“We Like Building New Categories”

Clearstone Venture Partners is another US-based venture fund which recently opened an office in India. It manages over $650 million, including $200 million in their third fund. Clearstone recently led a $7.5 million round in electronic bill payment company BillDesk. Rahul Khanna recently moved to Mumbai to head Clearstone’s India operations. Khanna, an MBA from Kellogg, has come with the mandate of identifying early stage companies across verticals like wireless, media, entertainment, retail, travel and finance. Prior to joining Clearstone, he was Area Director, Asia-Pacific, at Sonim Technologies, a wireless start-up in San Mateo, US. Before moving to the US, Khanna had helped launch Orange in India in various marketing management functions. I spoke to Khanna about Clearstone’s plans for India:

What brings Clearstone to India and where do you see opportunity?
We have about 25-30 active portfolio companies with back-end ops in India. Now we’re looking at Indian companies, which cater to the Indian market. Domestic consumption is on the rise, and a critical mass of middle income group, spending on lifestyle products, telecom, media, entertainment and financial services has been reached. We see two kinds of opportunities here- of the first order and the second order. I’ll take the second order first: there are 130 million mobile users, and we think of mobile in India as a proxy for the Internet in the west. For many people, the first interaction with the Internet will be via the mobile phone, and there is an opportunity in going beyond the SMS and the ringtone. The first order opportunity is that which marries two verticals – the retail and the financial services. That’s a bridge function.

How does the Indian pipeline compare to that in Silicon Valley?
The Indian pipeline is not as robust, and the types of businesses we’re looking at will have to reach a critical mass in 5-7 years. The early stage investing opportunity is still evolving and we’re in no great rush – we would rather pace ourselves and decide if we need a discreet India fund. We’re not comfortable with spreading ourselves across multiple businesses. There are various stages of investment – seed, early, growth, maturity and buyout. What you will see is that the early stage doesn’t see enough exits, while the mid and late stages see phenomenal results. We have 10-year funds, and there is no pressure to put money to work immediately. We like building new categories, which is what you saw with Overture, MP3.com and eToys.

Then why did you invest in BillDesk? Wasn’t that early stage?
BillDesk was a 5 year old company, established in 1999-2000, and had spent those five years establishing a network. They connected around 35 banks to 50-100 vendors. They’ve enabled online transactions with Citibank, Visa Billpay, Hutch. Mobile payments is another great opportunity in a vertical, but the challenge is to remain in a horizontal.

Apart from the money, what do you as VC’s bring to the table?
An element of understanding. VC’s come from various operating backgrounds, and they bring with them domain knowledge, as well as knowledge of pricing, brand building, distribution and taking the business outside the country. We are the coach, the mentor and the guide. Entrepreneurs need support because their main focus is on the product. For example, we help them hire the right kind of people.

And what’s your exit strategy?
We exit at peak value. It could be anything from four to seven years away. We see what drives value and how the business has developed – is there channel control? What is the consumer base? How are the dynamics changing? Is it better to merge with another business? More often than not, our companies get acquired. If you look at trends, for example, the Disney-Hungama TV buyout- It’s easier to buy localized content than start creating it yourself. Original content is critical to success.

How do you see the Internet space panning out?
Still very early days on the Internet, so really, no candidate to buy there. There are very few destinations of scale and size. The Internet is a horizontal and mobile and broadband are verticals. The advertising could evolve. Two main applications are lead generation and transaction. Transaction has hygiene factors to consider, and I think TV infomercials, those ab-rollers (Ed: equipment for exercise), are changing the way people think before buying. There is opportunity because for 21-25 year olds, plastics are a way of life. The credit card base is large enough, but allowing the use of debit cards online will bring the next round of growth. There are still systemic challenges. Transaction on the Internet in the US was an extension of catalogue shopping. One difference is that people can return products easily. Here the fear still exists – what if it isn’t good? Will I get my money back?

What about gaming?
Gaming was around $50 million at around 2-3% penetration in China a few years ago. Now it is at $800 million-$1 billion at 8-9% penetration. India is where China was. Broadband will drive content, and we have received proposals from several small gaming companies. The gaming and animation business is growing and domestic content consumption will increase. Distribution is a challenge, and that is where broadband comes in.

What would you advise entrepreneurs who come to you with proposals?
Know who your customer is. Why would he come back to you for a repeat purchase? Have milestones set – where do you see yourself in 12 months or 18 months. Have a good team in place with a good background. List out the challenges you expect to face.