Investing: India Vs Silicon Valley – Part II

10 October, 2008

If you have missed Part I, read it here.

Jolly’s Volley

Dearth of Management Talent: Continuing with the HR theme, it has also become very apparent to me that especially for startups, finding senior and even mid level management talent is a non trivial task in India. There simply haven’t been enough startups around for a long enough time to provide adequate experience for enough people to now help other startups, especially in the functions of product management, marketing and business development.

There are many who are moving back to India from around the world, but unless one has had business experience in India previously, it is often difficult to simply transplant best practices from the US, for example, in the India context. Poaching also takes place from the larger companies for key management positions, but there cultural fit becomes an issue.

Transferring from a large company with abundant resources to a startup is an adjustment many people simply cannot make. Comparatively, there is much more of a management pool to tap into in the US. Over time, as especially the tech startup market matures in India, that management availability problem will obviously reduce. It is interesting to note that most of DFJ’s investments in India involve founders or senior management with significant US experience.

Ultimate optimism: Entrepreneurs, by their very nature are optimistic. They wouldn’t be entrepreneurs if they weren’t, given that odds of success are stacked grossly against them. Often that optimism gets the best of them. Both the silicon valley and Indian entrepreneurs tell the key lie when it comes to pending milestones. Statements like “we are close to signing a multi-year partnership agreement with the biggest retailer”, or “we have a handshake agreement for a 50/50 revenue share with a large telco” are heard often on both continents.

Especially in India, one should never claim that they are close to getting anything done. What should take a day, takes a week, and what should take a week, takes a month. So, entrepreneurs need to be optimistic but also pragmatic. I have learned in my decade plus in this VC business that a transaction that seems imperative can fall apart at the 11th hour; a last second regulatory change can make or break an entire industry and especially in India, a multi-year signed contract is often meaningless since ethics and integrity often take a back seat to financial gain.

Dearth of seed: Although the venture capital ecosystem is very well established in the Silicon Valley, the same is just starting to take shape in India. When I say ecosystem, I mean a cohesive network of investors, service providers, banks (fewer of them now), academia and larger corporations, all looking to engage with entrepreneurs in a meaningful way.

Within the investor group, there are various tiers from angel groups, seed and truly early stage funds, to mid stage and late stage/growth stage private equity firms who have both formal and informal relationships in place to transition a startup from “womb to tombstone”. Let me focus on the seed capital segment of the investor food chain for a minute.

Getting the initial capital is often the biggest catch-22 for a startup. One needs capital to show traction, but investors often look for that traction before they commit capital. That is precisely where the angel groups, and seed/early stage funds come into play. They often invest when there isn’t much, if any, traction and the investment is in an idea and the team that has the confidence and background to execute again a big vision.

Seed capital is again more readily available in Silicon valley than it is in India. There are angel groups like the Band of Angels, Silicon Valley Angels, Angels Forum etc, along with super angels like Andy Bechtelsheim, the Google guys, and many other seasoned executives who readily write $100,000 checks to get companies going.

Service providers and others are willing to help entrepreneurs early on, not for cash but for equity in their companies or a combination of cash and equity. In India, that seeding infrastructure is nowhere close to being robust, but Kudos to entities like the Seed Fund, Erasmic/Accel, Mumbai Angels etc. who are trying to fill that void.

But most existing and new entrants are targeting primarily later stage investments due to the risk reduction and shorter liquidity horizon. For the venture capital community and environment to thrive, that movement towards later stage investments will have to change. It’s clear that unless there are high quality seed stage ventures being funded, the deal funnel will be fairly dry for those chasing later stage opportunities.

Venture funds in India will most likely have to adopt a bi-modal investment distribution with a combination of early stage and mid-late stage investments. DFJ has done its part with seed stage investments relatively recently in several companies including MGinger, Canvera, Catura and Attero.

Blame it on the Infrastructure: One of the benefits of being a VC is that one tends to see opportunity where others see challenges or obstacles. During the course of the day, the following are issues that I, like most people in Bangalore, end up dealing with and to an extent accepting – non-stop power outages, frozen cable feed to the house, unreliable broadband, leaky roof, a driver who can’t stop honking even when there is no one around, an access road that causes nausea and headache in the first five minutes of my trip to work, marketing calls from the telco even though I am part of DNC, flooding in the construction zone, complete chaos on the roads, charged a late fee for an on time credit card payment, dropped calls every 30 seconds even though the phone shows five bars, little kids performing some amazing gymnastics tricks at the traffic stop (although India I don’t think has a gymnastics program at a national level), men peeing everywhere, choking pollution especially from autos, bribing the traffic cop who pulled me over for no reason, only to mention a few.

The reason I am ranting about the issues is that entrepreneurs in India have to deal with an order of magnitude more issues and complications (many of which have nothing to do with their day to day business) just to continue to make progress, than their Silicon Valley counterparts can even imagine. A day trip from Silicon Valley to Seattle or San Diego is a breeze compared to a day trip from Delhi to Bangalore or Mumbai. My father in law often says and I now believe that “the fact that India continues to make progress despite all of its issues means that there is divine intervention”.

India is a nation of nations: A big shock to me as I started learning more and more about doing business in India was the fact that from a business perspective, India is not one country, but a conglomerate of several different mini countries, each with not only its own set of languages, traditions and very different way of conducting business. While in one part people tend to be more aggressive and business minded, another is more laid back and easy going.

Some regions can be higher integrity in terms of honoring contracts and partnerships while others could care less about contracts. In one particular area, telemarketing might flourish while in others face to face feet on the street is the only way to make a sale happen. The US also has its nuances from one part of the country to another, but those differences are more magnified in India.

I cannot claim to be an expert in conducting business in India. There are many others who are far more experienced than I with respect to best business practices here. I have tried simply to summarise my findings with hopefully a straightforward compare and contrast between startups in Silicon Valley based on my near decade of experience, versus my take on India and its breed of entrepreneurs after exactly one year of my arrival.

Being a venture capitalist is a phenomenal journey, filled with ups and downs, unpredictability, amazing challenges and rewarding experiences. It is not as glamorous as many make it out to be, but for me, who fell into the field purely by accident, it has been an incredibly rewarding and humbling experience.


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Investing: India Vs Silicon Valley – Part II

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