Venture Capital in India: Ashish Gupta (Part 6)

SM: What are you seeing in the Indian ecosystem in terms of deal size? What is the smallest size investment you would make?

AG: We would be willing to write a $500,000 check.

SM: In India, $500,000 is still a lot of money. There is a phase of building that entrepreneurs typically do before seed money goes into the business. Ideally, that is bootstrapped. What is going on in terms of bootstrapping and PowerPoint financing?

AG: The number of angel investors has increased significantly. Angel networks are growing across the country. Then there are several more funds willing to write smaller checks. I think that several of the entrepreneurs have also figured out how to raise money from friends and family to keep those businesses going. That entire piece has been accelerating, but not in line with the number of people who want money.

One of the single biggest complaints you hear at every single forum that gives entrepreneurs the chance to take VCs to task is to really question if the venture capitalist are really trying to do venture or if they are trying to protect risk. This is a double-edged sword. A lot of people confuse venture as a charity for moving entrepreneurship along. That is unfortunately not the stated reason for which we raise money. The idea is to make returns.

SM: Venture is a very specific model of funding businesses that can be very large. It is not set up to fund mid-sized businesses.

AG: Understanding that is a work in progress that the entrepreneurs and, to some measure, the venture capitalists in India, need to figure out. How will they work with the opportunity that several of these mid-sized businesses present? Should venture capital firms carve out a smaller piece dedicated to mid-sized companies? The returns can be very compelling. If you put only two in and you get twenty out, that is extremely commendable.

That question needs to be licked by both the entrepreneurs and the VCs alike. The economics of these funds are not completely understood yet. It is still early in the evolutionary cycle. The frustration among folks who are starting these companies is reasonably high. It far outnumbers the amount of money that is reasonably available. It is definitely what I would say is under- provisioned.

SM: Here, a lot of people have identified the problem. We had a huge explosion in the size of funds, and people were drawing huge management fees. Large funds are very inappropriate for early- stage venture capital. It is completely incompatible. Here we are now seeing a lot of really small funds in the $25 million to $300 million range. They are run by very experienced people. I think that is an even better model for India than it is here in the Valley.

AG: The good thing about markets is that folks will sort it out and emulate what is working. There are already several people who are doing just that. Large funds are figuring out how to operate smaller or to create a subsidy fund.

SM: NEA has done that, I believe.

AG: NEA has gotten the Indo-U.S. fund bootstrapped with an initial investment. Let’s see how that plays out. You are right that these smaller funds could be a very interesting way of working the problem out.

SM: I also think that some level of incubation is necessary, because you are working with so many first-time entrepreneurs. We have both been first-time entrepreneurs, and we both know how difficult it has been to understand what the hell is going on. This is not simple stuff.

AG: The incubators that are active in India that I know about include the one that IIM Bangalore has. Bombay and Chennai both have active incubators. Unfortunately, others are moribund. There is a fairly senior executive here in the Valley from a large Internet company who is thinking of returning to India to start an incubator.

This segment is part 6 in the series : Venture Capital in India: Ashish Gupta
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