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Venture Capital in India

Posted on Friday, Aug 25th

India is flushed with investment commitments from the giants of technology. Microsoft, Cisco, IBM, SAP, Intel, and AMD have each committed over a billion to further develop their India presence.

So have many of the leading venture capital firms from Silicon Valley. For the longest time, Valley VCs would only invest in their backyard. No more. India, China, Israel are fair game today. This month, Matrix Partners has announced a $150 Million India fund. Sequoia has acquired Westbridge Capital, an India focused fund that has been around for five years. Several other major VCs are playing the space – Kleiner Perkins, NEA, Norwest, Battery, Sierra, Canaan Partners.

Yahoo has started investing in Consumer Internet startups, the first of which was announced recently (Bharatmatrimony.com), playing the corporate venture capital game.

Together, the committed capital chasing India is abundant.

Business Week writes cover stories on how the new billion dollar companies will emerge from India. Some have, already. Infosys, Wipro, TCS. No doubt, the lure of India for VCs is legitimate. These new darlings of Wall Street were built without their money. They want to make sure the next wave is built with.

In today’s India, the commodity in short supply is good entrepreneurs. In VC parlance, fundable deals are few and far between. Why?

Historically, India has been the world’s back-office. Consequently, the skill-set that has developed in India is that of engineering management and coding. The specifications are provided by teams elsewhere. Elsewhere, the market studies get done. Indian managers do not understand global technology markets. They have hardly had opportunity to learn this aspect of business. Entrepreneurs try to position products without knowledge of the product marketing discipline.

The natural instinct for Indian entrepreneurs is to build outsourcing services companies. BPO. Software Development. Chip Design. Those ventures take less capital, and become revenue generating fast. None of the Operating Loss period of a pure play product company is necessary, and hence, venture capital is also unnecessary.

VCs typically do not like this business model. It has low entry barrier. But those who have invested in India in the last five years have also invested in this model and made money off it. It was the only thing that was available. It is, however, becoming less appealing, since those markets are also maturing, and behemoths start to rule.

The next stop for VCs, the most recent wave, has been Consumer Internet and Mobile offerings. India’s growing mass of connected consumer population is the target wallet. Travel, Matrimonials, Jobs, Games, Mobile Payments are all segments getting substantial capital infusion. This trend is likely to continue for the next 18 months. The engineering required in building these sites is marginal, marketing being the big differentiator.

But it will still not consume the available capital. Those who understand the subtleties of these dynamics have started diversifying their portfolios with Retail, Bio Tech, Real Estate. Sequoia’s Royal Orchid Hotels is a case in point. Oak Investment Partners has set up a $200 Million venture fund to focus on the retail boom in India. Veteran retail investor Jerry Gallagher visited India and was astounded by the revenue per square feet in the malls and stores. He came back and convinced his partners to commit capital.

Bio Tech has produced one of the flagship entrepreneurs for India, Kiran Majumdar-Shaw, who is now pulling her weight to drag the entire industry up. India has a better opportunity in this field for the same reason as Retail: domestic producer, domestic consumer. Tests can leverage a gene pool that is perhaps one of the most diverse and universal in the world. If Indian policy-makers can get their act together, then India could even lead a stem cell research effort that is so far faltering in the US. VCs would be delighted to play.

Real Estate, however, is a different animal. For the longest time, the old money in India had only one legitimate investment vehicle. That was buying properties. Indians know a lot more about Real Estate entrepreneurship than any other kind of entrepreneurship. There is a financial eco-system around Real Estate that works, and by and large, venture capital is unnecessary, even unwelcome. Private Equity investors, however, are playing this market.

Conspicuous by its absence in the above discussion is traditional technology venture investing, the game that VCs know best. The reason being, it is almost absent from the technology firmament of India.

Intriguing, but entirely logical. Technology innovation takes intense domain knowledge. Be it in software, hardware, chips or communications, the engineers capable of innovation of this nature are inside the multinationals, harvesting unthinkable salaries, enjoying unbound luxury and lifestyle with servants, chauffeurs, maids, nannies, and cooks coming out of their ears. A $200,000 salary in India effortlessly affords a grand lifestyle that even multi-millionaires in the US cannot dream of.

People become entrepreneurs for two reasons: either they have a chip on their shoulder, and have something to prove to themselves and to the world around them. Or, they want to afford a lifestyle that is substantially above their current means. India is banking on the motivation of the former category alone, to find its technology entrepreneurs.

The onus, I am afraid, comes back to Silicon Valley to come up with technology innovation, which Indian back-offices can then implement and scale.

Venture capitalists will continue to go on their eco-tourism trips to India, then return. In the words of Marcel Proust, The real voyage of discovery consists not in seeking new landscapes, but in having new eyes.

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[...] Read a longer, more comprehensive article that I wrote on the subject here. It summarizes a number of posts and series pieces that I wrote through the summer, with a 30,000 ft overview. [...]

Sramana Mitra on Strategy » Blog Archive » Venture Capital in India Friday, August 25, 2006 at 2:06 PM PT

[...] Sramana Mitra has written an article in her site about Venture Capital In India. It talks about build up of capital not only by the heavy weight players like IBM, Intel, SAP, Microsoft but also by Risk Capital Players like Matrix Partners, Sequoia, Westbridge Capital, Kleiner Perkins, NEA, Norwest, Battery, Sierra, Canaan Partners, Helion VC, Erasmic. And traces where the risk capital will be deployed. The article also has her usual quota of crib about not finding good early stage ventures to fund. And how a $200,000 salary in a multi national company is a major deterrent to entrepreneurship. [...]

