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Archive for June, 2010

Rupam Shrivastava, VP of ePlanetvenutres

Three years ago when I joined ePlanetventures, I was made part of the US and India investment teams.  I am based out of the Valley but travel to India frequently and have been involved in transactions on both sides, and so I hope to comment on the VC-Entrepreneur ecosystem in these two regions.

As with all other VCs, I have been hunting for that ‘Google for mobile’, the ‘first nanotech giant’ and the ‘next clean-tech success.’  It is easier to find candidates for those ‘star performers’ and ‘100X returns’ in the US than in India.  We all have a dichotomy of investment philosophies when it comes to India and the US.  Following are some reasons that are worth mentioning:

The Entrepreneur, the vendor, and the venture

Industry pundits profess the lack of entrepreneurship in India when compared with the US.  In a different lens, I say that being the Indian is being an entrepreneur.  From using car batteries to lighting up vegetable vending carts to negotiating rickshaw ride prices, Indians live and breathe as entrepreneurs.  Necessity is the mother of this Indian entrepreneur who negotiates and innovates throughout the day.  All deals in India are up for negotiation and innovation is an everyday phenomenon.  An Indian entrepreneur is thus street smart.

The US entrepreneur solves a real or perceived business problem or works on the larger canvas towards creating a disruptive technology.  He doesn’t fear failing.  At best, he will get funded and create the next Google, or he may go without a salary for a few months before embarking on something else.  At the very worst, he has unemployment benefits and his peers’ respect for ‘following his heart’ and ‘doing what he wants.’  People may find him/her cool as well.  An American entrepreneur thus needs to focus only on his goals and be business smart.

The Indian entrepreneur has fewer luxuries and safety nets.  Lacking social security and burdened with social obligations, he thinks high but aims pragmatically.  Despite the urge and potential to change the world, he takes comfort in a smaller world of success.  Historically, the societal definition of success has labeled entrepreneurship as a ‘second choice’ or the ‘final resort of the jobless.’  This created a morbid financial and social fear of feeling.  This situation though is rapidly changing.

The BRIC growth bandwagon has millions of passengers, with millions other yearning for their share.  The likes of Sabeer Bhatia have replaced the Tom Cruises of the world on posters and being an entrepreneur is not a taboo anymore.  On the ground level, initiatives like that form the IIMs are worth mentioning.  As a graduating student from IIM, the lure of the high paying banking and consulting jobs deters many budding entrepreneurs.  However, incase you decide to start a venture, which doesn’t succeed in the next two years, you can return to IIM, and apply again for the campus recruitments for your second shot at the high paying jobs.

Business model evolution and revolution

American startups aim to develop paradigm shifting disruptive technologies.  They wish to revolutionize industries and create billion dollar giants.  Funding applications are incomplete without exponential graphs and ‘billion dollar markets.’  ePlanet’s portfolio company D-Wave is an example of a similar path breaking innovation in the supercomputing arena.  This is not to say that all funding applications are sound.  The current vogue Total Addressable Market (TAM) metric provides an easy excuse to throw in billions.  Excel models are a sure part of any pitch and I always make it a point to notice if the startup’s growth projections are more aggressive than what Google or Facebook actually achieved.  Indian entrepreneurs are guilty of optimistic projections as well, but the VC hair-cuts to them are less brutal than applied to their US counterparts.

Indian entrepreneurs have traditionally focused on incremental evolutionary technologies.  That is, producing better, faster, cheaper variety of technologies and businesses.  There have also been recent businesses that replicate already successful models originally developed in the West.  ePlanet’s portfolio company Sree Ramcides, is a fast growing company in the high quality agrochemicals space.  Another one, Seventymm is a replication of incremental innovation through more grounded seldom excites the investors looking to put feathers their caps.

The Indian scenario however is fast changing with a reverse brain drain of US educated talent (the tougher US immigration is further accelerating the move).  These entrepreneurs are spawning interesting Internet models and applying technology to all aspects of commerce and business.  We have seen multiple fast growing companies emerge, especially in Internet enabled businesses.

