Financing A Business

The accounting equation, a fundamental identity of accounting, states that:

Assets = Liabilities + Owner’s Equity

A business converts debt (liabilities) and equity (owner’s equity) into assets that generate cash flows. Those on the right side of the equation make claims on this cash flow depending on the security they hold. Debt capital providers receive a coupon on their investment, while equity capital providers participate in the upside (and downside) as the owners of the business.

With that 20-second crash course in accounting and corporate finance out of the way, the question, both practical and philosophical, every entrepreneur has to answer is how the business should be funded.

Selecting the capital source for a business is one of the most important strategic choices an entrepreneur makes. Founders may not necessarily think through it in the way I have described above, but as Prime Minister PV Narasimha Rao said once, not taking a decision is also a decision.

Venture capital investors are equity participants, and expect higher returns compared to public equity investors. In recent years, the terms attached to equity investment by venture investors have turned equity into a quasi-debt instrument.

Debt financing is suitable for relatively predictable and regulated sectors, such as infrastructure and power, and it is unsuitable for riskier and innately unpredictable endeavours such as creative projects or technical innovation. Debt funding has an added advantage because interest payments are tax deductible, a provision introduced in the First World War.

Let’s examine what’s been happening in some sectors through the financing lens:

India e-commerce – Several e-commerce players raised very large sums of money at, it is now obvious with the benefit of hindsight, unjustifiably high valuations. These companies thought they were raising equity, but it was actually debt disguised as equity. This was not unique to Indian startups, and happened in other markets too. Venture capitalist Bill Gurley eloquently described the phenomenon as the “calcification of the cap table”. Onerous covenants on equity and the fund-raising arms race made the capital structure of many startups fragile, and the fragility has broken many companies. The calcification happened because founders chased higher and higher paper valuations. The price equity investors extracted for the high valuation was to take debt-like protections in case things went sideways. The transformation of equity into debt-like instruments was necessitated partly by the drive for higher headline valuation numbers. This is always irresponsible. Instead of fund-raising being a means to the end of building a business, fund-raising at ever-increasing valuations became an end in itself. While e-commerce startups have to do a capital raise to continue investing in the business, Amazon simply parks a chunk of the cash flows from its thriving marketplace and cloud businesses into India. Amazon is more conservatively financed than its Indian competitors and that is making a very big difference.

India telecom – Telecom spectrum is the essential “raw material” to run a telecom business. The corruption-mired allocation of this scarce and valuable resource by the Congress-led UPA government is one of the biggest scandals in India’s history. After the scandal, it became politically difficult to not maximize revenues on auctions of telecom spectrum. The legacy players borrowed huge sums of money from government-owned banks to license spectrum. Then Reliance Industries entered the business with Jio, funding spectrum acquisition and network buildout through very large equity-funded investments. Reliance can afford to invest on this scale because of its oil refining business. That business generates huge cash flows, and Reliance is investing some of this cash into its new telecom business. In a sense, Reliance Industries is doing to legacy telecom companies what Amazon is doing to e-commerce startups. Both Amazon and Reliance are investing equity, while the others are investing debt.

Global media and entertainment – A few months ago, Netflix issued corporate debt to fund new content. This is quite risky. Netflix’s low-rated and high-interest bonds were lapped up by investors starved of yield in the current low interest rate environment. It says something about the present environment that even though Netflix has told investors it will turn to bond markets to raise money frequently and invest the proceeds into a speculative assets like films and television shows, investors are handing over billions of dollars to the company knowing Netflix will keep burning cash. At the same time, digital music streaming startups in the US and India have raised enormous amounts of capital from private investors, probably with onerous terms attached – so these instruments may be labeled equity, but work more like debt. The problem the streaming services face is that the more money they make, the more content owners (typically large music labels and media companies) extract from them. As the intermediary, streaming services have limited bargaining power with the content owners. They are running the classic Red Queen race. The bet investors in such companies are taking is that the subscriber base can grow fast enough to a large enough scale so that eventually the economics of the model tilts in the favour of the licensee (i.e., the streaming service).

