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Venture Capital in Slow Growth Markets: India, EdTech, Cleantech

Posted on Friday, Feb 7th 2014

There are a number of relatively slow growth markets in which we do a lot of business: India and EdTech are two examples. These are also two markets that I am passionate about, and have covered prodigiously for a long time. In a way, these markets, and many others that have similar characteristics, share very similar trajectories vis-a-vis entrepreneurship, venture capital, and exits. Another market in which 1M/1M doesn’t have much presence, but I have invested in, is Cleantech. The story is somewhat similar there as well. Let’s take a look at these slow-growth markets, and how they will emerge over the upcoming years.

First, India. In my recent book, Seed India: How To Navigate The Seed Capital Gap in India, I have provided an analysis of what’s happening in that market. The bottom line there is a lack of seed capital, a lack of appetite for risk, the domestic market growing at a slow pace, and too much venture capital with too few fundable deals. Coupled with a resurgence of entrepreneurial energy, we’re seeing entrepreneurs having to resort to bootstrapping. I am, actually very optimistic that as this current batch of entrepreneurs sustain a few years of bootstrapped business building, towards the end of the decade, many of them will be ready to hit a faster growth curve – the inflection point that all entrepreneurs crave – and become worthy recipients of significant amounts of venture capital. At that point, the Indian market will see very fast growth, making the next decade tremendously exciting. In parallel, we project that the seed capital market will also grow, and entrepreneurs in the next decade will benefit from a more vibrant seed capital infrastructure eventually.

Next, EdTech. You just read my post Are we in a Golden Age of EdTech? where I pointed out that education is a market full of free-loaders and posed the question whether EdTech is ready for venture investment.

Betsy Corcoran responded:

As you observe, education is a tricky business. For starters, it’s helpful to distinguish between very different education markets. One easy cut, for instance would be:

• K-12
• Higher ed
• “afterschool”/affluent parents education market
• career-oriented learning

The last – career-oriented learning – has always been a profitable business. (I suspect that uberbootstrapper, Lynda Weinman of is a hero of yours.) We’re seeing a fair amount of VC$ go into the afterschool market, which is much like any subsector of the consumer world. The top two more traditional “education” sectors are in the midst of enormous transition, driven by economics, politics and relevancy.

We don’t know what business models will work for these “traditional education” sectors, which in fact are really splintered submarkets that have different dynamics. That’s led companies to try many different business models, including: Selling to districts, going “free” to teachers (who typically lack spending authority) and trying to “get big” (like consumer products). We certainly see many fine bootstrapped companies (Mathalicious is a great example). Particularly K-12 is still a highly fractured marketplace, which is tough for everyone whether they’re bootstrapped or financed.

Bringing traditional venture money into these markets will change them—and get people’s attention. And it’s “new” money as far as education is concerned: these venture dollars never went to products that were designed for educators. I think that’s all good. We need to bring great design and thoughtfulness into education products—and if some venture money helps, I’m all for it.

Long way of saying, we’re still in the early stages of this market evolution. There’s lots of experimentation going on – and I believe, room for both the venture backed and bootstrapped.

To which I responded:

The real question about venture money in slow growth markets is that it doesn’t fit their model. Perhaps a better solution is to bootstrap the slow growth phase and get to inflection point, then raise venture capital. If the slow growth phase – financial growth that is – goes on for five years, these companies won’t survive. VCs will pull the plug.

And that brings us to the crux of the issue in EdTech that VCs are facing. I know that John Doerr is extremely passionate about Education (and CleanTech, for that matter). He has consistently tried to put his money where his mouth is. I admire him for that, and the fact that we have the Internet today is largely due to the fact that he placed a couple of immensely risky bets (Netscape and Amazon) very early on when business models and monetization paths were not at all clear. There was, however, one thing happening: an Internet bubble developing. That allowed Netscape to go public without a business model, and Amazon without profits.

Today’s public market is dramatically less tolerant of such phenomenon. There is a bit of a bubble in social media (Instagram, Tumblr, Snapchat), but largely, the market is looking for fundamentals, and even highly speculative M&A deals are few and far between. That means, a monetization model is required, user growth isn’t adequate. This is where K-12 and Higher Education markets are getting tricky. We’re seeing user growth, but not enough monetization, and it isn’t quite clear yet whether we will see sufficient monetization to see venture scale companies develop or exit.

Currently, there are numerous EdTech startups in the market. Inside incubators and accelerators, funded by angels, a few even funded by VCs, many enthusiastic and well-meaning entrepreneurs are toiling hard to crack these markets open. Personally, I would like to see their efforts pay off, not die in the vine. And for that to happen, these entrepreneurs would need to take a realistic perspective about the market realities. They need to focus on finding monetization models soon, and not drink the cool-aid of free user growth. They need to manage the slow growth periods carefully, within the resources they’re able to attract, and try to get to the inflection point for their businesses without burning all their available cash and ending up in the dead pool. Those that can, would emerge as the true leaders of the 21st century, and god knows, they are badly needed.

Finally, Cleantech. Since yesterday, it has been raining in the Bay Area. After a long drought, we’re finally getting some drizzles. It’s scary, what this draught may bring to California. We are at the mercy of nature, however powerful we think of ourselves to be. And yet, the investment in California’s water infrastructure is still minimal. China is doing a better job. India, as always, a sordid one when it comes to infrastructure. Entrepreneurs working on water related technologies like Energy Recovery Inc. (ERII) have had a tough run. At one point, John Doerr invested heavily in Cleantech. Many other VCs followed. Today, the only VC with a sustained interest in the industry sector is Vinod Khosla. Kleiner has backed off.

While I think, with patience and bootstrapping, entrepreneurs in India or EdTech may be able to find their inflection points, it will be excruciatingly difficult for Cleantech entrepreneurs, mainly because the industry is capital intensive, and capital, especially public capital that finances large infrastructure projects, today, is a bottleneck.

In summary, my suggestion to entrepreneurs in slow-growth markets is to be pragmatic and patient, work diligently and capital efficiently towards finding the inflection point, and once you do, attracting venture capital won’t be a problem. It may take a few years, but your time will come.

The billion dollar question is whether you have the resilience and the commitment to sustain this long journey, this crossing of the desert!

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