"Billions of Entrepreneurs" Wooed by US Venture Capitalists

US-India Venture Capital Association (US-IVCA) hosted a panel discussion and dinner in partnership with Asia Society, Harvard Business School Association, Princeton Club, and the Indus Entrepreneurs in Silicon Valley on June 12, 2008. The venue was Quadrus Conference Center on Sandhill Road in Menlo Park, the home of the VC community in the United States.

The event featured Dr. Tarun Khanna of Harvard Business School as the keynote speaker. The event theme was inspired by Dr. Khanna's recent book "Billions of Entrepreneurs" that covers the rise of entrepreneurship in China and India and how the US venture capital community is participating in this phenomenon. Appropriately, the panel included David Chao of Doll Capital Management, Mark Sherman of Battery Ventures, and was moderated by Sumir Chadha of Sequoia Capital India. Each of these panelists has significant experience of VC investing in the world's two most populous nations in Asia.

To give a flavor of his book, here's what Dr. Khanna says, "In some sense people in these societies are running faster than their rules and laws can keep up. So they are creating the rules as they go along. And entrepreneurship is, after all, doing things in new ways, ahead of social norms and customs, and establishing the rules and laws. In both countries, these processes are unfolding not just in the mainstream business sector but in society writ large and even in politics and civil society,"

In his brief presentation, Dr. Khanna showed a few slides comparing India and China. He mentioned how China is far more efficient in executing on development plans and illustrated that by comparing India's inability to relocate "Machimaar", the fishermen's boat city in Mumbai harbor for more than 20 years to China's success in rapid development of Pudong across the river from the Bund in Shanghai. Dr. Khanna also gave an example of how China, India and US are successfully working together with Mahindra tractors, funded by Fidelity, designed in India and built in China, and marketed around the world.

In terms of media freedom, Dr. Khanna talked about the economic freedom in China where Caijing.com has risen as an example of economic investigative journalism that exposes economic corruption but remains silent on politically sensitive issues. He compared that to Tehelka.cm in India which exposed the bribery scandal involving India's former defense minister.

On the subject of involving Chinese and Indian diaspora in economic development, Dr. Khanna said Deng Xiaoping actively courted overseas Chinese who played an early and crucial role in China's economic revival after the devastation wrought by the Cultural Revolution. India, on the other hand, did not invite NRIs/PIOs to invest India. In fact, the Indian bureaucracy made it difficult for those who tried on their own. As a result of this difference, not only has India been slow to reform but the gap between the two economies seems to be growing. China's one-party government can be quicker in spurring growth, Indian Finance Minister Chidambaram said in April of this year, adding "the distance between India and China is in fact increasing, not reducing because China's growth rate is faster." Other South Asian nations such as Pakistan were not discussed at this event, but those interested can read this blog post about venture investments Pakistan.

Other points that came out during the lively panel discussion followed by Q&A:

1. China is 5-10 years ahead of India in VC and PE investments.
2. India's weak infrastructure and bureaucracy hinder development effort.
3. Food riots in India, unpublished food riots in China, government falls in India when onion prices rise, the poor in India spend as much as 60% income on food. Food price inflation is likely to impact growth rates in both India and China and cause instability.
4. The earthquake, Olympics have brought Chinese together as a nation.
5. Venture Capital investments, private equity rising in India.
6. Chinese start-ups have had big exits, e.g. Alibaba, Baidu.
7. India is a more long-term opportunity and seen as more stable longer term because of its democracy.
8. Sustained gap in growth between India and China could make India like Taiwan in spite of big population. The long-term concern about China is the possibility of less than smooth transition to political freedom and democracy.
9. China's one child policy is not an issue for many young couples, even those who can afford aren't having a second child, not unlike developed nations in the West.
10. Traditional national rivalries in Asia raise security concerns, and may prevent regional markets from developing. Asian Union is possible but not likely even by 2050.

Background Data on India and China VC/PE investing:

Venture capital investment in China was up to $719m across 39 deals during the first quarter of 2008 from $492m in the first quarter of 2007, with media and advertising companies accounting for the bulk of deal activity and investment, according to the China Quarterly Venture Capital Report released by Dow Jones VentureSource. However, deal count was the lowest the region has seen in three years.

IT and IT enabled services sector has emerged on top for VC investments in the India in the first three months in 2008, attracting over two-third of the total deals worth 144 million dollar. Venture capitalists invested $928 million in 80 India-based companies last year, a significant 166% jump compared to 2006, according to Down Jones. Overall, from 2006 to 2007, the number of VC and private equity deals in India increased from 299 to 387. The amount value of the deals increased from $7.5b to over $14b year-over-year, according to IVCA, the Indian Venture Capital and Private Equity Association (IVCA) which has all the big-name Silicon VCs represented in India.
Only a quarter of the funds accounted for VC deals. In terms of exits, there were 65 M&As and 16 IPOs in 2007.

