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This transcript is from a PodTech.net podcast at:
http://www.podtech.net/home/technology/1656/baazeecom-founder-avnish-bajaj-on-yochina

Guest: Avnish Bajaj - Matrix India.
Host: Kamla Bhatt -PodTech.

Kamla Bhatt- PodTech.
This is Kamla Bhatt for PodTech, today my guest is Avnish Bajaj, Avnish is an entrepreneur turned Venture Capitalist. He was the co-founder of Baazee.com, an online auction site that was acquired by eBay a couple of years ago. Avnish is currently the Founding Managing Director of Matrix Partners India. Just a few days ago, Matrix announced that it is investing $10 million in Yo! China, a restaurant chain headquartered in Gurgaon near New Delhi. Welcome to the show Avnish.

Avnish Bajaj - Matrix India.
Thank you for having me, my pleasure.

Kamla Bhatt- PodTech.
If you could share with us, how you went about evaluating and assessing the Yo! China opportunity for investment that would be a very useful place to start.

Avnish Bajaj - Matrix India.
So, the way we see these things Kamla is that we essentially have the belief that in India the opportunity is far broader than for example in the Silicon Valley or in the US, and what I mean by that is you know there is in the US, most of the low-hanging fruit, when it comes through consumer products has been taken and you see a lot of innovation that happens with companies, and as a result of which the company succeeds and there is a lot of resources that go into both funding that innovation and coming up with new things. In India there is a lot of low-hanging fruit of basic consumer services which is missing today, and when you look at, you share about the Indian middle-class and the growing, spending and all of that. Essentially that is going to go, that discretionary spending is going into consumer services, consumers spending on things that they need and in a lot of markets that need is underserved.

So, that's the broad macro thesis on which we are working. Specifically, to Yo! China, there are -- first of all, if you look at the market opportunity I was myself actually surprised to discover this but Chinese food I value is the second largest cuisine in India. The most popular and the highest-selling cuisine is South-Indian cuisine, Chinese food is the second-most popular and then north. So, it's an extremely large market.

Kamla Bhatt- PodTech.
Where did you get this data about Chinese food being the second most popular?

Avnish Bajaj - Matrix India.
Yeah, it's actually pretty well covered but there was a Business World cover story, I think about a month ago that further validated this. They had a cover story on what India is spending on and in that they have dragged the various cuisines and Chinese food was second overall and then you look at the youth segment which in India is the fastest growing demographic, it is actually number one. So, the destination of choice for people to get this food or the cuisine of choice for people, when they step out or they venture out of their homes, especially when it comes to the youth, is Chinese food. So, that's the overall opportunity.

Now, within that opportunity, if you look at how that opportunity is being served, in India what you find is there are either the really high-end restaurants which tend to be in luxury hotels or you find really kind of low-end roadside kiosks serving Chinese cuisine. There is nothing in between, if you contrast that with Indian food, there are actually quite a few mid level options which are hygienic, clean, good tasting food, all of that which is available, but in Chinese food there are very few. So, there was clearly a gap in the market that we saw and then we essentially ran into this theme of Yo! China, the entrepreneur, who has actually really pioneered the concept the way he puts it of Chinese food and Chinese prices and essentially you have an ambiance like you would see McDonalds anywhere, whether in India or in the US.

So, you have food that tastes really good and your prices that are actually at or cheaper than they were -- the roadside kiosk guy. So it's almost, it's a completely unbeatable experience. You combine that with the fact that they have introduced new things for the Indian palates so to speak of people going and eating Chinese food. They have Dim Sum, they have Chowmein in a box kind of stuff which has not happened in India before, that was what made us really feel that they have created a great customer experience. Then as we dug deeper into the opportunity, we also realized that in most retails/ real estate kind of businesses, people talk about location, location, location. In the case of Yo! China what Ashish has perfected is what he calls process, process, process.

His background is from GE, he's a Six Sigma, Black Belt from GE and the process -- everything has been processized, which means the menu have been broken down into it's individual ingredients and there is a process behind everything. They have a base kitchen working out of one place, they have four or five key sauces which serve all their; currently they have 20 outlets most of them in North India, they serve all of them. Essentially even the customer experience of how many minutes it should take to serve, what should be the table turns, all of that stuff, everything has been processized. That's when we found that not only the opportunity is great, the customer experience is great but because of this processization we were convinced that even the (Inaudible) are pretty good which is why we chose (Inaudible).

