Cautiously Venturing Funds.

Honourable examples apart, are venture capitalists in India generally risk-averse? Do they act more like private equity players?

WHEN Sujai Karampuri started soliciting venture capital investment for his fledgling business, Sloka Telecom, in 2005, he was 31 and the company was two years old. Both were too young to be funded, some VCs told him. Some others said the firm would fight a losing battle against giants such as Nortel and Alcatel. Still others were hesitant because the network infrastructure business that Sloka had chosen, was in a downtrend. The start-up approached about a dozen venture capital firms in India, but was declined each time.

Mr Karampuri’s experience is typical of hundreds of entrepreneurs in India, who find it nearly impossible to raise venture capital funding for their new businesses despite having a proper business plan and a good team. A growing tribe of business aspirants, as well as many venture capital managers themselves, say VCs adopt a very cautious approach in the country, which is just breaking into the business of start-ups. These investors, whose mandate must be to invest in new ventures and help businesses take shape, often act like private equity players and invest only in proven business models with assured cash flow. Is this a violation of the spirit of venture capitalism, just a passing phase in India’s entrepreneurship learnings, or is the quality of entrepreneurship and business model so low that VCs can’t help them even if they wanted to?

Spurned by VCs in the country, Mr Karampuri turned to those abroad. They either asked him to talk to their India offices, which brought Sloka back to square one, or told him to shift its base closer to where they were. With that option closed, Mr Karampuri weighed his next move. A typical start-up in his capital-intensive business needed $20 million. Trying to compete in an innovation-driven segment, Sloka needed $6 million for research and development alone. He figured that while entrepreneurs had to bet on the one thing they were pursuing, VCs had options from various suitors. He decided to end his search for VC investment and look out for angel investors. This time, he was successful. There has been no looking back since and Sloka’s business model was vindicated recently, when its technology was used to set up a WiMax network in the French town of Saint Medard en-Jalles.

Senior entrepreneurs and experienced fund managers in the venture capital industry say there is much justification in the criticism. Emerging markets such as ours will doubtless involve more risk, but the biggest rewards from the future are also here. Unless the VCs overcome conventional wisdom and become open to young age and radical ideas, they will miss out on the better opportunities.

But then, they also add that advanced nations, too, have gone through this phase when everyone was trying to figure out the concept of acceptable risk. Today, venture capital firms in the West take a lot more risk and have found out gems that would have been rejected in a cautious and ‘sensible’ approach. “As an entrepreneur who was once in the Valley, I can definitely say that VCs there have a larger risk appetite. This does not mean that VCs in India are not taking risks. Instead, they are taking as much risk as their mandate allows,” says Chandigarh-based entrepreneur Puneet Vatsayan, who co-founded an e-commerce platform company. “In a lot of ways, you can say that India is going through the excitement and learnings that the US went through in the 60s and late 70s,” he says.

Mr Vatsayan says it is only a matter of time before a virtuous cycle builds up in the country’s entrepreneurship scene. Mature and risk-aware entrepreneurs, backed by well thought-out business models, will be met by riskfriendly venture capital firms open to new ideas.

Venture capital industry has been substantially active for only a decade now. Already, there are success stories that inspire newcomers in both business-making and investing. Serial entrepreneur Rohit Agarwal, who founded techTribe, says businesses like Genpact, Naukri.com and JobsAhead are becoming large and will soon spawn new entrepreneurs from their stock of senior staff. “The seniorlevel and mid-level guys from these companies will be out to be entrepreneurs tomorrow. They will getting easier funding as they have been part of growing a company. In the Valley, most people raising funding are doing it for the second or third time around,” he says.

Sasken Communication Technologies CEO Rajiv Mody cites the example of Intel’s early journey through the 1960s. People didn’t understand semiconductors back then, but once they saw a success story there, there was soon a flurry of investment in that space. “The VCs in the West have a culture of innovation. As we see high risks yield high returns, we will see more people taking these risks.”

India also lacks institutional structures that can ease the way for venture capital flow. While business risks may be the same here and in the US, systems suffer inefficiencies in India, says Reliance Technology Ventures CEO Harshal Shah. For instance, the legal process for the formation or liquidation of a company is still long-winding and tortuous. “In the US, there is an institutional-like structure that has been built around venture capitalism. There is the concept of limited liability partnership, which hasn’t caught on in India. Then, there is also an accreditation system in place for VCs (there),” he says.

But at the core of many failed VC pitches is the entrepreneur’s inability to convince potential investors of his or her risk-taking ability. Raising capital is not a way to palm off the risk as some entrepreneurs might tend to believe. “Many ideas are just ideas, where the ideator himself is not willing to take a risk,” says Mr Agarwal, who is now working on his fourth venture. “Instead he wants the VC to take the risk. VCs want to see that you are willing to bet your career on your idea.”

There is also the problem of scale. Some businesses just can’t grow beyond a certain point. Rahul Khanna of Clearstone Ventures points this out with an example, “A hairstyling salon for children will not be a Rs 100-crore company in five years. It just cannot happen.” In a company without potential for scaling up, few VCs will show interest. So, the problem may be more basic in a business pitch than can be solved by repeated pleadings with more VCs for money.

“There are businesses that do not match our investment return threshold. This may not be the entrepreneur’s fault. It could be because the market isn’t ready for the idea. There is a much greater risk in a smaller company,” Mr Khanna says. “Entrepreneurs have a tendency to talk about a large opportunity, they don’t talk about how they are going to win.”

Venture capital firms are inundated with hundreds of pitches from professionals, genuine entrepreneurs, wannabes and hustlers. Occasionally, they put money where they shouldn’t and fail to invest where they should. And VCs, who had made either mistake, often laugh at themselves. Bessemer Venture Partners maintains an antiportfolio of what it calls “an unparalleled number of opportunities to completely screw up.”

The venture capital firm, which once invested in a wig company and French fry maker, missed out on several more lucrative opportunities, spurning repeated approaches. As per Bessemer’s own account, its managing partner David Cowan, listed as one of the world’s top 10 venture investors, was visiting a college friend when she tried to introduce Cowan to “these two really smart Stanford students writing a search engine.” Students? A new search engine? In the most important moment ever for Bessemer’s anti-portfolio, Cowan asked her, “How can I get out of this house without going anywhere near your garage?” The company was Google.

Article Resource:
Author: Jacob Cherian is the Chief Editor in the The Economic Times, Mumbai and the article appeared in one of their successful columns on Entrepreneurship/Start-ups called "Starship Enterprise".