Over nearly a decade, I have had the pleasure of watching the Indian venture ecosystem evolve not just as an observer on the outside but an active participant on the inside. As I sit on yet another long haul flight, I have the time to contemplate and think through the ebbs and flows of Indian venture capital over the years and perhaps where I see India heading in the near to mid term. As a matter of fact, my own personal and professional life has been tightly coupled with that Indian ebbing and flowing.
Over the years, I have also had the pleasure of spending time with Bill Draper who arguably was one of the first US-based venture capitalist to invest in and be bullish on India in the late 1980s. He invested in some of the earliest tech and tech services companies and had folks like Abhay Hawaldar and Kiran Nadkarni working with him back then. But the first real wave of US VCs started in earnest in the late 90s and early 2000s. The Y2K phenomenon led to the scaling effect of the large IT services companies like Infosys, TCS and Wipro. India came on the global technology landscape in a significant way. Silicon Valley VCs saw that as a key, leading indicator of entrepreneurial investment opportunities in the country. So, they came, one by one, but as tourists, eager to spend money/invest but without necessarily a deep-rooted intent of establishing a serious presence in the country. There was no real venture capital, outside of a few exceptional individuals and some pseudo government entities at the time; so the Sand Hill folks could afford to (and some would argue, had to) be tourists. Investors were attracted by the largest democracy, young demographic, emerging middle class, growing economy, and the perpetual parallels with China’s explosive growth. That was the first wave.
Marquis Silicon Valley tech VC firms like Battery, Norwest, Walden, Trident, Bessemer, Sierra, NEA, Mayfield, DFJ, SAIF and KPCB are just some of the names during this initial phase of India investing. The idea was to be early, have their pickings and catalyse entrepreneurial growth in the newest and potentially one of the biggest tech startup markets in the world. But the modus operandi was very different than the typical VC investing protocol in their local market. Rather than having a physical presence in India, most VCs decided to visit one-four times/year, meeting a handful of startups, established players, government entities and making their initial investments. This was the “dipping their toes” phase of the India investing. DFJ itself made several sizable investments in companies like Komli, Reva and Live Media during this phase.
The next phase, which started in the mid 2000s was one of “satellite operations” when some of the phase 1 VCs seemed convinced enough to establish a physical presence of some sort in India, while others exited. Those establishing India operations during that time included DFJ, Canaan, NEA, Norwest, Bessemer, Mayfield while others like Sierra, Battery and Trident exited, realising that they didn’t have the bandwidth, resources or returns to justify investing in India through a global fund. During this satellite phase, while there was a team on the ground, the investment decision-making still resided primarily or entirely within the respective US mother ships in Silicon Valley. I was part of this second phase of investing in 2007 when DFJ decided to set up an office in India and brought me on board specifically for that purpose. By the way, the phase 1 to phase 2 transition was also initiated not only by more conviction on part of the investors, but also increased competition which required more real time (rather than a quarterly batch processed) access to entrepreneurs.
The current third phase is really the most interesting to me. This started around 2006/2007 with further bifurcation of those VCs who were really “all in” with respect to India versus those who wanted optionality and felt that having a satellite office was good enough. For US investors, this was the proverbial “S#@t or get off the pot” moment. This was also the period when local funds like Nexus, Helion, Erasmic, Inventus and NEA, IUVP/Kalaari got established. For the first time, Sand Hill VCs faced real competition from home grown players. Decision making became a real constraint for those who were running the satellite operations (like yours truly), trying to compete with local firms, wanting to move quickly but still encumbered by investment committees in the US full of partners who often did not have their pulse on the Indian market. As a result, local players thrived and I would argue, were able to get preferential access to some of the most interesting startups. During this period, several Sand Hill firms decided to double down on India by either strengthening their captive presence in India or simply pseudo acquiring local firms. Accel partnered with Erasmic to create Accel India, Sequoia did the same with WestBridge to create Sequoia India and Matrix India was established as a sizable fairly autonomous entity, albeit coupled tightly with Matrix US. Firms like Mayfield and Norwest with senior partners (Navin Chadha and Promod Haque, respectively) who had strong personal ties to India, decided either to raise dedicated India funds or carve out a very meaningful portion of their overall global fund towards investing in India. My personal take is that with a maturing ecosystem in India, those still following a satellite model without local decision making authority, will struggle.
What is interesting to me is the very dynamic nature of a market like India. There are those who are bullish on the country’s prospects and are putting real resources to work. There are others who are on the sidelines waiting for India to mature further before stepping. There are yet others, like Silver Lake Kraftwerk and Google Capital with their initial investments just beginning the tourist or a partial satellite VC journey. Time will tell whether they will go through their own phase 2, 3 and beyond.
At the same time, the early stage ecosystem is evolving quickly with new indigenous funds being created at an accelerated pace, angel groups, and seed VC firms like Blume, Kae and Orios finding solid footing. The late stage craziness of 2015 brought in sovereign wealth and hedge funds into the mix, with most of them being opportunistic entities without a meaningful, if any, presence in India. While they seem to have withdrawn, the Chinese strategic investors have come with significant velocity into the country (as the Chinese usually do) and with deep pockets and long-term view on the country, are no doubt going to stay and change the landscape significantly over the coming years. I am having the kids learn Mandarin, by the way, to be more prepared for the new world order.
I think all this ebb and flow is good for India. New funds need to be and will be created carving out their own niches, whether stage or sector based. Overseas investors will need to decide how quickly they can move from the “toe in the water” phase 1 to an “all in” phase 3. Some funds may disappear based on performance or other issues. White spaces will emerge, and new funds will be formed to fill those gaps. During my conversations with the VC brethren in Silicon Valley, there are many who are eyeing India, and perhaps waiting for meaningful exits to start happening before they truly commit to India. Democratisation of resources (human capital, financial capital, technology capital) in the largest democracy in the world will create opportunities that we cannot even imagine at this time. With young Indian innovators opting to start companies rather than work for large ones, plugged into global innovation hubs like Silicon Valley, I have no doubt that world class companies will continue to be created from India at a faster and faster clip. I am personally bullish on the country long term (despite the current tech startup hiccups) and am betting my career on it. Finally, I am delighted to be back in the thick of it all with a new fund called Iron Pillar. I look forward to telling the world all about the firm in future posts. Stay tuned…