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Risk Capital in India June 20, 2006

Posted by rajAT in bangalore, entrepreneur, entrepreneurship, hyderabad, IIIT, iit, india, isb, startup, tie, vc, venture capital.
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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 🙂 :).

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Comments»

1. Anil Kurnool - June 22, 2006

I agree with you 100%…..

Good observation…

2. labsji - June 23, 2006

University industry linkage is very important in evolving a good Startup ecosystem.
In the IIT and the like, the internal politics is too intimidating for entrepreneurs.

In the not so popular engineering schools, they are obsessed with maximizing the number of campus recuritment by TCS/Wipro/Infosys and gang.

The sycophantic cultural baggage of the Indian academia will be a major turnoff for Innovators and the Industry. Given this baggage, how many serious
entrepreneurs will take them seriously?

3. Anil Kurnool - June 23, 2006

True Labsji,

Industry rejects are teachers in most of the engg. schools. Their lack lusture training makes the students glorified “digital labourers” (code coolies) but not innovators or entrepreneurs.

At times, diamonds are passed off as dust – due to scales of coolie operations. (As in case of Rajat.)

4. rajAT - June 23, 2006

@labsji – Shocked to know the politics bit going on in IIT with the entrepreneurs. The guy who is starting something already has so much to settle now the insitution itself is creating problems. Man kya hoga is desh ka.

@anil – Thanks for the metaphor – diamond.

5. DesiPundit » Archives » Venture Capital Scene in India - June 24, 2006

[…] Rajat Gupta comments on the trends in VC funding in India and observes that most of the funding is going towards late stage ventures. With more money chasing fewer deals, we should probably see a reversal in this trend pretty soon. […]

6. Krish - June 24, 2006

Money chases late stage ventures because of two reasons ;

a) Startup ventures either lack substance ( hence Biz Plans get rejected by VCs) or just that they are self reliant and don’t need VC funds.

b) Late Stage Ventures are more visible and know how to gain PE traction….Lesser risk perception too is a major driver.

This is the universal phenomena. However in India, PE / VC fund managers are mostly young MBAs with little knowledge about the way the system works here. They really don’t teach that in Harvard or Stanford.

For eg. a Startup definition in Silicon Valley is a great concept founded by a brilliant team who have a company and a few early customers. If so much is achieved, VCs do their due diligence and if they like it walk in with their millions – whether they need it or not.

But in India, the same principle does not work. If a startup can achieve so much, they don’t need the VCs. They can rely on Banks and Institutions for significantly less costly Debt / Equity support – minus the exit pressures which a VC association brings along. ICICI Bank has opened an exclusive SME desk for this.

Neither do the Indian HNIs treat PE / VC as a separate Asset Class as the US and UK HNIs do. For Indian HNIs the good old PMS schemes of Citi, Stanchart holds good. Now that there are wealth managers also to contend with. When the emerging markets are buoyant like now – the influx of liquidity from hedge funds into Indian PE. But remember, Markets do have cycles and if we don’t generate our own local fund streams and develop PE as a distinct Asset Class here in India, PE / VC funds run the risk of drying up when markets ebb down. That’s when entrepreneurs will accept realistic valuations and exactly when one should invest, these funds will have no money.

Hence the PE / VCs will have to soon learn to adapt to the ecosystem here. I think they are basically brilliant minds and hence will adapt soon before the system rejects them altogether.

Best,

7. sriram bala - June 26, 2006

There’s another reason why VCs stay away from early-stage deals. Promoters and co-founders want to have their cake and eat it too. There is resistance to change. They seem to want the money, but don’t want to give up control. You can’t have it both ways. There is also a tendency to not think about exit strategies. They prefer to ride out a venture to its dying breath, and will hence not agree to standard term sheet clauses.
I think this will change when more M&A deals start happening in India. The growth of the domestic market will also drive up revenue and customer acquisition models. Interesting times ahead.

8. Sourav - July 29, 2006

Need a resource which will give me details of genuine VC’s.

9. rajAT - July 29, 2006

@Sourav – try making it ot http://www.tie-isbconnect.com/
There will be whole lots of VCs there.


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