India

I do not think I need to start this post by talking about the opportunity in India. That is a given. From both buyer and supplier point of view, India has become a force to reckon with in the last decade or so. In recent times, more than 40+ VC firms have established base in India. In fact, currently most VC firms of any consequence have an India strategy. But will they prosper?

What is the nature of the opportunity in India?
First of all, there is far too much money in India by all accounts. An excerpt from an India-focused report by EValueServe sums it up concisely.

Over 44 US-based VC firms are now seeking to invest heavily in start-ups and early-stage companies in India. These firms have raised, or are in the process of raising, an average of US $100 million each. Indeed, if these 40-plus firms are successful in raising money, they would garner approximately $4.4 billion to be invested during the next 4 to 5 years. Taking Indian Purchasing Power Parity (PPP) into consideration, this would be equivalent to $22 billion worth of investment in the US. Since about $1.75 billion (or approximately 40% of $4.4 billion) has been already raised, even if only $2.2 billion is raised by December 2006, Evalueserve cautions that there will be a glut of VC money for early- stage investments in India. This will be especially true if the VCs continue to invest only in currently favourite sectors such as IT, BPO, software and hardware products, telecom, and consumer Internet. Given that a typical start-up in India would require $9 million during the first three years (i.e., $3 million per year) and even assuming that the start-up survives for three years, investing $2.2 billion during 2007-2010 would imply investing in 150 to 180 start-ups every year during this period, which simply does not seem practical if the VCs continue to focus only on their current favourite sectors.

What does this imply?
Firstly that there is indeed more capital than there are deals, and secondly, to invest effectively, VCs will have to move beyond their favorite sectors. No wonder, there is a trend among VCs in India to invest in pickle factories, electrical fittings and other later-stage, more private equity type of deals.

So?
So this means that early stage VCs moving into India will either invest in later, more growth stage deals than they used to or will under-invest. However, there is a third scenario that is possible. There is one school of thought that believes that large VC players are moving into India with the sense that they may get hit in the short term. Their motivation is not to make loads of money in the short term as much as to create a beachhead of sorts. The next few years will be hazy but if they can ride the storm, they would have enough network, crediblity and deal-flow that the deals of 2009 Vintage will more than compensate for any less-than-stellar returns from deals of today's vintage. And while that happens, VCs will move into more later-stage deals.
If this is indeed true, then it will tie in all the four major phenomena occuring in the Indian Venture Capital landscape:

1. Influx of VCs into the Indian market
2. Too much Capital
2. Very few good deals
3. Later stage Investing by early stage players

Finally, the biggest need in India right now is not Venture Capitalists but effective operators. There is a big dearth of good managers in India and this presents an interesting opportunity for people like us. On another note, VCs have a big role to play in this market. This is especially true for those who do invest money but more than that, offer their experience, ideas and manpower to their portfolio companies. Very exciting times out there! So, if you are an entreprenuer looking for capital or good people, mail in!