Kamla Bhatt- PodTech.
How big is this Chinese food market in India, can you give us a dollar amount on that?

Avnish Bajaj - Matrix India.
No, no unfortunately no because none of these things have been covered well in terms of the research, what I can tell you is that each store in Chinese food, each outlet, if it is doing well, can do anywhere between a $1000 to $2000 a day of sales, which is pretty good. If you contrast that with most of the coffee chains or if you contrast that with most of the Indian food chains, we are looking at 3x the billing amount of most of these other places. So, that's kind of the number we go with, that as long as we are doing, depending on the real estate rental cost; as long as we are doing between a $1000 to $2000 a day per outlet, we are doing fine.

Kamla Bhatt- PodTech.
In many ways, Yo! China probably is the first investment that a VC company has made in India, in a strictly food-related company. The food industry is also notorious for its high rate of failures, and in the case of India we have particular challenges in India for running a franchise. What are some of the challenges that you see and how do you think those challenges will be addressed? I'm thinking of transportation, logistics, cold storage.

Avnish Bajaj - Matrix India.
Yeah, so let me address two parts of it, one was the high failure rate and the second was the challenges beyond, because I think the high failure rate specific to the food has its own nuances versus standard logistics related challenges which a lot of Indian businesses run into. So, if I look at the first one, you are right. I mean one of the known things about the restaurant food industry is that you have a restaurant that's popular for six months, a year, two years at the most and people just migrate and you just don't get the same clientele back. I think, our view is that that happens when you are trying to introduce something new, when you are trying to change people's eating habits, so when it comes to pizza, when it comes to even places where like Subway where you are getting salads and stuff like that.

Now, that's not traditional Indian cuisine or that's not what Indians generally eat. We, fundamentally feel de-risked in Yo! China because of the fact, like I mentioned before, that Chinese food is so popular. It is so fundamentally ingrained into our culture that I think we feel de-risked from the standpoint of the food going out of flavor or the fad kind of going out of flavor. I would say that does not apply to the pizza industry or lot of the fast food because I think these things are sometimes a little bit of a fad or more as a metro -- metropolitan city phenomenon than a Pan-India phenomena.

So, there it brings us to the execution challenges which you're absolutely right, there are quite a few. We have taken the call at Yo! China to maintain consistency in user experience and customer delight, and in order to do that we do it centrally out of a base kitchen, and the way we have -- and you are right that there is no cold chain and supply chain in India, is a little bit of a problem. So, what we have done is, we have done a little bit of a, two-pronged approach. When it comes to the non-perishable stuff which can be transported, which are the basically the sauces and the concentrates that are used for the entire menu, that's all done centrally.

So, the base kitchen prepares that and every evening that's shipped out to all of the outlets, and the courier companies are actually reasonably good in delivering that in 12 to 18 hours and these things -- since I mentioned they are non-perishable that's not an issue. The only reason we ship them out everyday and they are still working with the frequency and they change it to once every three days is, so that the local outlet doesn't need to stock more than they need and that there is no wastage and stuff like that. When it comes to the produce and poultry, and all the fresh stuff, the perishable stuff that is actually procured locally but only through centrally approved (Inaudible). So for example, Godrej has great chicken throughout the country, or Venky's has great chicken throughout the company.

So, chicken contract will be with one of these players and that will apply nationally, and each of the outlets would procure from one of these kind of guys locally. So, it's a combination of the two, and I think on a broader point, the fact that some of these things are challenges in India also make the business that has managed to surmount or solve these problems more different. So, I always tell entrepreneurs that fundamentally in India, execution is itself a barrier to entry because it's not easy to sometimes get things done. I think that's what these guys have done and that's why we feel pretty comfortable with their position in this market.

Kamla Bhatt - PodTech
There is a Yo! China in Bangalore and I drive past it very often and it's a big hit within my family. Because the usual....

Avnish Bajaj - Matrix Partners India
Yeah. That's good to know. It's actually my due diligence of this opportunity was probably one of the better ones, because all I had to do was go and eat and I really like the food and then I asked around in my family in Delhi -- it's a absolute cult there. People actually eat twice a week; they'll order from Yo! China and in fact, take-out by the ways a big portion of our revenue, 30% of the revenues come from take-out.

Kamla Bhatt - PodTech
And take-out is more expensive.

