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Category: Venture Capital

Venture Capital

  • Riding The Indian Education Boom

    India’s education sector is seeing hectic entrepreneurial activity and private equity investors are deploying significant capital in this sunrise sector. Funds focusing exclusively on education have emerged. Recently, education company Kaplan announced the formation of Kaplan Ventures, which will invest in the education sector in India and other countries.

    There are a few structural drivers to the boom in India’s education sector.

    First and unusually, the Indian government has made a commitment to restructuring the policy framework, including the setting up of foreign universities in India. Human Resource Development Minister Kapil Sibal has taken a few steps forward, and some backward, but for now even the mere promise of reform and more openness in the sector is sufficient to generate hope and excitement that spurs investment and business plans.

    But some caution would be apt. There is a strong case for regulating the sector and putting in place standards and guidelines for what it takes for an educational institution to be recognized as a university or school. Without sound regulatory norms in the early stages, the education boom may fizzle out to the detriment of investors, entrepreneurs and India’s economy. Regulation, however, should be left to individual school examination boards and professional accreditation bodies as far as possible, distributing rather than concentrating authority.

    For instance, there has been a profusion of institutions offering the International Baccalaureate program for high school students. The IB is governed by the IB Organization based in Switzerland, which sets its own standards for what it takes to be an IB school. The government should empower Indian boards to set standards in the same way, for this would allow for competition between boards. Schools, private and government-aided, should be free to choose the board they want to offer, to design the admissions mechanism and to charge the fees they wish.

    Second, India is entering a phase of demographic change that has far-reaching consequences for society and the economy. According to research from Deutsche Bank, India will be adding almost a million people to its labor force every single month for the next 20 years till 2030. That’s a staggering number of people, equivalent to the current populations of U.K., Germany, Spain and France combined. The only comparable demographic shift from recent history is the post-World War II baby boom in the United States. Skill development, training and education will be among the first areas where all those consumers will want to put their money.

    These trends will only accelerate, making the education sector very attractive for both entrepreneurs and investors. Moreover, without private capital and the participation of entrepreneurs, India simply cannot train and educate a workforce of this size.

    While projects such as building full-fledged schools and universities would be beyond the reach of most first-time entrepreneurs and are typically not “fundable” from a venture capital perspective, ancillaries like infrastructure, technology and services are attracting investments.

    In 2009, TutorVista, Career Point and FIITJEE were some of the companies offering training for competitive university admission examinations that saw substantial investor interest. The most successful companies in the sector so far have been those that are providing information technology and software solutions to brick-and-mortar institutions. Companies like Educomp Solutions and EdServe Softsystems have combined the high margins of the software business with the scale and opportunity in the education space.

    Education is a very large canvas. The challenge is to identify the areas within it that will be the most profitable. As the sector evolves and grows, opportunities which cannot be anticipated today will soon emerge.

    Originally Published: WSJ

  • Venture Investors In India Must Rethink Bets

    According to Venture Capital deal data released late April, investment in India doubled to $259 million compared to the first quarter of 2009. While more than $210 million was invested in business services and financial servicescompanies, very few companies from cleantech or health care made the cut.

    In contrast, U.S. cleantech venture investment for the first quarter more than doubled compared to last year, proving to be more resilient that other investment sectors, with 72 deals attracting over $730 million in capital.

    The other revealing aspect of the India data was the median deal size, which more than tripled to $10.4 million. This is rather curious, that Indian services companies are absorbing as much capital as U.S. cleantech companies even though dollar for dollar, salaries, overheads and other startup costs in India are much lower.

    The data also suggests that the surge in venture funding was for growth-stage investments (investments targeted at companies that already have products and substantial revenue) in services companies, while there is ample room for allocating capital to early-stage companies building products.

    There are three reasons why investing in early-stage startups would be optimal for maximizing long-term returns.

    First, in many cases, promising companies are not able to reach the stage where they can justifiably raise the minimum level of a few million dollars that most VC firms in India like to deploy in each investment. More early-stage funding will increase that deal pipeline for growth equity investors, expanding opportunities for the entire ecosystem.

