Thursday, July 06, 2006

Indian Venture Capitalists (VCs): Nothing venture about them

Venture Capitalists (VCs) are called so because they take risks (they venture). Silicon Valley has many VCs firms which take huge risks and bets. This capital inflow into high risk companies had directly led to the dominance of Silicon Valley. For example, there is a company that launches balloons and airships into sky to give subscribers wireless service and it has gone IPO. When I heard about it I couldn't imagine how this company might have got VC funding. Imagine their pitch to those VCs and imagine the balls those VCs had who funded them. Most of the VCs in Silicon Valley know that most of their investments fail. Very few succeed and those that succeed seem to compensate for all their losses. Usually, VCs have some kind of thumb rule that they use. For example, a VC firm X may believe that out of their 10 investments, 8 will fail and only 2 will succeed. Such risk taking ability makes them 'venture' capitalists (VCs).

In India, you do not see VCs taking those big risks and big bets. In my opinion, there are no VCs in India; we only have private equity players. Private Equity investors take a business that is doing OK and make it better. Usually most of their investments show positive trends and very few fail. There is nothing risky about it. The only risk they are talking about is if the returns would be lower than their expectations (like 20% IRR instead of 30% IRR). They are not looking at failure at all. If a VC tells you that he had only successful investments so far with pride, you better know that he is a private equity player and will never 'venture'. If a VC tells you that he needs to see some revenues before he can jump in, please be assured that he is a late stage investor or a private equity player. A VC in Silicon-Valley-sense takes a big bet- he looks at the idea, he looks at the team, and he gauges the market (which may not exist) to take a bet. Such risk taking ability spawns new ideas- revolutionary, radical and innovative, NOT conservative, run-of-the-mill and cliched ideas.

Just look at the deals made by top name 'VCs' in India in the last one year or so. You will see that most of them are actually private equity deals. Even those Silicon Valley VCs, once they come to India, seem to play a low-risk game.

1 comment:

Rajiv said...

A good analysis on why there is no risk capital in india.