India’s Most Powerful Venture Capitalists
At the end of March (2011), The New York Times reported that Bessemer Venture Partners had closed a new fund at $1.6B, a quarter of which ($400M) will be allocated to investments in India. That is simply a huge number. It’s one thing to convince potential limited partners about the promise of growth in India, but it’s another thing to turn $400M into a 6x return in 10 years. While some leading firms have raised funds for India specifically and have a staff there, there are other U.S. firms wouldn’t take that bet, or maybe would with the right set of special pre-conditions. By contrast, most VC firms are quite bullish on China and many have realized tremendous gains there of late.
While there’s no shortage of entrepreneurship, exploitable inefficiencies, formation of new technologies, expanding middle classes with disposable income, and hype, it’s a bet I would be reluctant to make — and that’s why it’s a bold move. This is not to suggest that entrepreneurship won’t continue to flourish — it will. Rather, I am not sure it’s venture capital that will find the best companies and most profitable businesses. Instead, I believe that those companies will always be under the watchful eye of India’s most powerful venture capitalists — rich, dynastic Indian family groups.
While some debate the merits of venture capital in today’s entrepreneurial climate in the United States, for instance, there are many firms that have quietly had a hand in building category-defining, long-standing businesses, where the founders and employees would offer that the investors offered much more than money in the transaction. In the best venture firms, a network of talent helps companies navigate tricky mine fields in time of need, and this is why repeat entrepreneurs who are successful end up building multiple companies with the assistance of the same firm, and during idle periods, hand out as EIRs.
This same dynamic does not yet exist in India, though that could certainly change in the future. Whereas some venture capitalists in the U.S. have become expert not only at managing and allocating capital, they have also perfected the art of identifying entrepreneurial talent and helping that talent build businesses that reach a liquidity event. In India, while firms may have all the necessary skills to do the same, the operating environment is such that it makes it difficult to apply leverage and truly disrupt incumbents because so much of that leverage (and frankly, so many of the incumbents) can trace its roots back to a rich, well-known Indian family. I don’t mean to suggest that the presence of these strong family networks stifle innovation, but if entrepreneurs don’t have them on their side, it can make life more difficult in terms of breaking through.
So much of business in India requires the constant application of leverage through each part of a decision within an organization. Outliers such as the big software giants and services companies don’t count here, as they have adopted different structures and embrace more western styles of management. Typically, this is where traditional VC operational experience would help add value. But the majority of businesses growing in India are distinctly not going to be western in style, and therefore, will require operational expertise that must be and can only be accumulated in India. And while it would help to have a VC with that operational experience to help you launch and grow your venture in India, most successful endeavors are likely to disrupt businesses that India’s families have a financial and emotional stake in. For instance, if you are looking to disrupt one of the 100+ industries that The Tata Group is involved in, part of the planning will be to deal with this, head on.
That kind of fight — a head-on match with a family like the Tatas, for instance — doesn’t fall under the scope of most well-intentioned VCs in India, no matter how many IIT degrees they have, no matter if they finished off a blue-chip MBA in the United States, and no matter if they have operational startup experience in India. Granted, those all help, to a degree, but proper alignment with a big family is oftentimes a must for an entrepreneur to have a chance to break through and capitalize on really big, venture-style opportunities.