    Second, as Sanjay has pointed out, VCs have been playing it a little safe, shying away from home-run bets and settling for lower but more predictable returns. And as Internet entrepreneur Rajesh Jain wrote in a blog post recently, VCs in India act like private equity investors, and private equity investors act like banks – and as fellow panelist Sanjiv Bikhchandani has noted, India’s nationalized banks are not known to lend easily to new ventures and to small and medium enterprises. Venture capitalists must not abdicate their role of providing risk capital to ideas and sectors which more conventional investors would not touch.

    And finally, funding directed at technology-driven, product companies offers the prospect of outsized returns for investors, though this demands patience. A casual survey of the best exits for venture investors suggests that some of the biggest hits have been product companies with a strong technology differentiation – Google and Genentech come to mind. In a developing country like India where tens of thousands of people enter the workforce month after month, new ventures and small businesses have an important role to play in creating jobs.

    While the increased venture investments in India is encouraging, it also highlights an investment deficiency in sectors like cleantech and life sciences. Venture investors should introspect on where they are placing their bets. Adjusting strategies towards early-stage funding for product companies is in everyone’s interest and would grow the entrepreneurial ecosystem manifold.

     

    Originally Published: WSJ

  • 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: http://navam.in/1h8y6gM

  • 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.

    Originally Published: http://navam.in/1p68f9H

  • Crouching Tiger, Hidden Dragon

    The reports of the death of globalization have been greatly exaggerated, if investing trends in venture capital qualify as a compass for the future. According to a survey released June 10 by the U.S.-based National Venture Capital Association, half of the venture capitalists said they would increase investments in China and other Asian countries over the next three years, while 43% of those surveyed said they would invest more in India. (see the survey here)

    Just 17% said North America would see more VC investment. A large number of VCs also expect an upswing in venture fund backers, usually financial institutions and wealthy individuals, coming from abroad. The overarching trend is clearly towards global investing.

    Perhaps reflecting how the rest of the world views Asia, the survey has interesting choice architecture: India has been given a separate standing, while China and the rest of Asia are lumped together. It could have been the other way round, but isn’t. Putting aside compelling arguments derived from history and culture, the distinction also reflects the different economic growth models adopted by India on one side and the Asian tigers and China on the other.

    Since Deng Xiaoping ushered in socialism with Chinese characteristics, Asia’s dragon has established itself as the epicenter of global manufacturing, winning accolades for its efficient factories and seamless infrastructure. In the 1980s, the rise and dominance of Japan was conventional wisdom, and China didn’t really dominate the public discourse. The Chinese state, rather than the citizenry, has catalyzed this transformation, driven by massive public investment.

    India’s development has been more organic, with entrepreneurs usually growing their businesses despite the government rather than because of it. The founder-CEO of a leading India-based power equipment manufacturer once recounted to me how the government hindered his business and powerful bureaucrats extracted rents every step of the way, from the stage where the product left the factory in trucks to the point where it was loaded into containers at ports. The process made a business manager a “pehelwan” or a strong wrestler able to deal with any eventuality, he said. In China, he added, the government assists rather than hinders enterprise.

    Indian entrepreneurs have to beat their competitors and deal with a government that is not the most enterprise-friendly. In an almost Hayekian way, some of India’s self-created barriers to entrepreneurship have made Indians entrepreneurs that much more hardy and competitive, mirroring the aspirational urge of India’s people.

    Besides offering a large labor force of English-speaking people and a democratic system, India is also far more capital efficient than China. Since the early 1990s, India has invested about 25% of GDP and obtained an average GDP growth rate of about 6%, while China has invested over 50% of GDP and obtained an average growth rate of 9%.

    India is a better capital allocator, requiring four units of capital to generate one unit of output, while China consumes about 5 units of capital to generate 1 unit of output. As economist Niranjan Rajadhyaksha puts it, capital efficiency is the reason why India has “few good roads but many world-class companies.”

    For investors, return on invested capital is the metric to watch, and India widely outperforms China on this metric. To make itself an even more attractive investment destination, India has also started taking steps to reform higher education, a key ingredient to drive economic growth through technology and innovation.

    China has invested relentlessly in education over the last three decades, and the seed for change was sown by Deng Xiaoping himself, who resumed in 1977 the Gao Kao entrance examination system suspended by Chairman Mao. University student enrollment has grown nearly 50% and the number of universities has doubled since 2002. In the meantime, India has only succeeded in creating special interest groups competing for admission into premier colleges based on identity rather than merit, and starved its citizens of world-class universities to the point that more Indian youth study abroad than any other nation.

