital firm, closed its $275 million Fund III at a time when the startup investment ecosystem was in the midst of a Covid-19 induced downturn. 

Terming the pandemic a ‘black swan event’, Lightspeed India partner Hemant Mohapatra said Lightspeed Venture Partners’ presence in China offered it a “peek into the future” and helped it create a playbook for its India investment strategy and portfolio. 

In an interview with TechCircle, Mohapatra explains the firm’s position in a post-Covid world, how it helped portfolio companies navigate the pandemic and the impact of Chinese investment curbs.

Edited excerpts:

Will there be any changes in fund allocation in the face of the pandemic?

Nothing has changed. We are going to double down on whatever has been working well for us, even as Covid has expanded opportunities in some markets. 

Markets have gone up in their base valuations. A seed round three years ago, when we raised our previous fund, is not a seed round anymore -- it’s probably 30% more. We raised a larger pool of capital to level up to the market instead of fighting it. 

We chose to stay in the $200-$300 million zone because this is what we are best at -- it keeps us nimble, hungry and sharp. We continue to focus on fewer, high quality companies -- the aim is to turn them into kingmakers by investing large amounts of capital and building the best team through our services arm. That’s what we want to do more of in the India and Southeast Asia markets with the capital from the third fund.

What is Lightspeed’s investment philosophy for India?

We go for high conviction and high capital exposure early on. For example, we infused $10 million into Udaan before there was even a product or a team. We contributed $4.5 million in a $7 million round for NextBillion.ai even before the company was founded.

After the investment, we spend time with the founders and build the companies together. They’re offered a suite of services, from legal services to marketing and PR to hiring. We help them recruit executive and mid-tier talent, and hire quickly in the first six-eight months when they don’t have all the building blocks.

The India fund is an independent one, and about 80% of our investments are in the seed and Series A stages. We are typically the first institutional investor in a company. For investments in growth rounds, we pick firms with a valuation of $200-500 million and pull capital from the US funds. Lightspeed Opportunity Fund invests in companies with over $1 billion valuation.

What are the average ticket sizes for the investments?

We typically invest $2-$3 million in the seed stage and almost always lead the round. Series A rounds will see capital infusion of $5-$8 million. We defend our position through Series Bs and tend to dilute after that. We make about 25-30 investments from a particular fund.

What are the sectors you focus on in India?

We invest across consumer and enterprise sectors, and favour tech-enabled businesses compared to FMCG goods or brand-enabled businesses. In the previous fund, we were probably a little under 50% on enterprise vs pure consumer firms. With the second fund, we are little above 50% in enterprises vs consumer segments in terms of capital deployed. It is expected to be about the same in the next fund cycle, which is likely to back 30-40 companies.

How has Covid-19 impacted venture investing?  

There are two ways of looking at it – late vs early stage, and sector specific. I do not see any impact on the early stage investment cycles at all. You could argue that there are fewer companies being born in this tougher ecosystem, so only high quality founders, with the experience to envision their journeys, are the ones taking a risk.

The first instinct for investors, whenever there is uncertainty in the market, is to fly towards safety and security, because that’s where the premium quality lies. So people are taking fewer risks, but putting more capital behind high quality founders and opportunities.

On the late stage, from a quantity of deals perspective, it certainly feels like it has slowed down, but I’m starting to see an increase in numbers. For the right kind of companies, with the right unit economics and the right team, especially if it’s a Covid tailwind sector, growth investment cycles used to be about 90 days. Now, deals in the range of $30-50 million are happening in a couple of weeks of diligence time. Certainly, it seems like there is a similar flight to safety instinct in the growth investor market as well, more capital is going into fewer companies and the diligence cycles have come down from three months to one.

How did Lightspeed react to the crisis and help portfolio firms recover?

The pandemic is a true black swan event. Outcomes can be binary – either it doesn’t affect you or you crumble. It was panicky in the initial three-four months -- it was all about crisis control without a playbook and understanding what the next six-eight months will look like. We went into cash flow preservation mode for the initial three months, which played out well. Some large companies, such as OYO and Udaan, were heavily impacted, but a few smaller ones gained traction. There was personnel impact, but we were able to manage it through cost cutting instead of layoffs for the most part.

By the end of April, we designed a playbook. Being a large fund and a global franchise, we could see how the future would play out by looking at China, which is one of our biggest franchisees. As China had gone through the worst, we observed how things evolved and how companies managed the crisis there. We advised our founders accordingly. So, in a way, we had a one-two month window into the future. That really helped us.

This also enabled us to make investments ahead of our competitors as we had this little peek into the future and knew what the post-Covid world could look like.

What is a new focus area brought to the fore by the pandemic?

People talk about product market fit (PMF) a lot, but the Covid-19 crisis has given it a new meaning -- pandemic market fit. The question we ask ourselves is -- will the product retain its value, urgency and pull in the market post pandemic? We have refused to back a lot of fast growing companies because we did not feel that they could sustain growth after the pandemic at their current operational cost. 

While everything else remains the same, pandemic market fit is a focus for us -- how long would it take to create a shift in human behaviour? Can this founder/team/product truly change human behaviour over the next 6-12 months? We really dug deep and understood the benefits of this. Human behaviour will change -- we’ve seen how digital marketing has changed user behaviour. 

In our portfolio, Udaan, Yellow Messenger, Byju’s and MagicPin have witnessed that online behaviour shift. MagicPin’s online pivot plan was fast tracked by the pandemic and Yellow Messenger has been getting a lot of unexpected retail pull. We’re increasingly seeing such pandemic market fit situations. For SaaS and consumer retail startups, especially, the new consumer behaviour is going to stick because it’s so much safer and convenient.

We believe the founders today have a window to achieve such a change, add value and improve ease of use. That is how they can sustain themselves, post pandemic.

What is the impact of the Chinese investment restrictions on Indian venture capital firms and startups?

We are building global companies out of India. Global companies are successful when there is global capital, intelligence and markets available. You could argue that China was not a market available to Indian companies and will probably never be. However, China is among the many players that has been interested in India for a while. We’re seeing massive inflows of capital coming to Indian markets from different regions, including Russia, Europe, the US, Japan and Australia. These funds see Southeast Asian markets, especially India, as the next growth market.

There is no dearth of good capital available to companies that are doing well -- I have not seen that slowdown. But capital alone is not enough. Sometimes you need capital and advice. In some cases, advice from China could be useful and we are certainly missing out on that. Can that be fixed in the absence of capital? I think so. You can still get advisors from China without the capital component. I’m sure there are founders thinking along the same lines. 

Has the geopolitical tension affected your portfolio?

We are certainly tracking all the changes and complying with them. The regulations are more focused on new investments. Has that been impacted -- 100%, yes. Discussions involving Chinese entities are harder to have now.