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!
That’s a thought provoking article Basab. I can understand how Gridstone is competing hard with the likes of Thomson Financial and Factset in the US who have a definite advantage over their locations.
I think you have made an assumption about the market being in the US.
1.Most of the VC investments in India target Indian markets (cleartrip, seventymm) Of course if its a built to flip thing like baazee and ebay i understand the networking in USA thing but otherwise i suspect it might be redundant
2. Taking dumb money- depends on what you are doing as well. Sequoia might help Guruji by maybe using the right ppl in Google, but I dont see how someone can help lets say meravideo.
However flat a world, it can never be flat enough! and Thats good!! That’s the opportunity for new business. New gaps will create new VCs. Find the gaps, not the VCs. Gaps will drive the world. e.g. India didn’t have Travelocity. Today she has got ClearTrip. US doesn’t have Shaadi, tomorrow it will!
We have an organization that has already flatworlded itself. (I have decided to support your creativity. :-)).
Its Intel Capital and I work for that firm. We always have sector specialists in the US who work closely with our biz units and have Geo specialists outside US that have local expertise in their respective countries. The US partner works closely with the Geo partner in evaluation and closure of an investment. We recently invested in the World’s first “engineering services” company in India – Vignani. As usual Vignani’s customers are outside India and are well known to our US sector specialists. Hence customer introductions happen in a jiffy due to our US rolodex.
We also have ITDs (Intel Technology Days) in most of the countries we operate in and try to bring our diversified international portfolio to the local blue chips & OEMs. One of our recent success stories involved an Israeli company partnering with Satyam in India which according to the Israeli CEO would have never happened if not for our efforts.
Perhaps, we could help your IIM-A friends launch the hedge fund derivatives processing platform company. How about an intro? I can be reached at email@example.com.
I think your structure at Intel Cap makes a lot of sense. And I’ll let my friends know.
Thanks for the ref.
Sudhir – We have developed a derivatives portfolio risk management platform that provides front office for deal pricing and deal capture, mid-office for risk analysis,hedging strategies and back-office for settlement, compliance and acctg. The product is already rolled out at UTI Bank in Mumbai. We are also, planning to work on KPO for the derivative and treasury dept of banks and hedge fund administrators as we have the necessary systems that can be used for this and also we have the trained resources which can be deployed to get the KPO off the ground. Since its difficult to get experienced derivatives professionals, we have developed a 3 months training program wherein we can get a smart candidate and get him ready with required knowledge in derivatives.
We are based in Pune and my contact is 98508-18497.
maybe they should seriously look at the business model of T-Zero.They are doin some great stuff with Bloomberg together.
1)Thats what the market really wants in CDOs or swaps.
2)Your friends need a carrier to relay the processed data.These carriers will generally (for now) be the big boys (bloomberg & co). Hedge funds do have a limit to screening, thereby they do check out Biggies to analyse credit post trades.
3)Plain Vanilla Credit processing might not work, they need to work on the ITRAXX trades and then talk to guys like thomson financials, Reuters or Bloomberg to relay their processed analytics.Lets say initializing it by posting it through Reuters DTC, Bangalore.Thereafter overseas VC infusion should not be a big problem.
I guess it wont be that easy taking on thomson/Bloo/RTR without first riding on their networks, making a presence and then later going independent.
(ex product specialist, Reuters Germany)
(ex project manager, Reuters India)
Basab, you’ve rightly arrived at the solution of flatworlding VCs to suit Indian entrepreneurial ecosystem. I think the biggest problem with Indian startups today is lack of quality skillsets. You are bang on when you say “the small Indian domestic tech market which seems to be getting more press than it deserves”. Very well said.
Training can be a solution to some extent, but where it comes high end areas like multi-strategy quant fund derivatives, there’s only so much you can train. Would you train them on the financial products, asset class itself or quant techniques…? It calls for intensive application of a brilliant mind to capture the scenarios and deliver.
Best way I think is to hobnob with the domain experts in the developed world who’ve already done seminal work in the space. You can atleast have access to their market access, router libraries and feeds to familiarise yourself with the real challenge and dynamics in designing and execution of classic algorithmic trading solutions.
To add to sudhir’s point, i’ve heard the intelcapital head Michael.J.Scown speak.He pins up all his hopes on asia and to my dismay i see very little spoken about India. While i got in touch with him , he was pretty rhetoric as he mentioned that most VC’s hover around university campuses as they are the hubs of exciting work and India has a long way to catch up. Vietnam and Indonesia is where I-cap is looking at.
From what I have heard from Michael J. Scown, at a recent luncheon at my university and further discussing with him,
I found that most of the venture capital firms in Asia including Intel capital are not truly “venture” capital. (and my esteem VC&PE professor who previously worked for Hutchison Whampoa, and AIG supports this argument).
Most of the VC firms in Asia never fund a seed venture. e.g guruji.com or an youtube.com at inception.
Most to the VC firms enter companies which are up and running with substantial revenues and enter at a pre-ipo stage or a pre-buyout stage.
I know every VC firm has its own rationale but I really wonder, will this help the spirit of entrepreneurship in the developing economies like China/India.
I personally know a friend who left a lucrative job to start his own venture in virtual reality, and has been hunting for VCs for a long-time.
He had an initial funding from DRDO and then from an US venture capitalist, but never from an Indian VC firm.
Thought provoking post Basab…I have commented on it here:
I agree with all of your statements. Indian VC’s are ready to invest in companies who have positive cash flow, and who are ready to go IPO.
Our company has spent more than a million dollars in developing a ERP product for a hot vertical (e-governance vertical), and has customers who have paid, and many others waiting; But VC’s in India are NOT willing to take the risk of putting money into this space.
The potential market is big not just in India but also in other Commonwealth countries.
I am looking for VC’s who are interested social enterpreneurship. Do spread the word.
Basab, I cannot agree with you more. The gaps are very high in terms of US VC’s investing in India and challenges are much more. The way the business and cost structures work in India are much different compared to US. Here the flat world way will help narrow this gap. V.Thiyagarajan