India agriculture – Indian agriculture is woefully over-regulated. Farmers have little control over both the price they can get for produce and where they are allowed to sell their output. For decades, India has simultaneously romanticized and infantilized the farmer. Farming is simply not viewed as a business, even though it is one. As if it wasn’t enough, farmers are left to the mercy of the weather too because India has a dearth of irrigation infrastructure. About 45% of employment is in the agriculture sector. Most people (we are talking tens of millions of people) just default to agricultural employment as there are limited opportunities to do anything else in rural India. There isn’t much equity capital entering farming, as farming tends to be largely subsistence-based. Deprived of equity funding sources, farmers turn to loans from formal and informal sources. They don’t have much of an incentive to invest in productivity tools for their farms either, because of pricing and other regulatory distortions. Given the high dependence of India’s population on farming and the inefficiencies built into Indian agriculture, every now and then there is a political clamour for farm loan waivers. This is a vicious cycle, and can only be broken by structural policy reforms for the sector.

When evaluating an investment, I find it very useful to think both backwards and forwards about how the business has been financed and how it will be financed. It reveals a lot about both the economics of the business and the management behind it.

Rebalancing of Indian Equity Markets Will Smooth Volatility

Momentous changes in India’s equity market microstructure will improve market efficiency and smooth volatility over time.

Emerging markets are frequently stereotyped as being prone to wild swings and outsized volatility. In particular, India has historically been a market where foreign institutional investment has driven the direction of the market – bearishness by foreign investors has almost always pushed markets downwards, while optimism abroad about India’s prospects equally rockets equities to the stratosphere.

While sharp movements in either direction should not affect practiced value investors, the disproportionate impact of bipolar behaviour by international funds has both wreaked havoc in the Indian stock market, as well as created tremendous buying opportunities for the long-term value investor. For example, in 2014, when foreign investors pumped in over $40 billion into the Indian market after voters handed a single party with a majority in the general election for the first time in 30 years, the benchmark Nifty index rose over 30%.

Now, changes are afoot that will make India’s equity market more even-keeled over time. Employee Provident Fund Organisation (EPFO), an Indian government body, administers a pension fund drawing contributions from India’s formal sector labour force and controls about Rs 8 trillion (US$110 billion) in capital, In 2015, Prime Minister Narendra Modi’s Indian government decided that for the first time in India’s history, the corpus would be deployed in the equity market.

For its entire existence, EPFO had been investing heavily in debt securities. This was a system of indirect financial repression – the government would take workers’ pension and invest it primarily into government bonds. In line with how pension funds are managed globally, the Modi government decided that 5-15% of EPFO’s incremental corpus would annually be invested in exchange-traded funds tied to the major Indian market indices and a basket of government-owned enterprises. This is well below other large economies like Switzerland, where nearly 30% of pension money finds its way into the equity market, the United States (44%), and Australia (51%). EPFO’s equity allocation would translate to Rs 80-120 billion (US$ 1.2-1.5 billion) per year, and it invests in select ETFs that track India’s two benchmark indices, the Nifty and the Sensex.

EPFO draws over $12 billion a year in incremental funds from India’s salaried workers. Given that foreign investors pumped in $40 billion in 2014 and $9.5 billion in 2015, the share of the EPFO corpus invested in equities is relatively small today. Nevertheless, the entry of a significant domestic institutional investor into India’s equity market is a watershed moment. In its first year as an equity investor, the six decade-old EPFO parked 5% of the incremental corpus into ETFs. Late in 2016, it decided to increase the allocation from 5% to 10%, widening its mandate beyond large capitalization stocks to include mid-sized companies.

The Indian government is making a strong push to formalize the economy, and a burgeoning youth population means that EPFO’s incremental corpus from which a chunk is invested in equities should rise over time. The government also wants to increase the percentage allocated to equities over time, and the presence of a long-term domestic permanent capital will bring much needed balance and stability to the Indian market.