The Dow Jones report found nearly 48% of all venture financing deals in India were for Information Technology (IT) companies, as 38 rounds were completed, accounting for $384 million, more than India’s entire 2006 venture investment total. The most popular recipients of venture capital in the IT industry were companies in the Web-heavy “information services” sector, which accounted for 22 deals and nearly $141 million in investment. Among the deals in this area was the $10 million second round for Bangalore-based Four Interactive, an online provider of local information on food, events, lifestyle, shopping and more.

Recent examples of VC funding in India:

MakeMyTrip.com - 10 Million $ from SAIF Partners.
Times Internet - 7 Million $ from Sequoia Capital.
TravelGuru - 15 Million $ from Battery Ventures and Sequoia Capital.
MakeMyTrip.com - 13 Million $ from Helion Ventures , Sierra Ventures and SAIF.
TutorVista - 10.5 Million $ LightSpeed Ventures, Sequoia Capital , SVB Capital.
Sulekha.com - 10 Million $ by Norwest Venture Partners.
TravelGuru - 10 Million $ Sequoia Capital.
Games2Win - 5 Million $ by ClearStone Ventures, SVB Capital


A Girls World.. said…
IT and IT enabled services sector has emerged as the preferred space for Venture Capital investments in the India in the first three months in 2008, attracting over two-third of the total deals worth 144 million dollar. To add : Cleartrip.com leading travel portal received the Highest amount of VC Funding for Q1 2008 - $18.5 million.
Riaz Haq said…
Instead of diversification of VC money, it seems the concentration of VC investments in IT is growing. There are many issues such as energy, food price inflation, electricity, basic infrastructure etc. that could use more attention from the VCs and entrepreneurs in India and the rest of South Asia. Rather than continuing focus on exporting IT, I hope to see movement in the direction of solving the problems faced internally by consumers in South Asia.
Riaz Haq said…
#SoftBank's next big crisis may be brewing in #India. No investor has written bigger checks than SoftBank's Son in giving young #startups the financial firepower to out-compete their rivals while pumping up their valuations. #WeWork collapse has ended it. https://asia.nikkei.com/Spotlight/Cover-Story/Fallout-SoftBank-s-next-big-crisis-may-be-brewing-in-India

Overfunding and bloated valuations have destabilized the country's startups

In 2014, Kunal Bahl and Rohit Bansal, the founders of Delhi-based e-commerce company Snapdeal, boarded a plane to Tokyo. Their company had just struggled through a transition from a Groupon-like discount voucher seller to a full online retail marketplace, and had nearly failed -- but Bahl and Bansal had managed to turn it around. They brought in $850 million from major investors, including sovereign wealth fund Temasek Holdings, Ratan Tata, the head of Tata Group, and U.S. chipmaker Intel. EBay even approached Snapdeal with a proposal to acquire the business.

Instead, Bahl and Bansal flew to Japan to meet the global tech sector's kingmaker -- Masayoshi Son, the founder and CEO of SoftBank Group. Even though Snapdeal had pulled in hundreds of millions, investment flows into India were still just a trickle. Chinese giants Alibaba Group Holding and Tencent Holdings were yet to enter the market at scale, and there were few local funds investing in technology. SoftBank was just starting to seek out deals in India, in an early display of its now-familiar playbook: offering to inject vast sums of money, and driving valuations higher than any other investor could offer young entrepreneurs.

Warned that Son had a short attention span, Snapdeal's founders brought only 10 slides to accompany their presentation. They had got through just three when Son cut off their pitch. "I have heard enough," he told them. "I will give you $1 billion for 49% of your company."

The amount was far more than the pair sought, or could even use. Ultimately, the two sides agreed on an infusion of $650 million for more than 30% of the company. "It was Snapdeal's first rodeo with so much capital," says one insider.

SoftBank's Vision Fund, with nearly $100 billion of capital, has become perhaps the most powerful funder in global technology. (Photo by Ken Kobayashi)
Dozens of entrepreneurs all over the world have had a similar experience. No investor has been more obliging than SoftBank's Son in writing massive checks to young companies, giving them the financial firepower to out-compete their rivals while pumping up their valuations. And that same pattern has played out in India, where, until recently, there was virtually no domestic risk capital, making SoftBank the biggest game in town. "SoftBank did put India on the global map," says Vinish Kathuria, a Delhi-based venture capitalist.

Since then, SoftBank's Vision Fund, with nearly $100 billion of capital supplied by major sovereign wealth funds, tech companies and private investors, has become perhaps the most powerful funder in global technology. It has fueled a wave of disruptive companies, from ride-hailers Uber Technologies and Grab to office communication business Slack Technologies.

Now, the wheels are coming off. WeWork, the office rental company into which SoftBank had invested billions, announced in September that it would list in New York, seeking an extraordinary valuation of $47 billion. The company's prospectus revealed a business model and a highly unusual governance structure that rattled investors. Its valuation dwindled, and eventually the listing was pulled.

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