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We have an active pipeline of companies in India for investments, acquisitions: Francisco D'Souza, co-founder, Recognize fund

Moneycontrol logo Moneycontrol 14-01-2022 Chandra R Srikanth
We have an active pipeline of companies in India for investments, acquisitions: Francisco D'Souza, co-founder, Recognize fund © Moneycontrol We have an active pipeline of companies in India for investments, acquisitions: Francisco D'Souza, co-founder, Recognize fund

Former Cognizant CEO Francisco D’Souza’s private equity fund, Recognize, which he co-founded with industry veterans such as Raj Mehta, Charles Phillips, and David Wasserman, has raised $1.3 billion for its inaugural fund. The fund brings together investors and operators, with a singular focus on technology services, which D’Souza believes is in a sweet spot right now.

It has invested in three companies so far-  Ciklum, a cloud-native, digital engineering firm; SpringML, which is focused on Data, AI/ML, and Torc, which is developing a virtual talent platform for software engineers and also has ambitious plans for the India market.

D’Souza co-founded Nasdaq-listed  Cognizant in 1994 and served as its CEO from January 2007 through March 2019. He was elected to Cognizant’s Board of Directors in January 2007 and served as Vice Chairman of the board from 2018 until 2020. During his term as CEO, Cognizant consistently grew faster than its peers such as TCS, Infosys, and Wipro, becoming a barometer of growth for the IT industry.  Its revenue went up 10x, from $1.4 Billion in 2006 to $16.1 Billion in 2018, during this period. He is currently a director of GE and also serves on the board of MongoDB.

In this interview with Moneycontrol, D'Souza spoke about his investment thesis, the opportunities in India, why the technology services boom is here to stay, and his learnings as a CEO that he will use as an investor.

Edited Excerpts:

Your fund announcement is coming at a time when we are seeing an unprecedented rise in the adoption of technology and a record funding boom in tech startups. Where do you see Recognize, in this context?

I have been in the industry for decades, and in all these decades, I've never seen the industry at such an exciting and unprecedented time. We're seeing innovation happening faster than any time that I've been in the industry. And I would argue at any time in history. On the other side, you have the global enterprises, banks, healthcare companies, and others, that need to take all of this innovation that's coming out of Silicon Valley and Seattle and other places and create some business. The role that the tech services industry plays is right in the middle of those two. So I think about the tech services industry as linking innovation to enterprise outcomes. And that's what the industry has done for so many years. The reason this is such an exciting time is that as innovation accelerated, it created more pressure for enterprises to adopt that technology at the back of the pandemic. This has also created an incredibly rich and robust environment for the technology services industry. We are the first firm that brings together investors and operators, across both software and tech services with a singular focus on technology services. That's all we're going to do in Recognize.

This singular focus on technology services, was it also because you founded Cognizant and spent over 25 years in the company in various roles, including that of the CEO?

Certainly, that played a role. Because I've spent so many years in the industry, I think I have a unique perspective on the industry. I have a clear perspective on where I think the industry is going. I think part of the personal joy of Recognize to me is the ability to work with the next generation of leadership teams, to build, and essentially to pass on the learnings of, as you said, 25-26 years in the industry to a new generation of leaders.

Can you take us through the opportunities that you see as far as India is concerned? Is there a part of this $1 billion that you will specifically perhaps allocate for the Indian market?

All three of the companies that we've invested in, either have or are planning to significantly invest in India. You cannot invest in tech services and not have a significant presence in the country. So, we expect that India will be a very, very important part of our portfolio of companies, I think it will be a very important source of talent for us. In the coming months, you will see us establish a presence in India. Our portfolio companies have a few hundred employees in India. I think the existing portfolio of companies will have 1000 people in India or more by the end of the year. So, India is going to be very, very important to us.

But beyond a talent hub, can you share more about the investment opportunities you see here?

We've already looked at businesses in India to invest in. We have a very active pipeline of companies in India, both as an investment and as potential acquisitions to our existing portfolio of companies. So we are very active in the Indian market.

What is your area of interest in the Indian market? For example, we are seeing huge interest from investors in the data analytics space? We saw AI-firm Fractal recently become a unicorn after 20 years, and data analytics firm LatentView’s successful IPO.