This is possibly the biggest structural change the Indian market has seen in the last 25 years, comparable to when the Indian market was opened up to foreign investors. Bringing this corpus into equities wasn’t an easy reform – powerful labour unions have resisted EPFO’s entry into equity investing for decades, but this time the Indian government prevailed.

Given this momentous change, investors would do well to move away from old notions and biases about the foreign investor-induced hyper-schizophrenia of India’s Mr Market. In practical terms, entry timing should matter less and volatility will be mitigated. The Indian market now has a new ballast. The permanent capital provided to equities by India’s largest pension fund means that foreign developments can’t whiplash Indian markets like they have in the past.

(Originally Published: Latticework)

Energy Innovation For Emerging Markets

Energy and clean technology investing has proven to be disastrous for venture capitalists. Capital allocated to clean tech fell to less than half in 2013 from the $3.7 billion invested in 2012, and new clean tech-focused funds were able to raise less than $1 billion last year, compared to $4.5 billion raised in 2012.

High-profile flameouts like Solyndra, A123 Systems, Konarka, Miasole, Better Place and Fisker Automotive have, appropriately enough, made investors very wary. Billions of dollars of equity has evaporated. Successes, such as Tesla Motors and Nest Labs, have been extremely rare.

Clean tech and energy, once touted as a fecund sectors for entrepreneurship alongside software, life sciences and the Internet, are no longer mentioned in the same league. Risk capital has dwindled dramatically, with prominent venture investors either winding down energy investing teams or retrenching significantly, content only with managing existing investments and not making new ones.

But why has clean technology blown a hole in investor’s pockets?

From questions about the suitability of cleantech for the venture capital investing model, to heated debates about the validity of climate change itself, which became a moral basis for the promotion of clean technology, many a rationale has been offered for why clean tech didn’t succeed in delivering investment returns. There is still no clear answer to why companies led by top-notch entrepreneurial operators and commercializing promising technologies met with spectacular failure.

It could be something more prosaic: clean technology companies and energy innovators have been in the wrong geographical market. Investors have unwittingly violated one of the maxims enunciated by venture capital pioneer Eugene Kleiner, who said; “Make sure the dog wants to eat the dog food.”

Take any metric – energy demand, fuel consumption, pollution, power generation growth, electrical grid development or water demand. Over the last decade, North American and European countries don’t figure on the list of the fastest growing markets for any of these.

Yet, clean technology companies have focused almost exclusively only on these developed world markets. The economies that have witnessed the highest growth in energy- and resource-related consumption are in emerging Asia, South America and Africa. Countries and cities in these regions also top global rankings for being the most polluted.

Does it make any sense to build windmills in Scandinavia or solar plants in Germany and California, when those regions already have relatively low levels of pollution and are fully electrified? As Europe is discovering, moralistic grandstanding cannot become the basis for innovation. This discrepancy represents a fundamental misallocation on a global scale of both human capital and financial risk capital.

The difficulty of commercializing innovation is compounded thanks to the cultural challenge innovators in developed economies face when working in emerging economies, which also inevitably have very different business climates.

Frequently, the geographical markets that are amenable to innovation in clean technology have regulatory risks and present far more challenging conditions for building businesses, as evidenced by their low rankings in the World Bank’s ease of doing business study.

This is an advantage “virtual world” businesses that are in consumer-focused Internet and mobile sectors have over others in that they have to contend with a lot less friction in developing markets.

Consider China’s situation. Tens of thousands of environmental protests are reported annually, millions of consumers live in extreme pollution and smog is destroying visibility – so it is easier to make the case for higher rates for electricity.

India’s growth has so far been predominantly services-driven. Manufacturing output has collapsed and saw negative growth because of unprecedented economic mismanagement by the current national government. This isn’t socially sustainable – as India promotes manufacturing and heavy industry to employ tens of millions of its youth, it’s inevitable that problems with pollution and environmental degradation will be exacerbated.

