a byte of me

As glamorous as venture capital can get, it is also a very difficult profession. Unlike other professions, where one may need great in-depth technical knowledge in one field like chemical engineering, venture capital is a whole different ball game. You do need solid financial and due diligence skills, but you can get people to do that. We, the associates at my venture fund are the backbone that does that. But as I have risen above in the last few months, led teams, interacted with management at start-ups and partners like other venture capital groups, I am realizing that the whole game is different from the top.

More than any other industry, other than politics probably, venture capital (and private equity) is built on relationships and decision making skills. The entire deal flow in a venture capital fund comes from knowing other people and who knows whom. Thats almost driven by the top management, since they are the one who know many people in the industry that the young start-out employees don't. The top management get the deal from their contacts, make a decision whether to pursue it or not and then pass it on to the associates to start cranking out due diligence on the ones they decide to pursue.

But as I am discovering, that decision to pursue or not, can often be very difficult to make. For two reasons. One, is the fear of making a wrong decision and losing out on the next home run of the century. The second is the decision you have to make when it is associated with short time lines or other pressure.

For the first, the fear of losing out on the next home run, it doesn't really matter what decision you make. If you're good at what you do, you will do reasonably well even if you miss out on the next big run. Have a look at Bessemer Venture Partners' Anti-portfolio. The anti-portfolio is their candid way of admitting that they wrongly passed-on on many of the companies, like HP, Apple, Ebay and Google, that later were huge successes. But they're Bessemer. They're really good at what they do and have done reasonably well for themselves. But you and I, if we do that enough times, we can easily find ourselves on a losing game.

The other is the decisions you have to make under pressure. I just had my first experience on that and I surprizingly found myself between a rock and a hard place. In the end, I made a call and I really hope it was a good decision. Here is some detail without revealing too much. We were working on a deal that was referred to us by a great partner VC firm. We've really enjoyed working with them in the past and respect them too. We were asked to make a decision whether we are sure to move forward on the deal on a very short notice. Given it is summer and that we have to go through two different committees for investment, it is hard for us to make such a decision without polling a few of the various parties involved. Besides, the type of investment that this company would have been was absolutely new to us. So there was some fear regarding that at our fund too. But I have looked at the company before and like it a lot. I believe they have the potential to go out and capture a significant portion of the industry. In the end, I reluctantly made the call to pass-on, even though I didn't want to, to support our partners and to ensure that they don't lose out on the terms they've obtained by trying to squeeze us in. Oh well.

Labels: Private Equity, Venture Capital

Rediff.com reports latest that forty VC firms have raised funds totaling $400M to be invested in startups in India. Thats great. Last year (2006) total VC and PE investment in India was $7.5B as opposed to just $2.2B in 2005. This year $2.4B has already been invested in the first quarter, leading me to think that this year total investment will top $12B or so.

I wonder where all this money goes. Working at VC firm in America, I see why startups in America raise funds in millions of dollars. Having employees on your payroll in America is very expensive. Especially if your staff is composed of top scientists. You can burn through a few million dollars in one year easily. On top of that, marketing and sales costs are typically much higher too.

Comparatively, hiring people in India is much cheaper and many costs that you typically see in American startups are either inexistent or way low. So, it is my guess - and its totally my guess - without any research into data about startup funding in India, that an average startup company might burn through cash much slower than an average startup in America - and thus the need to raise less capital.

So if we are on average investing less money in startups, we must invest in a lot more startups to invest all that money thats flowing into VC and PE funds in India. But where are all the Indian startups that we must see blooming already? If India Inc's startups gulped down almost 28% of US VC investing (VCs invested $26.5B in 2006 in US), where is all the money going?

Is there a flaw in my logic that I am not seeing? Or are there other factors such as Indian startups taking longer to gain visibility or something else? It will be interesting to see. In the meanwhile, I will try to find some data about Indian startups in 2006 and 2005. Anyone know any good databases or good data resources for Indian startup arena? I know of Venture Source, but I afaik it has data only for US, Europe and Israeli startups (yes, Israeli! I was surprised too when I first saw it).

Apparently, the data that all news sites are reporting is from a study titled "Indian PE/VC Market Firing on all Cylinders-Liquidity all round" by Assocham and Ernst and Young. I am trying to find this study, but it seems it is too new for search engines to have indexed it or its restricted access. If someone can find it and send me a link or the file at indyman 'DOT' blogspot 'AT' gmail 'DOT' com, that will be great.

Another interesting read: Surging economy sees private equity investment soar. Wall Street Journal - Investing In India. (.pdf)

Update: Today morning 04/24, data for Q1 2007 VC investing came out. VC investors in US have invested just under $7.1B. This number is higher than all other Q1 results for the past 6 years, indicating a good forecast for the economy.

Tagged: India, Venture Capital

Labels: India, Venture Capital