India has a thriving entrepreneurial culture, high-single digits growth, strong talent, and is flush with money ready to put to work. Shouldn’t this naturally make it a venture capitalists’ heaven? Not necessarily.
The Playing Field
Venture Capital in India is still at a very nascent stage. The industry consists of roughly half a dozen active firms – most of which are U.S. based. The firms we met included Helion, DFJ, Accel, and I also separately met with Nexus. There are other firms we didn’t get to such as Sequoia, Canaan, and IDG Ventures (the latter which was interestingly co-founded by a Sloanie). Some other firms are present – but invest at a much later stage than pure venture – firms like Bessemer, Battery, Norwest and Matrix. Venture Capital has been around in India for a while, but roughly 10 years ago it morphed into PE. Various players such as ICICI Venture and Carlyle realized that with so much cash, PE was a much better model for them, so switched their strategy. The latest pure VCs to crop up have only done so in the past couple of years.
Are there Exits?
Since the firms have only been around for a few years, VC is still not a proven model in India. Until India gets its 20x’s, the main question on the lips of every firm we met with was ‘are there exits?’ This year should be an interesting year since there are about 100 IPOs lined up, including a sizeable number which are VC funded. However, until some major headline exits happen, VC lacks the reputation and still remains an unproven model in India.
Growth Garbed as Venture
Given its early stage as an industry, the VC happening in India tends to be more risk averse than traditional VC. There are still inhibitions around backing very young companies, so VCs prefer companies which are cash flow positive and use more PE-type criteria in evaluating companies - leading one firm to describe investments as “growth garbed as venture”. While this may be a less risky approach, on the flip-side, this also lowers the return potential. Since Indian VC investments tend to be oriented towards service companies rather than technology companies, while less capital is required and less risk is involved (since they don’t have to prove the technologies), there is also no exponential hockey stick growth that comes with tech plays. Service businesses are instead an execution play, and the time it takes to build out the business is a slower and more gradual process – which makes it tough to ensure that exits take place within a suitable horizon which is shorter than the 10-year fund life.
Where are the Angels?
There is still not much of an angel landscape in India – there are 2-3 well-known angels, but even these have a mixed reputation. However, fortunately the “friends & family” investing sphere is very significant – not surprising given India’s rich heritage of family-owned businesses. Hence, usually there is no trouble in getting early investments of around $100k to $200k. The only active VC making serious investments under $1 million is Accel, with the others mostly staying in the $2m - $10m investment range. Anything greater than $10m becomes very competitive, with companies with revenues to warrant large investment sizes automatically becoming hot property, sending valuations through the roof.
Sectors: Searching for Scalability
Most of the funds we spoke with had a sector agnostic view to their investments. The general theme we heard was there is rarely IP or new ideas coming out of India, and most start-ups are merely replicating and adapting foreign ideas for the Indian context. The one exception to this is mobile, where India is leading trends internationally largely because of the unique set of regulatory and socioeconomic conditions pushing this sector in India. Areas such as internet are still struggling in India, since it is hard to monetize websites if there is no E-commerce. E-commerce is still yet to take off in India since it requires logistics both through distribution and online payment, which are not yet in place. Cleantech is also a relatively new area, with only DFJ and Nexus seriously focusing on it, with some others starting to look at the space more closely. Generally the mantra on everyone’s lips when considering investments was ‘scalability’.
Where does this leave the Entrepreneur?
Interestingly, we heard that 95% of entrepreneurs in India are first-time entrepreneurs. Historically, businesses spawned out of family enterprises, so there was never a need for external funds, but now a new set of professionals is emerging. Other than the regular requisites of having a passion and stomach for start-ups, entrepreneurs in India also need to have a much longer time horizon. In the west, it is sometimes common to think in terms of a 3-4 year time horizon when make a decision to found a start-up, however we in India 10 rather than 5 years is the magic number.
So is it better to be an entrepreneur or investor in India? Chances are that in the early years at least, investors will get hurt more than entrepreneurs. It will take a few stellar exits to prove the model, but when it is proven, it could be the beginning of a very exciting era for Indian business.