These are markets where one needn’t be moralistic about why clean technology is required. As the prospect of unlivable communities and unbreathable air looms large even in the most important urban centers, the economic logic for clean technology is self-evident.

Innovators outside these economies should take them a lot more seriously and find ways to overcome the cultural and business pitfalls of operating in emerging markets. There is also an unprecedented opportunity for inventors and entrepreneurs in emerging markets to build companies in clean technology.

A reallocation of financial risk capital and human capital towards where the clean technology and energy innovation markets are would go a long way towards solving the world’s sustainability challenge – and in the process, would also deliver far better returns for investors.

Originally Published:

Challenging Silicon Valley’s Innovation Hegemony

For several decades, Silicon Valley has had a near-monopoly on innovation. The Valley emerged out of America’s deep commitment to higher education and scientific research, combined with the American will to maintain leadership in defence technology. Through the second half of the 20th century, China was disastrously experimenting with Maoism, India was embracing Socialism, a fragmented Europe was rebuilding after the Second World War and the other superpower, Soviet Russia, was persisting with its Communist economic model. The Americans invested public and private capital in fundamental research and development, allowing private enterprise to drive economic growth and entrepreneurial small businesses to commercialize publicly-funded scientific research. America invented the venture capital model to commercialize such research.

It stood out as an oasis in a world where central planning and a state control of the economy was the norm. Owing to a liberal immigration policy, it became a magnet for talent from around the world. Scores of scientists migrated from Europe to America in the throes of the Second World War, including titans like Enrico Fermi and Albert Einstein. Nobel laureates Hargobind Khorana and Subramanyan Chandrasekhar, both of whom completed their college education in India, also made America their home.

The migration of talent from other parts of the world to America continued through the 1960s and 1970s, with the best talent from China and India making the move, thanks to the economic havoc caused by the destructive ideas of Chairman Mao and Prime Minister Indira Gandhi.

In this way, America managed to consolidate the world’s best scientific talent. It then gave them a platform and funding to invent and create. The scientists and engineers who went to America might not all have founded technology companies, but through their work at private research labs, government research institutions, universities and startups, laid the foundations for America’s technological prowess that underpins its military and economic might to this day.

It is important to recognize that this was a historical aberration and cannot be sustained by design — America positioned itself to benefit from the poor choices that the rest of the world made. A reversion to the mean is underway, and the tide has started turning over the last two decades. Besides increased economic and financial integration worldwide permitting capital flows on a global scale, economic reforms catalyzing sustained growth in Asia and the creation of a common market in Europe have fostered economic blocks that can compete with America.

Sector after sector has become more globalized. Venture capital investing, long the exclusive preserve of a clutch of firms on Silicon Valley’s famed Sand Hill Road and till recently heavily concentrated in the United States, is now unmistakably global. Risk capital flows to places that have talented people pursuing breakthrough business ideas — and sustained global growth over the last two decades has set the stage for a need for technological innovation across economies and geographies. The rise of the Asian consumer is creating opportunities for innovation in all kinds of consumer products. Transplanting ideas from elsewhere doesn’t always cut it with the taste and sensibility of consumers in Asian countries. With increasing consumption, there is a glaring need for efficiency in resource utilization and energy use.

Challenging economic conditions combined with more stringent immigration policies in developed nations have made it appealing for accomplished scientists and engineers from developing nations to return home, where in many cases there is stronger economic growth alongside a new focus on nurturing and financing science and technology. This has set the stage for venture capital investing in emerging markets.

America has a long lead, but the rest of the world is catching up. It will continue to maintain primacy in Internet innovation in particular because of the spending capacity of the American consumer. The Internet is a platform for consumption, be it consuming information which allows for digital advertising to flourish or purchasing products through Internet-based retailers. America’s consumption power allows it be the breeding ground for global Internet giants such as Google, Amazon and Facebook, and it will dominate in web innovation as long as the American consumer has clout.

