July 29, 2010

"The Early Stage Mindset" - Article by Sanjay Anandaram

Originally published in the WSJ Blog. Reproduced with author's permission.

Early stage venture capital investing in India appears to be the flavour of season. There are funds being set up from $5m to $30m in size. Some are proposed to be set up by angel investors, some by former executives and investment bankers while others by successful entrepreneurs. Some are likely to be supported by government linked institutions, some by international investors and high net worth individuals. I recently had occasion to meet with some fund managers of these proposed funds. Clearly, they had done their homework: on the state of the Indian private equity and VC market, the various participants had been mapped out, the state of the Indian economy, the performance of existing venture backed companies, the valuations, the exit opportunities, the pluses and minuses of existing funds had all been analysed and the inevitable gaps/spaces/blue oceans (choose your favourite jargon!) had been identified. And they apparently conclusively pointed to early stage investment opportunities in India – the holy grail or the akshaya patra, if you will.

All the presentations however sounded similar if not identical. They all talked about how attractive the opportunity was and how money could be multiplied. They all would source deals by networking and by associating with the same set of organizations and institutions, by having business plan competitions; they all anticipated “adding value” as a differentiating feature – high powered advisory panel, incubation centres, connections with various corporations and the like.

But there was one thing missing. An understanding of the early stage entrepreneur’s situation. In my over 10 years of active involvement with the early stage sector in India, here’are some of my learnings:

1. It is a relationship, not a financing, business. Building relationships and trust with the entrepreneurs and the management team is crucial.
2. Spending a lot of time with the team is therefore a pre-requisite.
3. Emotions and egos will play a big role in decision making. Be prepared to getting involved in personal matters of the team as well. Learn to empathise with the (1st time?) entrepreneur.
4. Negotiations can re-start after a contract is signed!
5. Appreciation of the role of an investor and of many of the “standard investor clauses” is low. Invest time and effort to explain the role and terms of engagement.
6. Patience is important. Helping think through various strategies and sometimes even participating in the implementation. Companies will take 7 to 10 years to mature and create value. Pumping more money isn’t going to accelerate growth.
7. Company building mindset as opposed to a financial engineering mindset
8. Hiring isn’t easy – helping find talent and advisor and mentors is a great “value-add’. Compensation discussions involving stocks can be another effort.
9. Ready made deals and ready made talent aren’t available. Therefore, finding good deals requires being in the line of “people flow” not banker /consultant led “deal flows”. Travel all over to meet people from various sectors and in all kinds of businesses.
10. Very direct and blunt communication can be construed as being rude and unnecessarily aggressive.
11. There are no proven models. Try everything and stick with what works. That’s the strategy!
12. There’re no pure digital businesses. Be prepared for strong offline activity.
13. There’re opportunities in deploying technology to drive “faster, cheaper, better” solutions. Appreciate that business model innovation, as opposed to technology innovation, will be the theme.
14. Because something’s worked in the US or elsewhere doesn’t mean it will work in India!



None of this is of course very unique to India. It is what the top VC funds in the US used to be known for the early days (when fund sizes were in the low to mid double digit millions). These kinds of early stage funds are making a big comeback in the US; Given the opportunity/gaps/blue oceans (!), it is time the same mindset that helped create great companies there was applied by early stage investors to opportunities in India as well.

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.