Risk Capital in India June 20, 2006

Rafiq Dossani from Stanford and Asawari Desai from TiE has written a report on what is holding the growth of risk capital in India [Via Venturewoods]. Below are some of excerpts from the report and my supporting thoughts on it.

Over 90% of the money invested by VC firms is in late state ventures. And the remaining More than 90% of the money invested in VC firms in India ventures lie in the category of late stage funding. The rest of the funding also goes into the firms who are replicating proven business models. Hence, the risk capital as such is totally absent in India. There are multiple reasons for such a scenario -

1. Domestic Risk capital providers who are skilled at risk assessment and portfolio diversification lack technical skills and market awareness.

This is very true. Most of the HNI (High Networth Individuals) one will find here will be from IT/ ITES industries who will have little or no clue about what is latest in the industry. Some of them who might be able to dish out the names of hottest startups like Riya, Skype (now eBay), Flikr (now Yahoo) etc. but they won't have clear idea as in why they are hot.

2. Early-stage entrepreneurs, though skilled at cost-control and technology, lack market awareness, product development skills, global standards of professional and ethical behavior and team building skills.

a. Some of the entrepreneurs here will simply try to replicate what has been done in US without understanding the whole idea in depth.
b. Early startups will not have discipline which is essential to certain extent.
c. The ideas that they are chasing can get changed very radically because some other quick opportunity will knock their door. Mostly in services side.

3. Inadequate pipeline of angel/university/state funded seed-stage firms.

Univeristy funding or support is happenning at few IITs (Bombay, Chennai) very actively. Now IIIT-H has also started supporting startups. But a wider penetration will take a lot lot more time.
You cannot create a vibrant entrepreneur community in pockets. If Stanford students were crucial in creating Sillicon valley than students from other universities have also played a very important role. All top 100 univs in US have an active Incubation cells. This imbibes a spirit of entrepreneurship in the students right from the beginning.

4. Seed and early-stage entrepreneurs’ professional networks consist primarily of a few strong personal connections and brokers. A wider network of professional associates, incubators and prior-stage financiers, is largely absent.

TiE is the only entrepreneurship network in India. It has chapters all over India, but TiE Bangalore is the most active one. Recently it launched TiE-EAP which is great foot forward. ISB in Hyderabad is also trying to build the same along with TiE Hyderabad and IIIT-H.

At grassroots alot is happenning now days. All Tier 1 IT hubs (Delhi, Hyderabad, Chennai, Bangalore, Mumbai, Pune) have successfully organized Barcamps which were hugely successful. A small step but can go a long way as it gives a platform to the like minded to come and meet.

5. Underdeveloped equity markets for listing early-stage firms.
All big internet companies in India get themselves listed at NASDAQ or NYSE. This shows that Indian investor is not ready for the new age companies.

6. Shortage of complementary capital, such as debt capital.

Organized debt markets in India doesn't exist. One can get debt from improper channels at very high rate of interest. Mr. Finance minister are you listening.

7. The business environment discourages sophisticated standards of – corporate governance.

8.University-Industry partnership was an alien concept 5 years back. Corporate India is still trying to discover how such alliances can affect its topline.  

9.Domestic consumption of IT is not very high. When labor is cheap why bother about IT. This is the mantra at most of the organizations.

10. Bureaucratic, regulatory, legal and tax hurdles affects smallers VC firms and angel investors. Need of the hour is such firms and not big ones. Read my views on it here.

Well this all means we have long way to go. And we will go .