Conservative estimates put the venture capital available in India at USD 1 billion. In the early part of 2000, over USD 100 mm was invested into dotcoms. Today, most of it is worthless. As a result, venture capitalists in India have become extra cautious. In many ways, it has been a good and quick learning. To succeed in India, VCs will need to think differently in 2001.
There are four major differences in the Indian market compared to the US:
- Most entrepreneurs are on their first venture. This means they need a lot more guidance and hand-holding in the process of building out companies. They are dealing with large sums of money (the investment which has come in). Managing hyper-growth is not way of life in most Indian companies and for most Indian managers!
- India also lacks an effective angel funds market. TIE has been making efforts in this, but it will probably still take another year or so before this becomes a viable alternative to start companies. Since VCs prefer to make slightly larger investments, India needs angels (successful entrepreneurs) who can spend time with the founders in the early days.
- Since India is not a large market, companies and their management teams need to think international. This is where companies need help. VCs can through their networks help open doors for many of their portfolio companies. In fact, in the ideal scenario, part of the management team needs to be stationed outside of India and this adds another dimension to the initial stages of company formation – living with geographical diversity.
- Exit in India is not easy. IPOs are possible, but only for profitable companies. Many software and media companies have been listed in recent times in India. Technology plays still do not have a route to list. Without an IPO, the exit route is MA, not a lot of which has been happening so far. So, VCs need to be patient. Hopefully, the vision for the OTC exchange in India can still be realised.
The approach that VCs in India need to take is to fund fewer companies, invest larger amounts, and work more closely with the founders in the early stages. They also need to act as marketing and HR managers for these companies in the initial weeks. Rather than taking the approach that a few of their investments may succeed, they need to work towards making each of the investments pay off, since exits will be available only to a limited number of companies. What will work as the perfect tonic is for a couple Indian VC success stories in the next year.
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