New York-based venture capitalist Fred Wilson recently wrote about how the Valley’s dominance could be upended if there was a new wave of technological disruption, far separated from the computing and Internet industry on which the Valley has been built. Wilson said that should Silicon Valley miss such a new wave, it could look like Detroit in a few decades.

Just as a consumer-centric economy allows it to dominate Internet innovation, it also creates an insulation from innovation in non-consumer industries. The world has become a dramatically different place in the last few decades, and such innovations that define the next wave of technological disruption can come from any nation that has a sufficiently large pool of talented people working to solve the big challenges in energy, health care, clean technology and other sectors. That would weaken Silicon Valley’s grip on driving innovation — and further undermine America’s standing as a global power.

Originally Published:

India’s Rapidly Evolving Technology Landscape

Most investors who have put capital behind consumer internet startups trying to build commoditised businesses will lose money.

India’s technology landscape can be characterized as having seen three waves of evolution and growth. The first wave was led by the likes of Tata Consultancy Services, Patni Computer Systems, Infosys and Wipro, who pioneered the outsourcing model based on labour cost arbitrage. These were firms founded in pre-liberalization India and took decades to establish themselves as global brands. The second wave occurred in post-liberalization India of the 1990s, when several IT firms adopted similar business models to the outsourcing pioneers. The small- and mid-sized enterprises that emerged during this period strengthened the foundation of India’s nascent software services industry and today form the backbone of that thriving sector. The third wave can be said to have begun with the advent of the Internet – startups such as,, InMobi and who have emerged as category leaders in providing web services.

The common thread to the three waves has been the domination of the services-oriented software and Internet companies, and in recent years, the preponderance of ideas that have worked in the West that were repackaged to suit the Indian context. The fact is India has seen more imitation than genuine product innovation.

India’s technology industry has been dominated by IT and Internet firms, and venture capital investment figures for recent years bear out this trend. Since 2009, VCs have poured over $810 million into 113 deals in the software, mobile and Internet sectors. In contrast, early-stage health care and clean technology companies have received $292 million across 71 deals. It’s also interesting that average deal sizes are larger for early-stage companies in software and Internet than for health care and clean technology – one would have thought that the former is less capital intensive than the latter, and would hence require lesser capital to grow at the early-stage. By some estimates, India’s software and Internet ventures have been raising larger amounts of early-stage venture funding than American clean technology startups.

The data points to a clear mismatch both in terms of funding size and sectoral capital allocation. My hunch is that most investors who have put capital behind consumer Internet startups trying to build commoditized businesses will lose money. Most of these ventures are pursuing unsustainable business models. As if having imitators of American Internet startups wasn’t enough, we’ve seen imitators of Indian imitators of US Internet startups successfully raise funding. These ventures have almost no pricing power and hence almost no profitability. A fund raising arms race is under way, and the vast majority of startups will lose out as capital providers cluster around the top 1 or 2 category leaders.

In a more rational world, India’s VCs would bring together some of the outstanding engineers and scientists working at corporate research laboratories operated by Fortune 500 giants like General Electric, who are conducting key R&D work that is in many cases indispensable to the parent company. VCs should be willing to back stellar teams pursuing big ideas, and should invest capital in ways that harnesses the economics of outsourcing to deliver path-breaking innovation.

The data also tells us that more India-focused venture funds will be forced to look in places other than the tried and familiar Internet and IT sectors. Health care, clean technology and energy are mammoth markets that are relatively underserved and in dire need of early-stage capital, particularly for areas with substantial technology risk. Investors are beginning to recognize this, and several new funds have emerged that are both willing to look beyond IT and are comfortable backing early-stage ventures with $1-2 million.

