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Why WaterBridge Ventures' 50 percent portfolio bets on rural India

If ride-hailing in urban India is a $6 billion market, solving bus transport is a $20 billion market in smaller towns and beyond—opportunities like these is leading this VC to place bets on startups catering to rural India

Rajiv Singh
Published: Jun 10, 2021 12:11:20 PM IST
Updated: Jun 10, 2021 05:28:29 PM IST

 Why WaterBridge Ventures' 50 percent portfolio bets on rural IndiaManish Kheterpal, managing partner, WaterBridge Ventures, says one must look beyond the obvious to spot the Bharat opportunity
Image: Selvaprakash Lakshmanan for Forbes India

In 2006, Manish Kheterpal made his first big contrarian bet. After spending almost a decade in the US with top global private equity (PE) and venture capital (VC) firms such as Actis and Rho, the IIT-Delhi and Standford Graduate School of Business alumnus came back to India in 2005. The move made sense for the fund manager. India was being billed as the next big investment destination. The ‘India Shining’ campaign by the government in 2004 tried to sell a dream of a country gearing up for outsized business opportunities over the next decade. The global investors found the pitch appealing.

Kheterpal, too, was keen to participate in India’s promised future. He joined global PE firm Providence Equity Partners as director to lead its India office. In the last quarter of 2006, Providence picked up a 15 percent stake in Idea Cellular. The then-third-biggest telecom operator was itching to take on Airtel and Vodafone and become a pan-India player. What’s more, India was on the cusp of a mobile revolution, and Idea was billed as the new poster boy across top cities.

The funder, though, had put on a different lens. “Idea was the only player with a sizeable presence in Tier III and beyond,” recalls Kheterpal. The PE veteran, who was once enamoured with India Shining, could sense early days of Bharat Rising.  

Why WaterBridge Ventures' 50 percent portfolio bets on rural IndiaCut to 2017. A decade later in Mumbai, Kheterpal was about to make an outlandish bet. One of his former colleagues had fixed a ‘courtesy’ meeting with Mohit Dubey, co-founder of CarWale, which was acquired by rival CarTrade in 2015 reportedly for $120 million. Dubey had quit CarWale and joined Chalo, an intra-city bus mobility startup which he co-founded in 2014. The meeting, scheduled for 45 minutes, stretched to eight hours. Kheterpal, who had quit the PE world and started early-stage VC fund WaterBridge Ventures in 2016 and made his first investment in edtech startup Unacademy, found something jarring. Dubey, he recalls, had brilliantly built a successful company and sold it, but nobody was keen to bet on his new venture, which was catering to masses in smaller cities, towns and villages.

“Everyone was focussed on Ola and Uber, which was a $7-8 billion market,” he recounts. The bus opportunity, though, was more than double the size: $20 billion. “Everybody missed the bus stop,” says Kheterpal, who boarded Dubey’s venture as the first institutional investor in Chalo in August 2017.

Chalo—the fourth investment of WaterBridge Ventures, and the first in a Bharat-centric startup—took Kheterpal deeper into the hinterland. Over the next three years, he made multiple bets in startups building products and solutions for rural India and smaller towns (see box). “We believe in entrepreneurs who are going after large markets,” he says. An investment of ₹125 crore in six startups, including Chalo, may not be huge, but what makes WaterBridge stand out in a cluttered VC market is that half of its portfolio is chasing a massive opportunity in Bharat.

Why WaterBridge Ventures' 50 percent portfolio bets on rural IndiaCityMall, a social ecommerce platform, is in a $200 billion market; Bijnis, a B2B ecommerce startup, is in a market estimated at $30 billion; Chalo is the biggest player in a $20 billion bus mobility segment; edtech startup DoubtNut is busy cracking a $10 billion opportunity; social commerce platform OneCode is going after a $7.5 billion market; and health tech platform MedCords is trying to find its jackpot in a $5 billion business vertical. Kheterpal reckons that a VC needs to identify diamonds in the rough. “If everything is polished, then everybody can see it,” he smiles. The desire to set up WaterBridge, he underlines, was to do something different. While acknowledging that startups have an inherent high risk, the VC underlines the silver lining: High opportunity cost.

Massive opportunity is what the hinterland offers, the biggest reason being  the deep penetration of internet and smartphones. Rural India will continue to drive internet adoption and witness double-digit growth for the next few years, according to a report by market research agency Kantar IMRB. Between 2018 and 2020, rural internet users grew at a CAGR (compound annual growth rate) of 28 percent compared to 7 percent in urban India. Out of 622 million internet users in the country last year, the share of rural stood at 48 percent, a tad more than 298 million. The pandemic has further accelerated the pace of digital adoption.

With the country estimated to have a billion digital users by 2028, smaller towns and villages are likely to lead the consumption bandwagon. Over 458 million consumers will come under the bucket of ‘digital mainstream’, a set of price-conscious digital users who have come online post 2016, according to a media and entertainment study by KPMG released last September. This consumer segment, the report says, will have almost entirely mobile-led digital access and consumption. Another meaty category—digital enthusiasts—will number around 526 million. This group will exhibit the greatest diversity display and more linguistic preferences.  

If one more set of data is added to the above picture, one gets to see why Bharat is set to outshine India. By 2030, the country is likely to add 140 million households to its middle class, according a WEF-Bain report. A chunk of them will be in smaller towns. 