« Joy Of Innovation Saturday, August 26, 2006 at 1:24 AM PT

[...] Sramana Mitra has written an article in her site about Venture Capital In India. It talks about build up of capital not only by the heavy weight players like IBM, Intel, SAP, Microsoft but also by Risk Capital Players like Matrix Partners, Sequoia, Westbridge Capital, Kleiner Perkins, NEA, Norwest, Battery, Sierra, Canaan Partners, Helion VC, Erasmic. And traces where the risk capital will be deployed. The article also has her usual quota of crib about not finding good early stage ventures to fund. And how a $200,000 salary in a multi national company is a major deterrent to entrepreneurship. [...]

Risk Capital in Social Entrpreneurship: Deploy Now and Dominate « Joy Of Innovation Saturday, August 26, 2006 at 1:48 AM PT

[...] IMO the Indian entry into the space of virtual worlds would happen through something like this because historically companies in India have been formed that way. Services is a competence which we have built very well and this approach is much less risky. [...]

Living on the Edge » Blog Archive virtual games ecosystem « Sunday, August 27, 2006 at 12:02 AM PT

[...] According to Sramana Mitra People become entrepreneurs for two reasons: either they have a chip on their shoulder, and have something to prove to themselves and to the world around them. Or, they want to afford a lifestyle that is substantially above their current means. The context of her comments come in light of how entreprenuership is shifting in India due to venture capital extending beyond its normal bounds. [...]

Creation Step » Blog Archive » What Motivates an Entrepreneur? Thursday, August 31, 2006 at 6:16 AM PT

[...] “People become entrepreneurs for two reasons: either they have a chip on their shoulder, and have something to prove to themselves and to the world around them. Or, they want to afford a lifestyle that is substantially above their current means. India is banking on the motivation of the former category alone, to find its technology entrepreneurs.” (Venture Capital in India) [...]

Sramana Mitra on Strategy » Blog Archive » What Makes an Entrepreneur? Thursday, August 31, 2006 at 4:06 PM PT

[...] Serious capital is chasing India, China, BioTech and CleanTech. Each has its own issues. I recently wrote a series of articles on the Indian Venture Capital situation, lack of expertise in seed investing causing a bottleneck in the pipeline (Venture Capital in India, Too Much Money, Too Few Deals). [...]

Sramana Mitra on Strategy » Blog Archive » Inside the $250 Billion Venture Capital Industry Thursday, September 7, 2006 at 11:50 AM PT

[...] I have said before, that Real Estate and Retail are better investment opportunities in India right now than technology, and it is not a surprise that the big retail companies are going to flock to take advantage of this situation. [...]

Sramana Mitra on Strategy » Blog Archive » Bazaar Buster Monday, November 27, 2006 at 7:42 PM PT

[...] Fall, I wrote a widely read piece called Venture Capital in India, in which I pegged the Indian venture boom to be largely in Real Estate, Retail, and to an extent [...]

Atanu Dey on India’s Development » Challenge to Indian Entrepreneurs Friday, February 16, 2007 at 6:02 AM PT

[...] Fall, I wrote a widely read piece called Venture Capital in India, in which I pegged the Indian venture boom to be largely in Real Estate, Retail, and to an extent [...]

Sramana Mitra on Strategy » Blog Archive » SaaS: How About a Middle Ground? Friday, February 16, 2007 at 10:24 AM PT

[...] the same time, I also wrote my popular Concept Arbitrage series, which led up to the widely read Venture Capital in India article. In these, I explored what kinds of deals have been getting funded, and why. Consumer [...]

Sramana Mitra on Strategy » Blog Archive » Entrepreneurship in India Tuesday, March 20, 2007 at 12:03 PM PT

[...] the same time, I also wrote my popular Concept Arbitrage series, which led up to the widely read Venture Capital in India article. In these, I explored what kinds of deals have been getting funded, and why. Consumer [...]

The Indian Economy Blog » Entrepreneurship In India Friday, March 23, 2007 at 8:13 PM PT

[...] Capital in India 2. Report on Indian early stage VCs 3. Why are startups boring in India? 4. Venture Capital in India by Sramana Mitra Sphere: Related [...]

Venture Capital in India | Venture Itch Wednesday, May 16, 2007 at 1:46 AM PT

[...] learnt to come up with technology products of its own. Barring a few exceptions, the huge amount of venture capital chasing India finds it difficult to be deployed. There is way too much money, way too few deals. Instead, [...]

Death of Indian Outsourcing - Sramana Mitra on Strategy Tuesday, January 22, 2008 at 12:59 PM PT

[...] The interest and level of funding coming from Venture Funds and Private Investors far exceeds the demand for the funding – so there is tremendous opportunity for Entrepreneurs who have good to great idea’s to jump the funding bandwagon (the issues that plague Entrepreneurship and Venture Capital funding in India have been very captured by Sramana Mitra here) [...]

Tech India:2009 Saturday, January 17, 2009 at 4:38 PM PT

[...] Indian Entrepreneurship in doldrums By pallavipoojary Recently while surfing the net for reading material on Venture Capital in India, I came across an interesting article.(http://www.sramanamitra.com/articles/venture-capital-in-india/) [...]

Indian Entrepreneurship in doldrums « Pallavipoojary’s Weblog Friday, November 27, 2009 at 11:10 PM PT
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