The emergence of product-driven companies in sectors such as life sciences and clean technology in this decade will mark the fourth wave of the evolution and growth of India’s technology landscape. India’s talent base extends far beyond computer science and IT into fundamental sciences and engineering – it’s only a matter of time before risk capital connects with this talent base to deliver world-leading product innovation across more sectors. In order to achieve outsized returns, investors should skate to where the puck is going, rather than where it has been, to quote ice hockey player Wayne Gretzky.

Originally Published:

The Global Innovation Challenge

Rising unemployment and income disparity has shaken democracies across the Western world in the last year. Unemployment among young people in particular has been persistent and pervasive — the United States saw the highest ever youth unemployment in 2011, and it has reached as high as 45 percent in Spain. Job creation has suffered not just because of excessive debt. Advanced economies have seen a massive erosion in manufacturing, and new enterprises have been too focused on driving consumption.

Internet companies have mushroomed in Silicon Valley thanks to the low cost and ease of building products for the Web. They’re able to scale globally while maintaining a relatively low employee headcount. The year 2011 was a landmark one for Internet companies, with several start-ups going public and raising over $3.5 billion in the best year for initial public offerings since 2000. Among the biggest ones to do so in the United States were LinkedIn, Zynga, Groupon and Renren, a Chinese social networking site. And Facebook’s recent filing for a $5 billion public offering could make 2012 the best year for Internet I.P.O.’s since the dot-com days of 1999.

But all these companies thrive on aiding consumption, whether it’s through gaming, social networking or group discount buying.

In contrast, production-oriented technology sectors in health care, advanced materials and energy have had limited success in America. Most ventures in clean technology have absorbed large amounts of capital and have yet to show returns for investors. Many that have managed to grow, like A123 Systems, which manufactures advanced lithium-ion batteries, and Tesla Motors, aren’t very profitable. The success of consumption-driven Internet start-ups has left production-oriented ventures behind.

It’s technology that ensures equitable growth. Think of how mobile phones are ubiquitous across the developing world: there are over five billion cellphone users worldwide. Would it have been possible for all of them to have landline telephones instead? Would there be enough copper in the world to draw wiring to even the poorest day-wage laborers in India and China who today use cellphones? Even if the world had enough copper, could it all be mined quickly enough with limited environmental impact, and could it be devoted to laying telephone lines for a customer of meager means? Almost every modern day convenience that the West takes for granted will have to be re-engineered to make it cheaper and better for large-scale use in the developing world.

There’s a dichotomy here. The advanced Western economies aren’t able to create jobs partly because of their inability to compete with Asia when it comes to large-scale manufacturing, and this has in turn limited their ability to scale production-oriented technology companies. In the East, the emergence of manufacturing — and in India’s case, I.T.-outsourcing — has created higher incomes, a stronger consumer culture and the need for energy and resource efficiency. Rapid urbanization and industrialization in the developing world are irreversible trends. There are suddenly billions of consumers in Asia who can now aspire to the standard of living in advanced economies, and meeting this demand will require a giant leap of innovation across sectors like energy, chemicals, health care, transportation, water and materials.

But emerging markets lag in innovation because their entrepreneurship ecosystem, higher education institutions and research infrastructure are far less robust. Above all, entrepreneurship is celebrated in American culture and business failures aren’t looked down upon. Silicon Valley is the product of this culture — like French cuisine and Indian classical music, it cannot be cloned. As the world’s innovation engine, Silicon Valley should lead the way in commercializing game-changing technologies that can ease constraints on the world’s resources and enhance production. Instead, it has found more success in ventures for the consumer market.

But start-ups must be close to their customers, and there’s a case to be made that industrial and clean-tech start-ups in Silicon Valley have been hard-pressed for success because their real customers are in emerging markets. From an economic standpoint, climate change and resource efficiency are more the problems of developing nations. Moreover, as the bankruptcy of American clean-energy start-ups like Solyndra has shown, innovation that needs to be propped up by governments is difficult to sustain.

