Venture capital has been around in India for a while but has not gained enough popularity. Is it the overhype working against it or the entrepreneurs are just playing it down?
Most people in India would argue today that the country's sensation about entrepreneurship and business is a recent one.
Many would also tell you that Indians generally have an affinity to take risks. A lot many more, along with the media might also tell you that unless you raise venture capital, you'd never be able to build an enterprise in India.
None of these statements are true.
Entrepreneurship has been a movement in India since the late 80s when the foundation of commerce and business in this country started taking shape. You will notice that most of the government initiatives in terms of entrepreneurship are as old as the day when this country gained independence. In the mid 90s when policies were framed to make enterprises flourish, taxation rules helped them grow, and IT as an industry was born and started taking roots, it felt as if entrepreneurship had reached out to the masses.
It only seems that way because apart from a few major successes, and especially the IT industry which thrives on the massive tax subsidies of the government, we haven't seen that growth being an inclusive one. It is capitalistic at best.
Go back to the roots of how businesses have been traditionally built in this country and you would see a rather different story. Reports suggest that there are close to Rs 32 million small and medium enterprises in India and as per the report, these are entities that are generating more than two to three crores in annual revenue. The average number of companies that get funded by the venture capital community today in a year is around 150; where then did the rest of the companies raise money from?
Here is a question that I have been asking entrepreneurs lately and I get some rather disturbing responses: Which is riskier and has a higher rate of interest on it—a bank loan or venture capital money? If you are like most people, you would claim that it's a bank loan, but it is quite possible today that you can take a bank loan at around 10-15 percent interest rate, and apart from the collateral (there are also collateral-free loans now), there is not much risk to it. Take money from a venture capital firm, which is no more than a specialized bank, and you are committing to a 400 percent interest rate in a time frame of five years and the power to appoint other officers, liquidate the company and a seat at the governing board for them.
Of course it makes sense to make that promise when you can justify the nature of the business you are in, the growth rate and the stage at which your company is in, and if you are one of those really rare companies which can outgrow that interest rate—most companies will never be able to do that.
Why then aren't the venture capital firms telling you that? Truth is, they themselves haven't figured it out. The venture capital industry has a record of never performing as it should anywhere out of Silicon Valley. Even in the Valley where there are close to 1000+ venture funds (compared to the 132 funds in India), not more than 25 are profitable and make money. Most companies that are successful and make it past the headlines to us are the ones that are being fostered by a select few. When the same model does not even span out in the same area, let alone the same continent, can we really expect it to work miles away in a continent and country which has its own flair as to how things work? I guess not.
The venture capital industry is a key component of a healthy ecosystem but it is just one component, not THE component. And in this scenario, there is much that the industry as a whole has to experiment before it can arrive at the framework which will make sense for India. Currently, in no way does it do that. In the past five years, close to 1.6 billion dollars have gone into investment in India as PE/Venture Capital and very few of those dollars have made returns.
On the other hand, look at the companies that you will find in the manufacturing sectors, companies such as Shakti Masala (which processes, packages and retails masala powder) which are less than a decade old and garner a whopping Rs 320 crores in turnover each year. Such companies were started with less than Rs 10,000 as initial capital, was built with loans, repaid and turned profitable—it makes us doubt what we have been hearing that Indians don't have a risk-taking appetite. We do. We always did, but lately we have been trying to offload that risk onto a vehicle named venture capital, which unfortunately is not ready for prime time yet.
It's time to go back to the basics of building businesses in India, lest you want to wait for the VC industry to mature.
Blog Anand
Vijay Anand is an entrepreneur who has experience starting and building various technology startups, starting at the young age of 16. He is currently the Incubation Manager at RTBI, an incubator in IIT Madras that focuses on building rural-focused businesses. He is also the founder of Proto.in, India’s premier technology showcase event and is involved in various initiatives that are shaping up the emerging entrepreneurial scene in India. He blogs as The Startup Guy at www.vijayanand.name and tweets regularly at www.twitter.com/vijayanands.
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