Sandeep Murthy of KPCB & Sherpalo Ventures, in response to Sloka Telecom CEO Sujai Karampuri’s comments on the apathy of Venture Capitalists towards technology componies:
Interesting discussion… here’s how I look at our business:
As in all businesses, VCs will look to find ways to mitigate the risks involved in generating returns… a starting point for this is a need to understand the market that the entrepreneur is addressing… in understanding this market there needs to be an alignment of vision between the entrepreneur and the VC that the market has a need, the opportunity exists to disrupt in that market and that the chosen path is the best manner in which to disrupt. This is a large part of what the VC / entrepreneur dance is all about.
I agree that Excel spreadsheets are not the metric for decision making. Excel spreadsheets provide insight into the entrepreneur’s underlying assumptions… what are the revenue drivers, what are the cost drivers, at what pace does the entrepreneur believe the market grow, what are the views on the long term margins in this business, if everything turns out as projected. This in turn gives insight into the factors that the entrepreneur believes are necessary for success. It is not an “end all be all” of understanding the opportunity, nor is it the sole means to learn about an industry; it is a tool that helps align views on what must happen in the world to make the business a success. In addition to the drivers of the Excel model, customer references and validation play an important role in providing comfort that there is market for the product and insight into the pain points… we spend a lot of time speaking to people in the industry in an effort to understand the market and the opportunity.
The reason “Me-Toos” are attractive is that the market is understood, the execution challenges are clear, so with tweaks (sometimes minor, sometimes major) there is a belief that the risks in these businesses are manageable.
One way to make the dance between VCs and entrepreneurs easier is to engage with VCs that understand your space… find people that know the industry you operate in (i.e. if you are building a telecom solution, see if you can find the firm, or even better, the partner at the firm who knows about the telecom vertical)… if you find the right person that understands the industry, you will no longer have to worry about helping them mitigate the general industry risk and perhaps they have enough understanding to dig into the core of the product differentiation and have the requisite contacts to be able to get the market validation.
On the topic of Entrepreneurs as VCs; I agree that more entrepreneurs should go and start businesses rather than become VCs, but the reason many entrepreneurs find themselves valued in the venture community is that they provide comfort that post investing in the business the VC can help beyond just the money… here again this is about risk mitigation… knowing that you can be a part of helping with the end outcome gives some comfort while investing in new areas.
This is a great discussion and I applaud Sujai for taking the time to voice his opinions and frustrations… hopefully through ongoing dialogue we can find a way to make the process of matching money with innovative ideas as frictionless as possible.
Rajeev Mantri of Navam Capital also weighs in with his comments:
I agree with most of Sujai Karampuri’s diagnosis. VCs in India, especially most of the big names, should call themselves private equity rather than venture capital investors.
They usually play it safe by investing in things that have worked – copycats of successful US portals, or service-based outsourcing companies that are basically cost or labour arbitrage plays. The only innovation involved is in human resource management.
But the fact is there is little product innovation in India, even at major corporates in IT or pharma, whether it’s Infosys or Ranbaxy. You can probably count innovative Indian CEOs on one hand: I can only think of Ratan Tata and Kishore Biyani.
Moreover, when you can generate returns by investing in real estate and retail, why bother with innovation? In India, many sectors are so nascent that they see technology-style growth. Hence, there’s no need for Indian VCs to invest in disruptive innovators, which are probably far riskier. You probably can’t make 10x returns in the US by investing in retail and education startups, but you can in India.
I’ve also heard from many entrepreneurs that VCs in India simply have too much money to invest for the typical seed or early-stage company – starting up with Rs 50 crore in the bank is not a good idea because it destroys the startup and innovation culture at a new venture and kills entrepreneurial hunger, according to one entrepreneur-turned-VC I know.