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“Indian Entrepreneurs Are Capital Efficient. And LPs Love It”

27 July, 2009

With the global economic meltdown, venture capital investments have taken a hit across the globe as investors look to conserve capital.  Kleiner Perkins, Caufield & Byers or KPCB, one of the most successful venture capital firms in the world, has been an investor in companies like Google, Amazon, Sun Microsystems, etc. Venture capital investments in US and in India have also fallen dramatically. 

Ajit Nazre, a partner at KPCB, also leads KPCB’s India investment initiative. He joined KPCB in 2003 from SAP, where he played a key role in formulating and executing the company’s internet strategy, and co-founded and led SAPMarkets. Nazre did his undergraduation in Mechanical Engineering from College of Engineering Poona (COEP), in India, after which he went on to to do an MS in Mechanical Engineering from Michigan Tech, a PhD in Biomechanics from the Technical University of Hanover, Germany and an MBA from the Harvard Business School. VCCircle’s Madhav A Chanchani catches up with Nazre on what is happening in the US venture capital market, how will it impact India, and how he views India’s early stage space. This is the second part of the two part series interview with Nazre.

Q. How is the venture capital industry in the United States doing?

Q1 is looking better than Q42008. Though Q2 is closed, we don’t know the numbers yet, it will look better than Q1. Though 2009 is nothing as compared to what 2008 was, but quarter over quarter things are improving. The big trend is that investment has not completely stopped but definitely it has slowed down, especially when it comes to investing in new companies. Speaking about venture industry in general, the biggest activity is to make sure that their portfolio companies are well financed so that they have enough of a runway. So a lot of firms are trying to raise follow on rounds for their companies. So the big trend is insider rounds. So a majority of the companies are being funded by the insiders. Raising funds from insiders is a shorter process while inducting an outside investor takes time.

Second is that valuations have come down across the board. Not just IT, mobile, lifescience, or cleantech. Even for healthy companies. We like that because the investment opportunities are more attractive, and you don’t have to pay a premium because there is a hype. It’s more closer to the reality than it was a year ago at this time.

As far as portfolio companies are considered they are targeting profitability versus growth. The reason is that you want to make every dollar count, and you don’t want to lose money for growth. You want to extend your life because the first thing is survival.

As far as sectors are concerned, cleantech has definitely surpassed IT as far as numbers are concerned. We also see a massive trend of entrepreneurs moving from IT to cleantech whether it’s Green IT, or energy generation and efficiency.

Fundraising for first time funds is very hard. Most LPs are still coming out of the liquidity crisis and VC & PE is an illiquid asset class. There is an expectation that there will be some which will not survive because the LPs will probably not be able to respect the capital calls. It all depends on how quickly the US comes out of where it is right now.

Q. We have also been reading that the venture industry in the US is expected to shrink by 25-33%. Do you really see it happening at this scale?

I think there was a similar crisis in 2002 time frame. If you look back, from around a 1,000 funds, mostly VC firms, nobody really went away. They hunkered down, didn’t invest, managed to survive the “nuclear winter” and then came out and started investing again. I don’t think it will be a third, or a fourth, but it will be less than that.

The net effect will be that you will not have this crazy investing (phenomneon), just like in the dotcom boom you had five companies of the same sort getting funding. I see that as a good thing as you will not have 250th solar company getting funded. Web 2.0 will not receive the sort of attention it did when people had money.

Q. How do you see that impacting India?

It will definitely impact the private equity business as it depends upon writing large cheques and availability of debt. Private equity will have a bigger crisis on their hand. How will it impact India – people who are investing in India for domestic consumption will do well. Our thesis is not made in India for US like BPOs, etc. The reason why India is relatively untarnished is that most of the banks here did not have the fancy derivatives and India does not depend upon exports as much as Germany and China does.

China has solved its problem by announcing a huge stimulus. India, as two-third of the economy is domestic consumption, what happens in the outside world does not impact much as compared to the export driven economies.

The prediction is that the venture capital and private equity business in India will be less impacted. In fact, I sense that a lot of the guys who are not able to invest elsewhere will come here.

Q. US Government has pumped trillions of dollars into the economy as stimulus. How has that worked out?

This quarter is when we will now if stimulus is working, and is it enough. I think there are a very few isolated places where stimulus dollars are now starting to hit. They are trickling in and they are going to make an impact of either stemming job losses or creating new jobs. But it’s still very early.

The bigger concern that we have is the states, take for example California, are writing IOUs. The next, possibly worst thing that can happen is that we default on our debt. California is a sixth of the US economy.

Q. What do you think of venture capital industry in India?

The venture industry in India, as far as it comes early stage venture capital, is still very small. We have got eight early stage portfolio companies and we are always looking for early stage VCs to co-invest with, and it’s not easy. Most of the so-called early stage VCs don’t do anything early stage. They all are interested in profitable, revenue growth companies which they can essentially take public in 1-2 years. Investment horizons are so short that they should not call themselves early stage VCs.

We really want and wish that there could be others who think like us. We want more of early stage risk capital available in India.

Q. Do you see early stage investing in India taking off any time soon?

I think it’s improving. We already see our companies doing well. It takes time, effort and patience. But it pays off. We see that as more role models get created, more people will see that it’s ok to start a company. I think as entrepreneurs go up the learning curve, that is one reason. The second is that the fact that there is such a reverse brain drain is very helpful. Entrepreneurs and folks coming back from US because there is a slowdown there is the best thing that could happen to India. 

But of course they have to learn what works in India. What works in US does not definitely mean will work in India. You need to understand the nuances of the market but I think that is doable.

The third I would say is in general is that there is a lot of talent coming from locally present multi-national companies (MNCs) and that adds to the talent pool. I think a ripe ecosystem is being built. But this does not happen nationally but in pockets – like Delhi is good for mobile, Mumbai is great for media and internet, and if you go to Bangalore its great for technology.

Q. What do limited partners say about early stage investing in India?

The most impressive thing about India is entrepreneurs here are extremely capital efficient. They would take far fewer dollars to get a company to cash flow break even. LPs love that since you don’t need a lot of money to build a cash flow positive company. Second is that though there is recession globally we are going to grow at 6% still. And we have a vibrant market. Sure you don’t have companies going public everyday but you have market which is growing. So all things are positive.


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“Indian Entrepreneurs Are Capital Efficient. And LPs Love It”

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