Why WaterBridge Ventures' 50 percent portfolio bets on rural IndiaWaterBridge’s Bharat army, for sure, has been building its base across Tier III cities, towns and villages. Take, for instance, Chalo. Out of 20 cities that it operates in, 45 percent are in Tier III. In fact, the startup has grown during the pandemic in terms of adding more buses on its platform. Given the diversity of geographical operations—Assam to Kerala—and state-level lockdowns as opposed to a national one last year, Chalo is unlikely to get hit by the second wave.

Ravi Kaushik, partner at WaterBridge Ventures, explains why the bus mobility platform has been gathering steam. Unlike the users of Uber and Ola, who have been working from home during the pandemic, Chalo’s consumers come from lower middle class—factory workers, employees at small enterprises and state government offices. “It’s on track to grow revenue by 1.5-2x during this fiscal,” he says.

CityMall too has been growing at 30 to 40 percent every month. Sales of staples, groceries and essentials have seen an uptick in Bharat. Though the startup faced problems for a few weeks during lockdowns in Haryana and Uttar Pradesh, it has staged a rebound, reckons Ashish Jain, one of the partners at WaterBridge Ventures. With Covid causing massive unemployment and triggering migration of labour to Bharat, OneCode too has seen heady growth. By providing an alternative income by creating a parallel distribution network for products like education, financial services and local brands, the startup is expected to grow 3-4x during the second wave, he adds.

Anjali Sosale, partner at WaterBridge, decodes the DNA of the entrepreneurs who are flourishing in the hinterland. “They have a unique understanding of the Bharat users, which means right pricing and right products,” she says.

Take, for instance, DoubtNut which has over 3.5 crore students across 4,000 Tier III and IV towns like Munger, Gopalganj, Hamirpur and Raibareli. While its user base grew from 2 crore to 3 crore during the first wave, it crossed 3.5 crore during the second. “The revenue has grown by 10x over the last six months,” claims Kheterpal, who attributes the success to three factors.

First, tackling the core problem and pain point of students: Doubts. Started by Tanushree Nagori and Aditya Shankar in 2017, DoubtNut’s multilingual doubt-clearance platform uses machine learning and artificial intelligence to provide video-based solutions. “They didn’t build a push product. This turned out to be their biggest pull,” says Kheterpal, adding that the startup didn’t charge money in the first year of operations. Second was building products for Bharat rather than India. Over 2.5 million daily active users spend more than 600 million minutes per month on the platform. The co-founders, he points out, realised quite early that the edtech market in top cities would fast get saturated. Third was rolling out ‘sachet’ or affordable pricing. With an average pricing of ₹500 per month for a student, DoubtNut didn’t burn a hole in the pocket. It, he adds, perfected the three Ps—product, pricing and placement.

Investors started to take notice. In February, Doubnut raised ₹224 crore (around $30 million) in a Series B round led by US-based SIG and Lupa Systems, a James Murdoch-founded firm. Existing investors Sequoia Capital India, Omidyar Network India and Waterbridge Ventures also participated in the round. The fresh infusion in the edtech firm comes a little over a year after it got $15 million in its Series A round in January 2020, and four months after it raised funding from venture debt provider InnoVen Capital last October.

For 60 percent of students who availed the services of DoubtNut, the transaction happened to be their maiden digital purchase ever across all categories. “A lot of them took help from a recharge shop, neighbour and/or relative to make the payment,” says Nagori, co-founder of DoubtNut. For most edtech startups, she maintains, Tier II, III and IV at times are restricted to the Lucknows and Patnas of India. For DoubtNut, though, penetration into the hinterland is deep. The last few students who bought packs or installed the app were from small cities in Bihar and Rajasthan like Darbhanga, Nalanda, Naguar, Jhunjhunu and Sitamarhi. Their parents, says Nagori, are farmers, labourers, kirana store owners as well as businessmen in the traditional sense.

Nagori maintains that the journey was not easy. The co-founders first figured what the offering would be, then did multiple experiments in pricing and packaging, which were based on rigorous student interviews, conversations and calls. “Communicating in their mother tongue, right pricing and using truly tech products without manual intervention works for Bharat,” she says.

Of course, not all of Kheterpal’s Bharat experiments worked. Investment in a kirana tech startup was one of the misses. The co-founders, Kheterpal recalls, spent a lot of time in building the POS (point of sale) machine. “When you have a hardware-based product, your risk layer increases,” he says, pointing out why the investment made in 2017 bombed. The venture, he explains, was also ahead of its time. The mobile revolution in kirana happened over the last two years. “We didn’t have the patience to wait,” he rues.

Bharat indeed tests the patience of entrepreneurs and VCs. Monetisation is slow, earning consumer trust is not easy, and one has to be nimble to keep experimenting. Any thoughts of making quick money—for the founders and funders—should not be entertained. Kheterpal points out the example of MedCords, a startup in which he invested in 2018. Founded in 2017, the rural health tech venture has laboured to make money. Reason: Rural India still doesn’t trust telemedicine. “They are not willing to pay,” he says.

Investors too shouldn’t expect a swift payout. Look at the US. In over three decades of VC history, 95 percent of returns have come from just 5 percent of funds. “This means 95 percent of funds didn’t return capital,” he says. The mantra to make money in Bharat, he explains, is simple. Stay calm, stay invested, exhibit high-risk appetite and make contrarian bets. “You need to look beyond the obvious. Then only you can spot the Bharat opportunity,” he signs off. 

(This story appears in the 18 June, 2021 issue of Forbes India. To visit our Archives, click here.)

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