Similarly, consumer Internet ventures in emerging markets are only able to clumsily copy ideas from abroad. Though there is a rapidly growing middle class with Internet access in India and China, the United States still has the world’s largest and most affluent consumer base, making it a natural pioneer for consumer Internet innovation.

The Internet is challenging the hegemony of nations. An Internet start-up in any country can reach consumers worldwide because of the platform’s openness. But the same isn’t true for production-focused start-ups. Greater economic integration and free trade will help them globalize more easily. To foster innovation in production-oriented sectors, nations need to champion the freer flow of technology, labor and capital and create institutions and laws that promote the same openness. There needs to be a symbiosis between entrepreneurial talent, investment capital and sectors that are in need of transformational innovation. Only then will global economic growth be truly inclusive and harmonious.

Originally Published: The New York Times International Weekly

Unshackling India’s Domestic Capital Base

Harsh and I have co-authored a piece on why India should expand the participation of domestic institutional investors in the equity market:

India’s economic growth has been achieved on the back of sustained investment and improved capital allocation in the economy made possible by structural reforms. However, we are once again approaching a scenario where India may be heading into an investment famine, which would then translate into sub-par growth.
But India is being starved for investment just when several domestic institutions have significant investible capital but are barred from deploying this capital in the economy as equity investors.
More here.

Involve Investors Early In Business Plan Competitions

University and business school entrepreneurship events and conferences in India tend to be clustered in the winter season. Participating in business plan competitions and panel discussions on startups and ventures is par for the course for most venture capitalists around this time of the year. IIT Kharagpur, IIM Ahmedabad and IIT Bombay were among some of the institutions where I participated in entrepreneurship events this year.

The structure and format of the events can be critical to the value that entrepreneurs and investors derive from it. Business plan competitions are standard fare at most events, and serve a vital function in the venture ecosystem. Venture capitalists get to examine potential investment opportunities, and entrepreneurs get an opportunity to present their ideas and get feedback from investors. Business plan events are in many ways the most important segments, the raison d’être of the conference.

But if the process of selecting ventures is not designed and executed thoughtfully, the business plan competition can quickly become a waste of time for everyone instead of being a well-curated platform where startups and investors can talk to each other and form an initial connection.

There are a few simple things that should be done to make business plan competitions more productive for investors and startups. The conference organizers, typically the finance or entrepreneurship clubs at the universities, should work to involve investors as early as possible in selecting the startups which make presentations on the day of the event. Allowing investors to have a say in picking companies invited to present refines the selection process and ensures that companies which otherwise may fall through the cracks are not overlooked in the rough and tumble when busy students take up the responsibility of organizing an on-campus event.

IIT Bombay has taken the lead and incorporates investor feedback for startup selection. Others would do well do adopt this as a best practice.

Besides investor involvement, putting in place simple and thoughtful filters that self-select ventures of a certain minimum standard would greatly enhance the value of business plan events. Such criteria need to be designed carefully.

India’s venture ecosystem is still in its infancy. It is important to get the processes and systems in place correctly at the beginning to ensure that the right companies are able to get visibility.

As things stand today, there are many more companies that are looking for funding than there are entrepreneurship conferences that organize business plan competitions and startup showcases. There must be several companies that deserve the platform, but don’t make the cut because of thoughtless selection process design. Fine-tuning and standardizing the process across events will ensure that investors know exactly what to expect and the time investment and travel typically required to attend is worthwhile. For entrepreneurs, it would mean transparency and consistency in selection procedure along with merit being rewarded. Overall, events would be more interactive and productive for all participants.

Originally Published:

Aamir Khan and The Pursuit of Excellence

Film-making is very similar to entrepreneurship. The role of a film producer is analogous to that of a venture capitalist. Good producers, like smart venture capitalists, know that it’s not just about writing a check and it’s not just about big stars and quality music. In the same way, simply providing venture funding or throwing money at a start-up cannot ensure success, and it’s not necessarily a great thing for entrepreneurs to have lots of work experience and domain expertise in their industry. The actors and the director, like entrepreneurs, work to bring the script and business plan to life. More than anything else, making a good film and building a business from scratch both require oodles of creativity.

