Post-euphoria, VCs May Go Slow & Steady This Year

By Mohanjit Jolly

  • 23 Jan 2012

As 2011 came to an end and 2012 has begun, it is time for all of us in the venture industry to take a deep breath, do a dozen Surya namaskars, and once we have untangled our bodies from the various shapes that they are not designed to be in (much to my wife’s chagrin, I have tried and failed miserably at yoga), think about the year gone by and the plan for 2012.

Clearly, 2011 will go down as one of the most exciting and active years in the formative portion of the Indian venture capital industry. On the technology front, it was clearly the year of e-commerce coming into its own and significant capital being invested (I won’t go into whether valuations were rational or not).

Mr Lee Fixel from Tiger Global single-handedly turned the sector on its head, and if you had him paying up for one of your portfolio companies, you were ecstatic and signing a petition for his sainthood. On the other hand, if you didn’t or if you were competing for that deal, you were calling him irrational and accusing him of “messing up the market for the rest of us.” Billion-dollar valuations were being talked about for companies which are 3-4-year-old. And $100 million plus deals (albeit a combination of primary and secondary transactions) got done really for the first time in the Indian venture-funded tech industry history. The IPO pipeline became robust, at least from a funnel standpoint, although exits are still more a dream than reality in India.


The world was full of more excitement than in recent years with the Facebook and Twitter-fed uprisings in the Middle East, India winning the World Cup (and sinking Down Under), LinkedIn/Groupon/Zynga IPOs, global natural disasters, European countries in financial disarray, eurozone on the brink of explosion, loss of some of the legends of art, music, cinema, and technology… we didn’t really have time to catch our breath. I am out of breath as I write this and this is only a partial list of the key stories.

I think 2012 will be a pit-stop/catch-your-breath year for the Indian venture industry, where more moderation, rational behaviour and conservative approach will prevail, as the world tries to figure out which side of the metastable state it’s going to roll into (further uncertainty, or some notion of recovery from all the economic and political turmoil). From the venture standpoint, deals will still be done, but the euphoria will be replaced by “now that you have the capital, show me what you can do with it” approach. By the way, there is a clear change in the entrepreneurs’ mindset as well, where the thinking is maturing and the exuberance is being replaced by more thoughtful approach to building a real business.

Where I used to hear “we have a term sheet already and you need to decide in a week,” I now hear: “We understand that simply having a PowerPoint is not enough, so we have bootstrapped, have something working and have a proof of concept deployed with a customer.” Additionally, VCs, who have now been in the business for a few years, will start doing some house-cleaning, i.e., taking a look at their portfolios closely and deciding what to do with the bottom 10 per cent-20 per cent of the companies which are taking up bandwidth but not really going anywhere. There will be several (although hidden from the Press) small M&A transactions as part of the natural clean-up process.


The year 2011 reminded me a lot of Bangalore traffic. I guess when you spend as much time as I do in Bangalore traffic, it’s easy to relate virtually any aspect of life to the city’s traffic patterns. Let me splain (again borrowing my favority Cheech and Chong phrase). I have two drivers, with extremely different driving styles. One, as I have mentioned in prior submissions, used to be an auto rickshaw driver and I am actually not sure if his driver’s licence is genuine. By the way, he is also a vendor of anything and everything that can be used to fuse broken parts together (allow me to go on a tangent). Four different pieces of my licence plate are held together with simple tape (not all that interesting); the front fender is attached to the body with an inch-thick rope; the side mirror is held in place with electrical wire and the tyre hub cap with one of those zip-ties that one uses on plastic grocery bags. I was thinking of entering my car in the annual Pragati Maidan auto show to really highlight automotive innovation. The other driver is slow and steady. He doesn’t speed up or slow down, but continues at a relatively uniform pace without causing nausea, which is usually brought on by the sudden speeding up, slowing down and up-and-down motion of pothole-laden roads, a special feature on Indian roads.

Similar to my drivers, there have been two schools of thought within the VC realm – very similar to the two driving styles. Some VCs have had very lumpy activity cycles in 2011 while others have been slow and steady, not getting caught up in all the excitement. Only time will tell which approach was appropriate. I personally follow the latter.

I think the year 2012 will be a relatively difficult fundraising environment. My recommendation to start-ups is to be very capital-efficient, and if funding is required, do so in the first half of the year, without getting hung up on optimising the raise. In other words, “when offered cash, take it.”


Having said that, 2012 will continue to see sector excitement. E-commerce, for example, will evolve further with new verticals getting funded and ecosystem players targeting comparison shopping, payments, logistics, loyalty and analytics starting to establish themselves. Mobile will continue to make waves around new Tablets and applications targeting the Indian diaspora in terms of content – Indian A(strology), B(ollywood), C(ricket)), vernacular and device-agnostic rich access. Data, 3G and thanks to everyone’s overly reliant (pun intended) friend, Mr Mukesh Ambani’s foray into telecom and 4G, interesting stuff should start happening around rich data (primarily video) applications later this year, perhaps, and for the near future.

Unlike China, where language itself is a barrier (to international competition and, therefore, a key to success for local companies), such is not necessarily the case in India yet. But as the Internet spreads truly to the masses and vernacular becomes initially a differentiator and over the time a necessity, we should start seeing some Indian companies making a dent, targeting the local mass market.

Education will continue to be a key theme in 2012, using as a proxy the number of start-ups that I have seen just in the last few months. But in addition to K-12, which should see some focus given the latest dismal rankings for Indian kids when compared with their peers globally, the bulk of intellectual capital will (perhaps understandably so) continue to target the enterprise customers which are going through (and will continue to go through) the pain of hiring, training and retaining. The entire spectrum of assessment, hiring, on-boarding, training, reassessing, retraining and eventually retaining is a painful one regardless of whether it’s a TCS hiring by the thousands or a start-up interviewing a haystack to find a needle.


On the cleantech front, a sector near and dear to DFJ, interesting blend of both homegrown and imported innovations will continue to proliferate. Recently, I was speaking at a cleantech event in Mumbai where nearly half of the audience was non-India. This comprised foreign entrepreneurs, either moving to India or looking to establish partnerships with firms which could help deploy their solutions in India. Obviously policy push, around renewables (wind and solar, primarily), as well as areas such as e-waste (where companies like Attero are making strides), will continue to garner attention.

By the way, I am very heartened to see significant product innovation now starting to happen in India, with entrepreneurs who are looking to create unique products, with global application and thinking at a “I am going to create a billion dollar company.” Just yesterday, I met a very interesting entrepreneur in the entertainment space looking to build a “$500M revenue company in five years,” targeting the US and European markets sitting in India. Usually, I would have chalked a comment like that off to naive enthusiasm, but this is a group of four IITians with interesting technical and business savvy who are thinking big.

Bottom line: I am excited about what 2012 has in store (even though the world presumably will come to an end on December 21 according to highly reputable sources). It will give India a lot to cheer about, but at the same time, it will bring some of the realities of start-up business to the forefront with potential fundraising challenges. Therefore, these will either shut down or in all probability, be merged with more established entities. Technology sectors will continue to garner attention and capital, but at a more modest pace and without as much hype. India needs innovative solutions to tackle the very basic of problems, and most of those solutions are going to come not from Sam Pitroda, Montek Singh Ahluwalia or Manmohan Singh, but rather a couple of bright young kids, dreaming in some lesser-known part of India and wanting to disrupt the status quo.


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