Avnish Bajaj - Matrix Partners India
I think there is a delivery charge associated with it. I think in terms of profitability, obviously, it helps the business because we are not spending as much on real estate. So, your asset utilization is better but I think that the -- whatever the extra charge is basically a small service charge.

Kamla Bhatt - PodTech
Now, let's switch tracks; started off as an entrepreneur, during the first dotcom, and you started -- you co-founded Baazee. When you look back from today's vantage point, what are the changes that you see in India and the Indian startup scene, the venture capital scene? Within these 6 years you probably have noticed a lot of changes?

Avnish Bajaj - Matrix Partners India
Oh absolutely. I think things have changed dramatically, for the better. So, just to give you a sense, when I first came to India, and we were looking for office space in Bombay in Nariman Point, it was a challenge. We identified an office and the landlord asked us for -- I think 5 years of income statements or balance sheets or whatever and 2 years or one year of security deposit, which was going to be a few hundreds of thousands of dollars or maybe a $100,000. That was a lot of money. That showed you, how unknown the concept of a startup was. In India, traditionally, the people who are called entrepreneurs are what would be called industrialists in other countries. These people who've been around a while and have done -- have really large family businesses.

So, the concept of a real seed stage from-the-ground entrepreneur, honestly, didn't even exist, 5-6 years ago. There are obviously some exceptions, but for the most part didn't exist. The ecosystem, fundamentally, didn't exist for such kind of entrepreneurship. So, like I said, we couldn't even get an office, finally, an agency we had hired, to find us some people, basically executive-search agency, took pity on us and gave us their office, because they had a spare office. We worked out of their office for about a year, before we raised all our funding and could make those deposits and stuff like that. That's just a minor example, but gives you a sense of how different it was in those days.

Today people, even executive-search firms are willing to take options instead of cash which is much more the Silicon Valley way. So, things have changed dramatically. I think if I step back and look at a macro level -- from a technology-internet-mobile perspective, the biggest change is that today there is a market, 5-6 years ago, there wasn't. When we started, we worked through early in the market, we -- at that time there were probably about three-and-a-half or four million internet users; today, depending on which data source you look at, it's 25 to 50 million. There were maybe 6 million mobile users; today there are about a 150 million.

So fundamentally, the market has arrived. Not just in Internet and mobile, but in general in domestic consumption and consumer services, there's today a large market. India has a critical mass, where you can build businesses to actually target the Indian market as opposed to always trying to target the US market. So, that is one big change.

Second big change is that a lot of new -- this whole entrepreneurship ecosystem has started to build. So, you'll see a lot more of these venturing organizations, TRAI has become more active. Lot of associations have started to take interest in entrepreneurship and in mentoring people. Band of Angels has been set up in Delhi; a Band of Angels has been set up in Bombay. So, stuff like this has started to happen, which is fundamentally encouraging the entrepreneurs.

Third thing that has happened, I fundamentally believe is that the investors were smarter which is a good thing and I would say the entrepreneurs are smarter. I'm seeing a lot more people who are looking to start real businesses, which are going to make real impact long-term as opposed to just doing it opportunistically to fit their businesses and make some money. So, investors are asking the right questions, they are not getting swayed by any evaluation somewhere else sort of business that might not work in India. So, lot of fundamental changes have happened, in this space -- I think that augurs pretty well for how this is going to develop over the next few years.

Kamla Bhatt - PodTech
This is with reference to the old school boys' network. You are an IIT product; you went to the University of Wisconsin, which is very well known for it's databases and engineering department. Then you studied at Harvard. In India, many of the entrepreneurs either have an IIT background or they have one of the REC backgrounds. Those networks help each other out a lot. The Harvard Alumni Association in India is very, very strong. What is your take on that?

Avnish Bajaj - Matrix Partners India
I think it definitely works. For me, I would say the Harvard one has probably worked stronger than IIT and mainly -- probably because being -- by virtue of being in the US for some time, I did lose contact with my IIT alumni network, which I have been rebuilding over the last 3-4 years but the Harvard one, like you said, is very strong. I think the easiest example I can give you is -- Baazee was the reason I came back to India, was because one of my buddies from Harvard, one year senior to me, is Ashish Dhawan. He was starting a venture firm called ChrysCapital, in India and he encouraged me to come back and he said "Look, as long as you are working on something good and it's a decent idea with a decent opportunity, we will invest in you", and just to have that trust reposed in you and the fact that somebody would basically say, comeback and don't worry about your job security and all of that and as long as you're doing something good, we'll invest, goes a long way.

