By Sourav Majumdar and Bindi Shah
Bala Deshpande, Senior Managing Director of venture capital major New Enterprise Associates, talks about the entrepreneurial scenario in India, NEA's strategy and the challenges in the investments space.
Q: A recent Gallup poll had shown India is one of the worst countries in Asia for entrepreneurship. From a venture capitalist perspective, what is your view on this?
A: My own belief is that we tend to swing between extreme positivity and extreme negativity about our country. It is, in some sense, a bipolar kind of a situation because at some points we truly believe we will grow by 7-7.5 percent and when the downtrend starts we say it's going to be 4 percent. These extremes are a reality but as a VC I believe that despite this we can be a truly great investment destination. Clearly, there is a reality which is beyond all these macro numbers. There is a very strong underlying micro opportunity which is very important for us to participate in.
Q: But if the basic foundation of entrepreneurship is not strong, then doesn't everything else flounder?
A: I think it's a generalisation. Yes, the sentiment does make a difference, especially if you want one of your companies to go to the capital market or every other day there's a scam that breaks out. But if you look at what our entrepreneurs go through to become who they are, it is truly marvellous what they have achieved. We have the highest cost of capital at 13 percent, a fairly uncertain regulatory regime which is dictated by the mood of the political powers. So we have to deal with that. If the service tax goes up we have to live with it, if the dollar goes up we have to bear it. We have very few enablers in our economy; corporate governance is also really patchy here, in the sense that there are some extremely good guys and some extremely bad guys.
But I have great belief in the entrepreneurial talent of our country, given the headwinds they have to deal with. There's been a lot of learning.
I started on the venture capital side in 2000. From 2000-12 I have seen changes in the type of entrepreneurs, the kind of mindset change that has happened. They are far more savvy and have woken up to some big realities. One big reality is: "I don't have to build this business for my son. I am here for creating value and for realizing that value."
The big reality is what goes around comes around, so you can't get away with sloppy practices. The other thing is also of understanding the role of talent. In 2003-04, we would talk of hiring a world-class CFO, once, twice, three times, but today we almost talk about it just at the time of our investment. It is equally true for HR or even for CEOs. I am not saying we've undertaken the complete journey of building the perfect organization chart, but in the level of awareness if we were three earlier, we are now a six or a seven.
These are the most important elements of a business, right? I think there's a definite amount of entrepreneurial talent and far more awareness about what it takes to create an organization. If you look at the fundraising that entrepreneurs have started engaging in, it's not just about raising $2-3 million. Today people are understanding there's a quantum play in fundraising which is really very important: to shore up their balance sheets, take on aggressive bets whether in M&A or in market expansion. So the dollar amounts being raised, both in debt and equity, have definitely gone up.
Q: Do you think we are coming closer to a stage where a truly global organization can be built from the startup stage from India? Or is it still a distant dream that another Google or Facebook will come from India some day?
A: My sense is we're far away from that. We have to get seriously good enterprises. I am not saying there aren't any-yes there is the Infosys, there is Tata, there are Birla companies and other enterprises. But we're far away from the dream of a 'Facebook from India'. One of the biggest ingredients for that is a very, very large market. If you were to look at names like Facebook or Google or others, they were born in a very large market. When your domestic market is significant like in China-in manufacturing they have created some impact-their internal cost structure and large domestic market are the two key ingredients.
In the US, NEA has seen significant scale in some of the startups we have looked at. Some of our companies have grown from scratch to $250 million of revenue. So the day India has that size of the market - and it may be possible because we are talking of becoming a trillion dollar economy, come 2020 - it will happen. But it's a while away.
Q: From an NEA perspective, you fund later growth stage companies but act like a venture capitalist. It's a bit like being a private equity investor with a VC mindset
A: In the US we follow a very diversified investing approach which has augured very well for the firm. I am trying to adopt that in India because we believe that money should chase opportunities and not just be invested for the sake of investing. So starting from sector diversity which is a given, we also have stage diversity. We have very strong early stage investing in the US as well as venture growth equity. So our deal sizes have ranged from $5 million to as much as $75 million. It is actually the strength of NEA and it has been able to give back superior returns to the LPs (Limited Partners) on the strength of this diversified strategy.
Q: In India, it's above $10 million, isn't it?
A: In India when we were setting up, we said let's define a go-to-market strategy which will make sense. In India, it's a lot of hard work: you have to see 3,000 deals to do 10. That's what we have done in the past four years. We have had an excellent deal flow, and have been very selective in our picks. The idea was to essentially have a finely-honed strategy because this is for the first time that NEA is having a dedicated presence in a country.
So we said we will do mid-market growth equity where the deal sizes will range between $10 million to $50 million; we will be sector-agnostic but won't do real estate and infrastructure because those are different type of investments.
Q: But you're essentially focusing on three-energy, tech and healthcare...
A: That's in the US. Here, in healthcare we are in all sub-sectors-devices, biopharma and services. In cleantech we have done energy efficiency, solar, wind sources.
In tech, which is a very amorphous bucket, it's a very broad ranging thing. So we have some technology for noise suppression in the mobile telephony space, we have e-commerce, social media...tech is a very loose term, really. It's more for the ease of bucketing it together. It's fairly diversified.
Q: What's the total number of investee companies in India?
A: In India, we have 14 currently, with close to $250 million invested, including some earlier funds since NEA had started investing in India directly since 2004.
Q: From 2008 onwards it's your own entity here...
Q: Did 2004-08 see a lot of money too?
A: Let me give you exact figures. The total money is close to $270 million so far and we have done about $220 million from the dedicated entity.
Q: When you say there's competition for deals, do you see a lot of deals happening?
A: The money waiting to be deployed is very high. The competition for quality assets is very high.
Q: Is it because there aren't enough quality assets, high valuations, or is it because of the environment?
A: I think it's a combination. We continue to see significant deal flows, we continue to say no to what we think are highly priced deals, because despite all the uncertainty which happened in India we are unhappy with the valuations which tend to be high.
Q: So you're saying not enough price adjustment has happened in line with the realities...
Q: Is it because entrepreneurs in India are still living in a bubble of their own or are greedy?
A: (Laughs) I think it falls in one grey area about what they think is the potential of their firms versus what we think they can achieve. So there have been firms that have done CAGRs of 25 percent or 30 percent and that is real. But when we hit an uncertain environment, we start wondering whether that track record can be sustained.
Not anything to do with what they are doing or not doing, but because it's a rough patch. So we tend to be a bit more realistic of future growth numbers because they are future growth numbers. It is a subjective arena. The entrepreneurs have lived with the companies and the market, and they truly believe they will achieve these numbers. That's where the difference comes in.
If I as an entrepreneur believe that from 100 I can go to 500, my company should be priced in a certain manner. We as VCs believe that 100 will go to 300 and therefore the price should be X minus something.
Q: Do you see this trend changing slightly, though?
A: Yes, we do. It did change significantly in 2008 and that's when we picked up a few assets. It's also very important for us to do time diversification. The biggest thing about venture capital is we're placing our hopes on future events which in today's world are very unpredictable. The way to address that is to be systematic in your portfolio construct, which is really sector-diversification, stage-diversification and time diversification.
Article first published in http://entrepreneurindia.in