India is a hot venture destination. My earlier post about TiEcon Delhi talks about the excitement I could sense amongst both the entrepreneurs and the VCs at the conference. In the same post, I also outline how I think the venture scene in India will play out – very different from what it looks like today in the US. Much of the VC community does not realize just how different it will be and is leaving big underserved gaps in the market.
Flat world ventures are one of those underserved segments. But first, what do I mean by a flat world venture? A flat world startup is one whose product or service is largely put together or provisioned in India for markets that are largely developed markets outside India. Our venture, Gridstone Research, would be an excellent example of a flat world startup. We do our company research and our software development in India and our markets are (currently) in the US.
Why are flat world startups underserved by the venture industry? Like all startups they need capital, connections (customers, partners, senior hires), and counsel. But it is very rare that you will find a VC who is as familiar with the Indian market as he is with the US market. His expertise, his connections are typically more slanted towards one of the two markets, but not both. So if he has spent his entire career in tech companies and VC firms in the US, his networks are in the technology sector in the US and can help in making introductions to potential customers and partners, but isn’t much help in hiring senior tech personnel in India. If, on the other hand, his background is in the Indian corporate sector or one of the early venture firms in India, he can use his connections to hire senior technology or product executives in India but can gain no market access.
This has an impact on the availability of funding to entrepreneurs as well. VCs like to keep the management of their investee companies as close as possible to where they are. Sequoia, I believe, doesn’t invest in companies that aren’t in or won’t move to the Bay Area. What this means is that entrepreneurs in India don’t have access to VCs in the US. They will typically have to go to VCs in India. However, out of these Indian VCs, only some will have the experience in developed markets that is necessary to evaluate an investment opportunity. And those few that do, because they just moved into India, will be ill placed to help their investee companies – no networks in India and too far away from the US to actively help in making connections there.
I recently met a couple of old batchmates from IIM Ahmedabad. Their startup is having to deal with this gaping hole in Indian VC setup. Their startup offers a service that is a very sophisticated and niche service – a derivatives processing platform targeted at hedge funds. The market is large, growing and pays top dollar. The founders have great resumes. They already have an implementation going at an Indian securities shop. Normally, you’d have VCs eating out of your hands with a story like this. But that isn’t the case here. Their product/market is so specialized that there aren’t any VCs in India who can assess the market opportunity/risk equation.
This story is going to be repeated again and again for flat world startups where the founders are in India. The entrepreneur will have to compromise – take dumb money or settle for a low valuation. Which is a shame because I think there is great potential in flat world ventures, certainly more than in the small Indian domestic tech market which seems to be getting more press than it deserves.
In case there are VC firms out there that realize the potential in the flat world theme, here’s what they would have to do:
1. Have offices in both India and the US with General Partners in both offices. It is important that the Indian office not be perceived as a satellite office staffed with junior staff.
2. Associate two partners with every flat world investee company. One, in India and one in the US. Assuming only one board seat, the other would be observer. But both would be actively involved in the company. This is a big commitment but believe me, it is worth it.
3. Create a culture of sharing and ‘boundarylessness’ within the firm which allows ideas, connections to flow freely across the globe. This will bring a global perspective to firm partners in both India and the US and make them both look smarter to entrepreneurs.
4. Get used to doing business over video conference, telephone or skype. Its that, or constant jet lag – take your pick. The reassuring handshake will get rarer, unfortunately.
5. Be ready to partner. If you can’t immediately do 1 through 4, do the next best thing – build a network of like minded VCs at the other end of the world who you can co-invest with.
In short, if you are a Venture Capital firm and believe in the flat world theme as a big one to bet on you’ll need to ‘flatworld’ yourself to make it work. There, I’ve made a verb out of it now. I wonder if I’m the first person to do that? Well, I’ll just have to Google that and see what turns up!