So, we were actually -- Baazee was ChrysCapital's first investment in India. Today, you're probably aware that we're an extremely successful private equity firm. That's how it all started, it started at Harvard, it was our HBS network. So, I think, in fact, even beyond that Mr. Anand Mahindra is one of the people that I often seek out for advice and that connection is also HBS. I just approached him when he came to India and I said "Oh I'd love to have you as a mentor" and he just agreed. So, I think it goes a long way, I think it definitely helps. That said, I will tell you that today as we are looking at building out Matrix or as we're looking at investing in various companies, Harvard opens the door, but it doesn't get you to the finish line.

So, we have lot of candidates coming to take jobs with us or we have a lot of entrepreneurs coming by with business plans who are from HBS or, my partners from (Inaudible) for that matter. It definitely is easier for them to get through to us. Obviously, we try to meet everybody, but if it's an HBS person, it'll probably happen very quickly wherever we are but that said, unless the idea is good or the person is really good, they still have to have that excellence in, not just at background but in what they're trying to do, for them to make the final cut.

Kamla Bhatt - PodTech
How does an entrepreneur, who probably doesn't have any of these pedigree schools to his or her credit, how does that person operate in this environment? What opportunities would they have?

Avnish Bajaj - Matrix Partners India
I think, the opportunities are no different. Let me make sure I clarify that it is easier for someone from Harvard to -- it'll again, open the doors but that doesn't set them off for success longer term necessarily, they still have to do all the work. In fact, all the investments that we have made so far they've none of them has been to Harvard or any of these Ivy League school graduates. So, we've made four investments, we're talking about the second one we made, we have made two more that we haven't announced, and none of them are from HBS. People have plenty of opportunity. Yo!China entrepreneur Ashish Kapoor, for example, has been in India for the last three years and he happened to at Thai, which I think is one of the ways of making sure that people stay on the cutting edge of what's happening in this whole entrepreneurial environment.

So, Ashish met me at Thai and I knew about his business and then when we started Matrix, I ran into him again and he said look I'm looking to raise money, so that's how it worked. So, I think if somebody's starting out, today like I said, the ecosystem has developed. They can approach -- frankly they can send me an email. I pride myself on the fact that I'm extremely responsive. It may take me two-three days but I always respond to everybody and that's one forum is to just reach out to the VCs. Our contact information is almost always on our Website. The second is to definitely participate in organizations like Thai, in events organized by such organizations. Lot of other associations are also trying to encourage entrepreneurship. So essentially participate in those and you will find somebody who'll be able to guide you a little better. Today, if somebody has a great idea, I think there is definitely somebody who is out there who's willing to either mentor them or invest in that business. That's where the environment has changed significantly.

Kamla Bhatt - PodTech
Let's again switch tracks. About two years ago, round about this time, you were in the middle of a legal battle with the Indian Government, right?

Avnish Bajaj - Matrix Partners India
Yeah.

Kamla Bhatt - PodTech
I just wanted to clarify, this was about two years ago, there was a video clip, a two minute shot X-rated video clip, that was hosted on your site, somebody else put it up on your Baazee.com server, right? You were then put behind bars, because the government held you responsible for that offensive video clip, can you tell us what happened after that, what has been the consequence of that incident and the legal precincts.

Avnish Bajaj - Matrix Partners India
Sure yeah, no precedent has been set yet. I think fundamentally anybody with common sense would realize that, this was like prosecuting the owner of a shopping mall, if one of the stores in them was doing something illegal, people in the US understand, what eBay is all about, and in India it was just still early days, but I would actually not just to be -- just to clarify, I think this was an over-zealous police inspector or over-zealous cop rather than a system, that didn't understand this. I obviously haven't had a very traumatic experience, I'd say less so physically but emotionally, definitely very dramatic, but ultimately the court's -- it released me, and they released me fairly promptly, and they did make a remark that this seemed like the wrong person was being prosecuted.

So, I was obviously in the depths of despair at that time, but it definitely did restore my faith that people get it, it's not like people don't get it, but that said, the process is not over yet it's still in the court, the court's so far have been taking a favorable view, but we'll see how it plays out. There has been no precedent that's been finalized as yet, but there have been media reports that once this incident happened, the government took it upon themselves to plug any possibilities of ambiguity, because even the current IT law under which I was supposedly held liable has clear lack of liabilities for intermediates. It clearly absolves intermediates which is what we are of liability.