    Education Minister Kapil Sibal has spoken at length on re-organizing the higher-education institutional framework at all levels and reducing government control on education. He sounds like he means business.

    From purely a development standpoint, India needs more investment from abroad in the form of both foreign direct investment and venture capital than China does. Global investors are eager, and Indian entrepreneurs have demonstrated that they are a cut above the rest. It’s now up to the state to ensure that it doesn’t fritter away the merit of the Indian entrepreneur.

    The crouching tiger might spring a surprise.

    Originally Published: http://navam.in/1ouVZhG

  • Harnessing India’s Technological Potential

    Over the last decade, clean technology and nanotechnology have emerged as prominent investment themes in venture capital.

    According to New York-based research firm Lux Research, venture capital investment in cleantech and nanotech has grown at about 40% annually since 1997. Rapid advances in the physical sciences and materials engineering have ushered in everything from hybrid-electric cars and lighter airplanes with substantially enhanced fuel efficiency to eco-friendly specialty chemicals and stain-resistant apparel.

    As China and India industrialize, there is a glaring need for such innovation to ensure that limited natural resources are consumed with high efficiency. Venture capitalists have a key role to play in fostering that innovation.

    VCs typically consider India to be just a technology deployment market. That view is too narrow: India has not just the entrepreneurial competence but also the scientific talent to invent and lead in science-driven innovation.

    The American model for technology commercialization has proven to be highly successful. Corporate giants such as Hewlett-Packard, Genentech and Google took root at universities.

    More recently, President Barack Obama unveiled the government’s biggest infrastructure investment plan since the creation of the U.S. highway system with energy efficiency as its cornerstone.

    Prof. C. N. R. Rao, chairman of the Prime Minister’s Scientific Advisory Council and one of India’s most distinguished scientists, has worked tirelessly for the cause of science education and research, recently obtaining a grant of over $200 million from the central government for fundamental research in materials science and nanotechnology. When I met him in July last year, he lamented the lack of enthusiasm for science and technology in India, and commended China’s nationalist zeal for building prowess in high-technology.

    There is no dearth of scientific ability in India, but Indians prefer to work in laboratories abroad thanks to the lack of cutting-edge infrastructure in their home country. What’s missing here are incentives for innovation and entrepreneurship.

    The Indian government has promoted investment in renewable energy sources such as solar and wind, and these sectors are beginning to see some traction. However, India is still way behind both the U.S. and China.

    Economist Joseph Schumpeter feted the entrepreneur as the growth-driver of an economy, the “wild spirit” who would cause creative destruction by innovation and disruption. A market-based mechanism must be adopted, but the government has a vital role to play in setting effective policies. The government should invest in basic scientific research and introduce reforms in higher education, allowing for the creation of more world-class universities.

    Culturally, Indian scientists are hesitant to partner with entrepreneurs and external investors. For some Indians, the traditional concept of education clashes with the notion of commerce. Profit is still a dirty word in India’s academic circles. This malaise is partly caused by the red tape stifling Indian educational institutions.

    Basic mechanisms for technology transfer are absent or deficient at leading Indian universities. When the appropriate systems are in place and research institutions are forthcoming, venture capitalists and entrepreneurs can license and commercialize technology, moving it from the lab to the market. Taxpayers get a return on their investment in the form of better products and increased productivity if investors and entrepreneurs are able to beat the odds and succeed.

    Otherwise, research remains research. IIT Delhi and IIT Bombay have taken the lead by establishing sophisticated infrastructure for technology transfer and venture incubation. I’ve seen technology transfer offices at some of the world’s leading universities, and the offices at these two Indian institutions are comparable to the best. Others would do well to follow their example.

    The next step should be the establishment of a national group to represent the voice of science-driven innovation, on the lines of the Indian information technology industry’s Nasscom. With prudent government policy and a thriving ecosystem, private capital can kick-start the transformation of laboratory inventions into marketable products.

    India missed the information technology and electronics manufacturing wave. If India is to transform itself from an economy driven by agriculture and services to one with high-technology industry and manufacturing as its bedrock, it should put in place effective policies to ride the new Schumpeterian wave of creative destruction driven by physical sciences-based technology.

    Originally Published – http://navam.in/1iL8eTr