Aamir Khan, whose latest film 3 Idiots hit the silver screen recently, has built an awe-inspiring track record as a film producer, director and actor. Khan is consistently inconsistent in an industry known for its formulaic fare. Like venture capitalists, who tend to think and invest in herds, film producers tend to go with “what works” at the box office. Aamir Khan, as actor and more recently as producer and director, has broken new ground with every film, especially since the release of the Oscar-nominated Lagaan in 2001, defying categorization as an action, comedy or romantic actor.

Mr. Khan achieved considerable commercial success as producer, director and actor in a film about a dyslexic child’s travails with the schooling system, a subject unheard of in Indian cinema. When he has been associated with projects where the story is more formulaic, like in last year’s romantic comedy Jaane Tu Ya Jaane Na and action flick Ghajini, the treatment has been refreshingly different. Mr. Khan has mastered the balance between art and commerce, pleasing the critics and pulling in hordes of audiences at the same time. With 3 Idiots, the cumulative box office collections from his last three films are projected to exceed 5 billion rupees, or $109 million. By Bollywood standards, Aamir Khan is a one-person industry.

There are several lessons that one can draw from Mr. Khan’s success. The defining characteristics of his approach seem to be his selectivity when committing to a project and his insistence on working with high-quality people. Many venture capitalists tend to make more investments than they can understand or manage, hoping that a few might hit, a philosophy known as “spray and pray.” Producers and actors, too, have followed this approach. Nowadays, all actors like to profess the virtues of selecting the right script and focusing on one film at a time – an approach which, incidentally, was pioneered by Aamir Khan.

Through his cinema, Mr. Khan has also made subtle political and social pronouncements. His art has been imitating life in India, whether it was the anti-establishment stance and anti-right wing-extremist undertone of 2006’s Rang De Basanti, or 3 Idiots, which talks about how parents pressure children to achieve academic success and the mechanical approach to education at most Indian universities. Pursue excellence and success will follow, the protagonist in 3 Idiots reminds us.

Mr. Khan’s recent cinema has sensitized millions of parents to let their children become what they want to, rather than forcing them to be doctors, lawyers or engineers. The subtext of why parents would wish so for their children is, however, missing from the narrative.

In a socialist India with strict government control over economic activity, those vocations were likely the only ones which came with a certain guarantee to a minimum standard of living. Since the liberalization of 1991 and the boost to economic freedom given by the BJP-NDA government from 1998-2004, career opportunities have expanded dramatically. Today, young Indians can be productively employed as radio jockeys, artists or sportspeople. Popular attitudes haven’t caught up with the growth of opportunity and the majority of Indians continue to believe that what you study in college should dictate what you do in life. It is incomprehensible to the pre-1980s generation why someone might choose to study literature, or why an engineer might want to be a photographer. This stems from the perceived or real lack of economic opportunity in “unconventional” career choices, and the solution is economic liberalization.

Creating an environment that allows people to pursue excellence in a field of their choosing is what makes for a prosperous and happy society. The importance of effective policy design and implementation cannot be over-stated to achieve that end. In that context, last year’s Right to Education bill was a major letdown. It does not allow individuals and communities to run schools as they would deem fit, favoring needless government control instead. It focuses on rationing existing supply instead of sowing the seed for capacity expansion.

The consequences of such a policy are very damaging, directly affecting the quality of human resources available to startups and established businesses alike.

Since 2004, there has been virtually no progress on economic liberalization. Without it, India’s true potential will remain untapped. Aamir Khan has started a revolution of sorts in drawing rooms across the country by bringing attention to the state of the schooling and higher education system. The liberalization of the economy and the education sector must go hand in hand. Any other policy is a deliberate denial of opportunity to millions of Indians. Perhaps Aamir Khan would do well to make a film on this impossible topic, and then we can expect life to imitate art.

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