During my time here at Softbank, I have gotten to work on a few pretty cool deals. I have looked at a company that sells POS and ERP software to retailers here in India. I have worked on a start-up that is looking to sell financial services to India's middle class consumers. I have also looked into the online search market here in India. It has all been pretty interesting.
Here are a few of my impressions, both of VC generally and in India specifically:
Venture Capital firms generally look at a very small business and provide capital to hopefully make a very large business 3-7 years later. In the US, the major considerations are market risk (how big will this market be in 5 years), competitive risk (what other firms can capture substantial share of this market), and management risk (is this a team that can successfully build this business). There are also financial/valuation considerations, though this is substantially less important in venture investments than later stage investments.
In India, however, there are two major complications. First, the market risk is much bigger, because almost all markets are very small today, and any investment needs huge market growth to succeed. Secondly, the emerging economy risk is very significant also. This involves government decisions largely out of control of the firm, macroeconomic risks, and political risks that are largely non-existant in the US.
As a result, Indian Venture Capital is still a tiny industry. There are only 6-8 funds who are doing early stage venture deals in India. There are more private equity firms providing growth capital to larger companies, but really very few providing true venture money to emerging businesses or entrepreneurs.
The companies that VC's look at in India are also incredibly small. This is probably true in the US as well, but lots of the companies that we look at have 0-$100K in annual revenues. But in India, you can still have a mid-sized workforce at this size.
There are also a lot of foreign investors who don't really understand the Indian market but who will pay any price to enter. For example, the third largest coffee chain in India just sold for US$120MM to an Italian chain. They have about 30 stores, so the chain paid about$2.5MM per site, an amazing price for a small chain of Indian coffee shops. (For comparison, Starbucks which is obviously a substantially bigger brand trades for $1.7M per site). Lastly, a few other VC's I have talked to here tell stories of how many entrepreneurs just "add a zero" at the end of their actual cash flow projections so that the VC's who want to invest meaningful dollar amounts by US standards will talk to them.
While working as a VC has been interesting, my three biggest complaints about the venture business are:
Much of the VC business is just networking. Tons of time is spent going to conferences, trying to meet entrepreneurs, and trying to find experts who know what the next big thing is. I don't think I am a bad networker, but it's not my favorite thing.
VC investing is often a herd mentality play. This is sometimes well justified, as any fund who did not get into google underperformed the last VC bull market. But mostly, it just plays out as everyone is looking for the next big social networking site, everyone is looking for the next big mobile media company, but everyone is really just doing the same thing without really knowing what's going to work.
I think VC economics are not that compelling. From a fund standpoint, with the exception of the few top VC funds whose brand names give them real proprietary deal flow, VC funds generally underperform the general market. They also do not scale. VC funds simply cannot make enough seed investments to deploy a few billion dollars of capital like LBO funds can. As such, funds stay small and carry is small.
All that said, there are a lot of things that are very cool about being a VC. You get to spend a lot of time trying to figure out how new markets are going to emerge and how you can invest capital to affect and capture a share of that growth. You also get to meet a lot of smart and interesting entrepreneurs with cool ideas for new businesses. But I'm still just not sure it's my number 1 career choice.
Here are a few of my impressions, both of VC generally and in India specifically:
Venture Capital firms generally look at a very small business and provide capital to hopefully make a very large business 3-7 years later. In the US, the major considerations are market risk (how big will this market be in 5 years), competitive risk (what other firms can capture substantial share of this market), and management risk (is this a team that can successfully build this business). There are also financial/valuation considerations, though this is substantially less important in venture investments than later stage investments.
In India, however, there are two major complications. First, the market risk is much bigger, because almost all markets are very small today, and any investment needs huge market growth to succeed. Secondly, the emerging economy risk is very significant also. This involves government decisions largely out of control of the firm, macroeconomic risks, and political risks that are largely non-existant in the US.
As a result, Indian Venture Capital is still a tiny industry. There are only 6-8 funds who are doing early stage venture deals in India. There are more private equity firms providing growth capital to larger companies, but really very few providing true venture money to emerging businesses or entrepreneurs.
The companies that VC's look at in India are also incredibly small. This is probably true in the US as well, but lots of the companies that we look at have 0-$100K in annual revenues. But in India, you can still have a mid-sized workforce at this size.
There are also a lot of foreign investors who don't really understand the Indian market but who will pay any price to enter. For example, the third largest coffee chain in India just sold for US$120MM to an Italian chain. They have about 30 stores, so the chain paid about$2.5MM per site, an amazing price for a small chain of Indian coffee shops. (For comparison, Starbucks which is obviously a substantially bigger brand trades for $1.7M per site). Lastly, a few other VC's I have talked to here tell stories of how many entrepreneurs just "add a zero" at the end of their actual cash flow projections so that the VC's who want to invest meaningful dollar amounts by US standards will talk to them.
While working as a VC has been interesting, my three biggest complaints about the venture business are:
Much of the VC business is just networking. Tons of time is spent going to conferences, trying to meet entrepreneurs, and trying to find experts who know what the next big thing is. I don't think I am a bad networker, but it's not my favorite thing.
VC investing is often a herd mentality play. This is sometimes well justified, as any fund who did not get into google underperformed the last VC bull market. But mostly, it just plays out as everyone is looking for the next big social networking site, everyone is looking for the next big mobile media company, but everyone is really just doing the same thing without really knowing what's going to work.
I think VC economics are not that compelling. From a fund standpoint, with the exception of the few top VC funds whose brand names give them real proprietary deal flow, VC funds generally underperform the general market. They also do not scale. VC funds simply cannot make enough seed investments to deploy a few billion dollars of capital like LBO funds can. As such, funds stay small and carry is small.
All that said, there are a lot of things that are very cool about being a VC. You get to spend a lot of time trying to figure out how new markets are going to emerge and how you can invest capital to affect and capture a share of that growth. You also get to meet a lot of smart and interesting entrepreneurs with cool ideas for new businesses. But I'm still just not sure it's my number 1 career choice.
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