First round funding venture ecosystem not really

Indian entrepreneurs are mostly bootstrapped.  As opposed to the US where there are more than 250,000 active angel investors, in India you can count them in a handful.  Erasmic, Seed Fund and Mumbai Angels are the few bold ones who are bucking the trend.

Venture funding for later rounds is abundant in India.  The India story still resounds heavily in the rich western investor’s mind (those who obviously survived the recession).  In fact, with an up and running company, you stand a better chance of getting funded if you are in India than in the US.  This unfortunately, has also meant that venture valuations have skyrocketed and have forced investors to conduct deeper diligences and negotiations.

Funding is not the end of the problems for Indian entrepreneurs; it is the beginning of new ones.

Infrastructure: More Innovation versus Plug and Play

For those of you who don’t know, Plug and Play provides basic infrastructure to bootstrapped entrepreneurs in the Silicon Valley.  It is not the only place where can set up shop for your technology startup (after a rigorous selection process of course and seed money definitely helps).  All of us know that garages and dorm rooms are the other major place of path-breaking innovation in the US.

The Indian entrepreneur on the other hand, with the seed money in his pocket, ventures out to negotiate further deals not with potential customers, but with landlords, electricity suppliers, Internet providers and local cafeterias/food courts.  He works hard to find the most cost effective options for his venture.  For the Indian entrepreneur garages do not exist, are hopelessly out of fashion, and dorm rooms are quite ill-equipped to say the least.

There are initiatives with universities, FITT of IIT Delhi, BI of IIT Bombay, ISB, and IIIT are helping incubate startups of these institutions.  These will in time expand to invite outside entrepreneurs as well.  An up and running Indian entrepreneur faces another challenge that his American counterpart seldom does managerial talent to stand with him in thick and thin.

Team recruitment: cash and equity

In India, cash is king (apart from gold that is).  Indian employees expect cash salaries without much regard to the equity component.  Additionally, whether they work at a startup or a conglomerate, the expectation of yearend bonus is common.  The US counterpart is loyal to the startup’s vision and can work for long periods on equity.  This leads to the following dynamics:

As an entrepreneur, it is tough to recruit managerial talent in the US as you want people who share your vision and are ready to work on ti 24/7.  However, once you have found them, they stick for the long run.

In India, it is extremely touch to find people who share your vision.  However, it is quite easy if you are willing to poach them from the successful conglomerate across the road with higher cash salary.

For the investor: brokers and others

Most Indian venture deals still remain brokered.  This is primarily a function of the late-stage focus of the investors.  Most of the investment targets are sourced through boutique investment banks.  They help broker, negotiate and close the transaction.  However, unless you know the broker for long, you run the danger of other VCs upping your offer.

In the US, all sorts of deal sourcing channels are equally important.  Entrepreneurs attend conferences, connect with B-school buddies and also work through investment banks.  Investors looking for the next Google stay close to Silicon Valley or Boston.

Attractive areas: all industries versus high tech

In India, IT/ITES, banking, financial services and healthcare remain the most attractive areas.  We also see a good future in the education, hospitality, infrastructure and power industries while clean tech will evolve in interesting ways.

In the US, the Internet and new media will create new businesses around them.  The applications-boom will create a wave of growth and innovation just as the software boom did in the late 90s.  Other areas would be SaaS, cloud computing, analytics, and virtualization.  Medical devices, biotech, clean tech, and clean energy are other areas to watch.

Conclusions: Fear of the Ocean

For centuries, the Indian civilization never crossed the oceans.  The Eastern philosophy of ‘inward satisfaction’ reigned supreme.  The US on the other hand, was built by daring seafarers venturing into the unknown.  Those seafarers were also the first entrepreneurs, raising capital fro their kings for their risk-fraught adventures.  Today, however, globalization and growth is bridging this historical dichotomy of mindset.

In the current times, like always, the fittest and the visionary will survive, wherever they are.  In the US, the recession will forge the leaders of tomorrow.  In India, the growth will produce them.

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