We are the only private equity investment platform that's entirely focused on tech services. Tech services really touch all aspects of the economy serving almost every industry and governments around the world. We are looking at high future-oriented ecosystems like AI and ML, data and analytics, IoT, and 5G. We are also looking at those opportunities in industries that have historically been aggressive adopters of technology like healthcare, financial services, and eCommerce.

About what you asked about data analytics, I don't even want to say it, but data really is the new oil. In my first innings in the industry, at Cognizant, we spent most of our time focused on the software stack. I think that there's a parallel stack that's emerging now or already has, which is the data stack. I think that the reason you see substantial traction with the data and analytics firms is because of this recognition.

Your fund closure is also coming at an interesting time in the public and private markets. Public markets, we've seen a broader tech sell-off happening in the US, and even the Internet companies that IPO-ed in India haven't fared too well. But in the private markets, we are still seeing elevated valuations, particularly for SaaS firms. Does this make investing difficult for you? What kind of valuation upside are firms seeking in the current environment?

You have asked me this question in different formats over the years, and my answer has always been the same, which is, we want to focus on building great businesses. That's what we are going to do. We are going to work with entrepreneurs, and we are going to build great businesses. And we think if we do that, then the valuations will follow, markets will recognize the value of good businesses, whether they are public markets or private markets. We think that we're uniquely positioned to help entrepreneurs and founders, and to work with them, to build great businesses because of the operating experience, track record and network of talent, clients, and other connections that we bring to the table. When you put all of that together. We can really help entrepreneurs grow and thrive and create fundamental value that will lead to successful outcomes.

The kind of growth that we are seeing in IT is unprecedented, with companies such as Infosys looking to end the year with a 20 percent growth rate. As someone who has spent a considerable amount of time running an IT services company, do think this kind of growth is sustainable? If you can give us a macro view of this new wave of growth we're seeing?

The tech services boom you are seeing right now is driven by the rapid pace of innovation that we're seeing in the software industry. I don't see that piece of innovation slowing down in the coming years. If anything, there are several promising new technologies on the horizon that will continue to drive innovation. We are in the very early innings of AI and ML. As I think about 5G, IoT, self-driving vehicles, and drones, there are so many of these things that are coming down the pike. I don't think that will slow down, frankly. And I think as a result of that, the demand for tech services will continue to be robust.

However, having said that, I think this is perhaps different from the past in at least one important way. In the past, we have spent a lot of time talking about demand. For the next decade, the game is going to shift to the talent side. Given this robust level of demand that we're seeing, I think the winners of the future are not going to necessarily be the ones who can create demand most effectively. Because there's lots of demand out there.

I think the winners of the future are going to be the ones that can build amazing cultures and create real reasons why people want to work for those companies. I think the point of focus would be, can you build a great firm for the long run with the higher levels of attrition we are seeing today.

What we are seeing in the industry is a blurring of lines.  Large IT firms, the big four consulting companies, smaller data analytics firms, and mid-sized IT firms are all competing for the same projects, which has not happened before. So how do you see these business models evolving?

The reason the lines are blurring, in my mind, is for two reasons. One is because I think as innovation happens, at this very rapid pace that I talked about, clients, in general, need skill more than they need scale. So clients are willing to look for the right partner, regardless of the size and scale. If I have to find the right skill and go to a small company somewhere in the world, I'm willing to do that.

So, I think that's a really important trend. The other is the great digitization of the services industry. You know, we talk about the great digitization that's happening across other industries, but services themselves have to be digitized. How do you digitize the services industry? Just as we talked about digitizing banks and healthcare companies. That is another big trend. And I think we're in the very early innings of that. As that starts to happen, you start to see firms that look very much like hybrids between software firms and services.

What is your biggest learning as an operator that you will bring in your current role as an investor?

I would do two things. One is to hire great people. My success at Cognizant is directly correlated with the amazing team of people that we put on the field, who came to work every day and gave more than they did the previous day. The second thing is, take smart risks. That's what business is all about. To understand what are the market opportunities and make smart bets on those opportunities.

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