Inc feb 2011 -alok mittal - venture capital

1. LOOKING AHEAD
BY ALOK MITTAL | CANAAN PARTNERS
Venture Capital in India
Will come of age—look at multiple sectors
beyond tech; geographically more wide spread
Cashing In
For the right businesses,
venture capital will not
be a tough hunt.
risk of non-participation. Ten years later,
there has not just been a revival of venture
capital, but even early successes of the
model, which is encouraging more and
more investors to head eastwards in
search of gold.
As we look towards the next 10 years,
therefore, it is important to derive the
potential of venture capital by looking at
what the economy at large, and entrepre-
neurship in particular, will deliver in real-
ising India’s potential. Venture capital will
“There was a fresh spark of entrepre- venture capital left around, and it is hard to be driven by, and will contribute to, that
neurship in India a couple of years ago. The imagine that it will make any real come larger picture. Even as we look forward to a
global emergence of the internet revolution back in the next decade.” decade that will more than double India’s
and widespread passion among entrepre- This obituary of venture capital in India economy, it is likely to represent an incre-
neurs led to thousands of businesses taking was written in 2001. mental and not a seminal shift in the life of
seed. Unfortunately, today we stand among Most decennial predictions tend to an average Indian. However, in several spe-
ruins, with most of those businesses and carry the downside risk of over projecting cific areas, we will see developments that
those funds reporting failure. There is no the future. This one carried the upside are nothing short of revolutionary—along
“It’s easy to build a brand, but difficult to sustain it. The biggest
thing is not to become number one, but to stay there for
10 years and still have no one around you.”
— Dr Mukesh Batra, Founder, Dr Batra’s
88 | INC. | FEBRUARY 2011

2. LOOKING AHEAD
similar lines as seen in telecom over the ing expectations of external investors, and Both through public initiatives, and by pro-
past decade. Some of these areas of disrup- about differentiating amongst various viding incentives to private investors, these
tion will be sectoral, such as education, kinds of capital providers. elements of the ecosystem can be plugged,
technology and healthcare. Others will be The demand for capital that above ini- and will have a many-fold leverage in
based on consumption driven by a dra- tiatives entail, will be matched by increas- enabling large scale entrepreneurship.
matic expansion in discretionary incomes. ing comfort of global investors towards I also expect venture capital to evolve
The basis for most of these changes will be India. Partly as an effect of global rebal- somewhat differently in India than it has in
entrepreneurship. ancing, whereby it will become less and other parts of the world. It is already evi-
Let us consider some examples. One of less attractive to continue high exposures dent that venture capital will successfully
the greatest strengths of India is the demo- to developed markets, and partly due to address multiple sectors beyond just tech-
graphic dividend—in order to realise this increasing capacity of emerging markets nology, which may continue to remain the
advantage, we will need to train hundreds like India to productively deploy capital, single largest sector. In high-growth econ-
of millions of our people to take up pro- the relative migration of investment capi- omies, venture style returns can be made
ductive occupations. India’s developmental tal is a given. Cou-
indicators, including those around educa- pled by domestic
tion and healthcare, continue to lag behind savings and invest- Venture capital will be more
most other countries—and, they certainly
do not match up to the aspirations that we
ments, one can
expect a decade geographically widespread
carry as a nation. Access to financial ser- that has adequate in India, than concentrated
vices remains constrained—with direct
impact on resultant growth.
availability of capi-
tal to fuel India’s in pockets like in Silicon
In each of the cases above, and many
others, the only available blueprints are
growth.
The virtuous
Valley or Israel.
those with heavy involvement of private cycle of investors
enterprise. As policymakers define our seeing returns in the Indian market, and through growth and not just through dis-
approach to solving these issues, they are hence increasing their commitment to ruption—India will emerge as a prime
interweaving the role that entrepreneurs India, has already been set in motion. Ear- example of the same.
are expected to play—be it in terms of lier in broader private equity, and of late in Similarly, venture capital is likely to be
training organisations, or providing edu- venture capital, there are increasing proof more geographically widespread in India,
cation at all levels and increasing health- points of the model working in line with than concentrated in pockets like in Silicon
care delivery capacity, or in building investor expectations—as such proof Valley or Israel. This will be driven by the
end-user services on platforms like Aad- points multiply, more and more investors heterogeneity of opportunities across
har. Given the long history of entrepre- will commit to these asset classes. India, as well as relatively wide spread of
neurial activity in India, it is only to be As we look ahead to a future where entrepreneurial activity across many mar-
expected that it will continue to be the key there is abundant availability of risk capi- kets. Finally, most developmental agencies
driver for the future we have set our eyes tal, there is a need to ensure that policies globally are realising the role of for-profit
on. India is a bottom-up country, and eco- are supportive of these underlying forces. enterprises in enabling development—this
nomic growth in India will be no different. The regulatory framework around private will lead to continuous expansion of social
Venture capital will play an increasingly equity and venture capital still remains venture capital activity, almost acting as an
important role as entrepreneurship drives fragile and fragmented—the same must be improvisation on the philanthropic model
the new India. Majority of start-ups in streamlined on a priority basis to ensure of the west, providing more sustainability
India are led by first generation entrepre- that investors get comfort of regulatory in the process.
neurs, who lack alternate sources of financ- certainty around investing in India. The time has come for India to cap-
ing. While bootstrapping is an option and India will also have to take more owner- ture its destiny, and while there might be
will always remain so, the premium on ship of forming domestic pools of risk capi- hiccups here and there, the next decade
time, which capital helps to crunch, tal—the current norms almost actively will mark significant strides towards that
increases in a high-growth environment— discourage the same. An interesting case in goal. The linkages of India’s growth and
it is already visible that entrepreneurs pre- point here is Israel, where the 1993 Yozma development with entrepreneurship, and
fer to accelerate the growth of their initiatives single-handedly led to the forma- of thriving entrepreneurship with avail-
businesses through infusion of capital, tion of a vibrant venture capital industry. ability of risk capital are undeniable. The
even if that means sharing the rewards and There is also a need to plug market fail- next decade should mark coming of age
control. They are also getting more sophis- ures in the capital food chain, especially in of venture capital in India, in a uniquely
ticated about understanding and manag- early-stage incubation and angel financing. Indian manner.
FEBRUARY 2011 | INC. | 89