The Startup Guy

This Article was written and Appeared in Dare Magazine May 2010

Most people in India would argue today that the country’s sensation about entrepreneurship and business is a recent one. Many would also tell you that Indians generally have an affinity to taking risks. A lot many more, along with the Media might also tell you that unless you raise venture capital, you’d never be able to build an enterprise in India.

None of those statements are true.

Entrepreneurship has been a movement in India since the late 80s when the foundation of commerce and business in this country started taking shape. You will notice that most of the government initiatives in terms of entrepreneurship are as old as the day when this country received independence. In the mid 90s when policies were framed to make enterprises flourish, and taxation rules helped them grow, and IT as an industry was born and started to take roots, it felt as if entrepreneurship has reached out to the masses.

It only seems that way because apart from a few major successes, and especially the IT industry which thrives on the massive tax subsidies of the Govt, we havent seen that growth being an inclusive one. It is capitalistic at best.

Go back to the roots of how businesses have been traditionally been built in this country and you would see a rather different story. Reports suggest that there are close to 32 Million small and medium enterprises in India and as per the definition of the report, these are entities that are generation more than 2-3 Crores in annual revenue. And there are 32 million of them, they say. The average number of companies that get funded by the Venture Capital community today in a year is around 150 – where then did all these companies raise money from?

Here is a question that I have been lately asking entrepreneurs and I get some rather disturbing responses to: Which is more riskier and has a higher rate of interest on it – a bank loan or venture capital money? If you are like most people, you would claim that its a bank loan, but it is quite possible today that you can take a bank loan at around 10 – 15% Interest rate, and apart from the collateral (there also being collateral-free loans now) there is not much risk to it. Take money from a Venture Capital firm – which is no more than a specialized bank – and you are committing to a 400% interest rate in a time frame of five years and the power to appoint other officers, liquidate the company and a seat at the governing board for them.

Ofcourse it all makes sense to make that promise when you can justify the nature of the business you are in, the growth rate and the stage at which your company is it, and if you are one of those really really really rare companies which can outgrow that interest rate – most companies will never be able to do that.

Why then arent the Venture Capital Firms telling you that? Truth is, they themselves havent figured it out. The Venture Capital Industry has a record of never performing as it should anywhere out of the pincode of the Silicon Valley. Even in the valley where there are close to 1000+ venture funds (compared to the 154 funds in India – According to the IVCA membership list), not more than 25 of the funds are profitable and make money. Most companies that are successful and make it past the headlines to us are ones that are being fostered by a select few. When the same model does not even span out in the same Pincode, let alone the same continent, can we really expect it to work miles away in a continent and country which has its own flair as to how things work? I guess not.

The Venture capital industry is a key component of a healthy ecosystem – but it is also just one component, not THE component. And in this scenario, there is much that the industry as a whole has to experiment, before they can arrive at the framework which will make sense for India. Currently, in no way does it do that. In the past five years, close to 1.6 billion dollars have gone into investment in India as PE/Venture Capital and very few of that dollars have made returns.

On the other hand look at the companies that you will find in the manufacturing sectors, companies such as Shakti Masala (which processes,packages and retails masala powder) which are less than a decade old and garner a whopping 320crores in Turnover a year which was started with less than Rs.10,000 as initial capital, was built with loans, repaid and turned profitable – that it makes us doubt the heresy we have been hearing that Indians don’t have a risk taking appetite. We do. We have been, but we lately have been trying to offload that risk onto a vehicle named Venture Capital, which unfortunately is not ready for prime time yet.

Its time to go back to the basics of building businesses in India, lest you want to wait for the VC Industry to mature.