So, the government though felt that given that an over-zealous, legal law enforcement officers can go out of control with the current interpretation of the law, have mentioned that they will be modifying it and there was a Press report a month ago, that the cabinet had approved the new law. Now, I haven't seen the new law, and frankly, that's a government prerogative to make it, but it's not like nobody reacted, I think there was reaction, and I think although it was at my expense to some extent but I do think people will understand the whole medium a lot more now. There have been controversies about Orkut, there have been controversies about Google, there have been controversies about Yahoo! but nobody's gone crazy and started putting people in jail for these kinds of things.

Kamla Bhatt - PodTech
Let's switch tracks, coming back to Matrix, what led you to become an investor because two years ago you had sold your company, you were with eBay and you probably took a small break. I'm curious to know, what influenced your decision to become an investor?

Avnish Bajaj - Matrix Partners India
Like you said, after the Baazee sale and being at eBay for a year, I felt like I had definitely gone through one full life cycle, so to speak of an entrepreneur from quitting a job with -- while still having loans too, successfully consummating a sale, more importantly successfully integrating to a large company with a startup and having a team of people to whom I felt responsible, very happy in the new environment and that to me was the culmination and completion of the life cycle.

So, I did think about what next and what I realized was obviously being a serial entrepreneur or starting something new was always a possibility. Along the way I also started having lot of people approaching me for help, like I mentioned before like as mentoring help and people wanting me to look at their business plans and help them potentially get to various stage of funding and stuff like that. That's what I realized was that I really truly enjoyed that process, I really truly enjoyed talking to entrepreneurs and so, what I did was even before this Matrix thing, I actually made maybe three or four angel investment in companies and I would get involved as an advisor in those companies, and essentially help them, execute along. So, that was why my angel investor avtar so to speak was what made me -- what convinced me that I wanted to be a Venture Capitalist as opposed to an entrepreneur again, also because one key reason was being able to work with entrepreneurs and helps them and two was that I really enjoyed the stimulation of participating in multiple industries, as opposed to going very deep into one industry, which is how you have to be as an entrepreneur.

So, now it's Yo! China as in hospitality, food and beverage, whatever you call it, another investment Seventymm as you know from Matrix is Internet, third investment is going to be media entertainment or one of these sectors, that across the consumer services sectors that we mentioned, financial services so on and so forth. That was something that really gave me a rush at. So, that's something that convinced me that that's what I wanted to do, and then I fortunately happened to know Rishi, Rishi was looking to setup his own fund, so that's where we'd ended up deciding to setup our own fund and along the way ended up actually get to know the Matrix people really well and having excellent chemistry of them, and decided that we'd actually do it under the Matrix brand name as opposed to our old brand name. So, that's kind of how it evolved.

Kamla Bhatt - PodTech
When do we get to hear about these two tantalizing investments that you've made, you've mentioned it a couple of times, but no names have been disclosed.

Avnish Bajaj - Matrix Partners India
Yeah, that's right -- yeah, as you'd probably appreciate, they're under confidentiality. We will be announcing one, probably in the next week -- ten days, actually by the end of this month or the end of December we would have announced both. So, that would make a total of four for us.

Kamla Bhatt - PodTech
What is your plan for 2007?

Avnish Bajaj - Matrix Partners India
So, when we started the fund, our view was they would do anywhere between four to eight investments in a year, with medium size being about $5 million. So, we're looking at about anywhere between 25 to 35 or 40 million dollars of investments a year. So far we have actually like I said done four, so we have gotten off pretty much to the kind of start we expected or maybe even slightly faster than we expected; 2007 we'll see what happens, because this is a cyclical business but I would say, I wouldn't be surprised if we're able to stick to the goal of four to eight investments which is what we mentioned every year. So, my guess is maybe hopefully, somewhere around five or six investments.

Kamla Bhatt - PodTech
Thank you so much for your time Avnish, we wish you the very best and we look forward to hearing about those two investments by the end of the year.

Avnish Bajaj - Matrix Partners India
Sounds good, thank you Kamla, thank you for having me, it's been my pleasure.

Kamla Bhatt - PodTech
You were listening to Avnish Bajaj Founding Managing Director of Matrix Partners, India. Avnish has recently joined the board of Yo! China, a Chinese restaurant chain that operates out of India. This is Kamla Bhatt for PodTech, and as always, thank you for tuning in.

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