An Investor’s Observations on Investing and Company Building in an Emerging Market: India
As a technology venture capitalist, I provide funds to help companies reach their next evolutionary level more quickly, efficiently, and successfully than without my cash. My mandate is to also offer non-cash benefit and support that, one might argue, is even more critical than cash to speed ahead of milestones, competitors, and expectations.
In the course of my work, I have had the opportunity to invest in my home market, the United States, and in international and emerging markets including the BRICs (Brazil, Russia, India, China). I’ve also held various operational roles in some of these markets. While working in these places I’ve discovered, unsurprisingly, that the nature of business and entrepreneurship differ significantly from region to region. Sometimes these differences lead to great confusion, sometimes to great competitive advantage. Of the markets I’ve invested in, I seem to always get asked about the highly visible BRIC market of India, where I spent several years as a private equity and venture capital investor. So highlighted here are a few themes that may be of interest to those investing in or doing business on the Indian subcontinent, or thinking about it.
One key theme that crops up repeatedly is the ability of the Indian entrepreneur to build a company on limited resources. Getting more mileage out of the same resources seems to be an Indian talent. This is not simply due to pure frugality (which is an accusation I’ve heard but is hard to believe if one has experienced some Indian weddings or Indian hospitality). Nor is it due to goods and services being less expensive in India versus other regions (because on a relative basis this is not necessarily true). This phenomenon has to do with the very DNA of the populace and to a degree cuts across stratifications of class and wealth.
Generally, Indians think lean; they are orientated to do a lot with little. The understanding of this trait is reflected as a general bias in the Indian investment community which expects Indian entrepreneurs to bootstrap to a milestone or revenue target—whereas it is equally well understood that an American counterpart would need to raise a round to get to the same goal. This mentality also extends to the personal sphere. I recently met with an Indian student attending an MBA program here in Boston who confided that Americans had advised him to budget a horrifying amount for two years; he’s doing it on 40 percent less and says he hasn’t missed out on a thing.
Adjustment is another idea that runs deep in the Indian psyche. The visitor to India is sure to be asked to “adjust” to (admittedly sometimes inane) situations. In fact, adjusting is the only way to survive in India. Ultimately one comes to understand this is how a nation of one billion souls—often vastly different from one another in the physical, economic, mental, and spiritual spheres, and with different ambitions—co-exist without a major civil war. Adjustment is a key characteristic of how businesses are built and run, too. Entrepreneurs who suddenly face a threat to cash flow immediately institute all sorts controls, standard and imaginative, to conserve and extend cash runways indefinitely.
Imaginative and unapologetic cost cutting are modus operandi and occur in cities and rural villages, amongst the educated and illiterate, the rich and poor. In one real example, an Indian CEO of a U.S. firm saw the writing on the wall of the impending 2008 financial crisis and took preventative measures well before investors got involved. He consolidated offices, reduced the workforce, cut exec pay, shrank budgets, sold off non-core lines, re-focused the core, and conserved cash (Indian training). He then presented a neat bullet point list of actions taken—as well as those he planned for round two if these were not enough (American training). And this was hardly an isolated example. During this same period, and due to rapid adjustments like those just described, I personally observed young Indian firms run by mostly inexperienced CEOs who were unable to raise follow-ons not only survive, but evolve.
At its best, particularly for investors, such a response is incredible to behold. This ability to confront pain, turn on a dime, and adjust to prevailing reality is a trait that seems to run in the blood of the Indian entrepreneur. This is not to say that there are not spendthrift Indian entrepreneurs or adaptable American entrepreneurs, just that the adjusting gene doesn’t seem quite as embedded in our American DNA.
Related to this, resourcefulness is a trait that also seems to be naturally in abundance in India. From the CEO who balanced a large glass plate on his scooter while racing back to personally replace the conference room window hours before an important investor meeting to one of my own well-educated and pedigreed fund partners, who carefully extracted the wires out of the back of an unused electronic device to extend our landline phone wires, resourcefulness is part of surviving in a resource-constrained, bureaucratic environment.
The lean mindset, resourcefulness, and ability to adjust position Indian firms to survive tough times and reach goals without outside capital, which has implications both for their development and investors. This means firms get further on less and generally, outside of heavy industry (manufacturing or infrastructure, for instance), are expected to reach some milestone by the time they approach investors. It also means investors deploy less capital per round, and raise rounds less often, which can be frustrating to U.S. investors who expect to invest at the round sizes and frequencies they do in the U.S..
Additionally, since the markets are not as deep in India, there is an abundance of capital chasing a limited set of investable deals. This has forced investors to become opportunistic by, for instance, expanding their investment stage, sector, or specialty focus—or adjusting (that concept again) their regional investment thesis to fit the currently available opportunities. The nature of Indian private equity is also different due to its youth (not much more than a decade old), the regulatory environment, and company structures (mostly family run and/or closely held and controlled). The traditional private equity model is to look for a business with steady cash flow, employing massive leverage, buying out the business, restructuring, turning it around, and then exiting. In India today, by contrast, a lot of private equity looks more like growth capital, with firms taking a minority investor stake (getting a board seat with negotiated rights), no leverage, and no restructuring or buyout action.
Of course, American entrepreneurs have their innate strengths as well. In the U.S., entrepreneurs appear slightly more willing than their Indian counterparts to take a holistic view of valuation, treating it as one of a variety of things to be traded off and weighed against others. The recognition of the value an investor can bring beyond capital—strategic expertise, experience, contacts—seems to receive more bandwidth in the United States. Many Indian entrepreneurs seem to get stuck on a particular valuation number, arrived at by a mysterious process that may or may not have anything to do with inherent value of the business or activity in the macro environment.
One interesting feature that doesn’t have a direct corollary outside India is that of community-defined professional expertise. Communities and castes are organized along some broad ancient classification of ethnic lines, but more importantly and specifically along traditional divisions of labor. So, for example, those who hail from traditional jewelry or leather craftsmen castes might today be doctors, IT professionals, and bankers, but their roots could be recognizable by strength in their hereditary expertise and traditional, identifiable last or community names linking them to their ancient heritages.
This concept can be near impossible for an outsider to get a solid grip on. While the private equity world as defined by the West might still be evolving in India, trading and business have been ongoing for millennia. Traditional Indian business communities have been solely dedicated to practicing and perfecting their craft domestically and internationally for thousands of years. There are hundreds of subcastes in the main mercantile caste/class (one of four main castes), each with distinct specializations. In the context of doing business, this means you may be interacting with someone who has at least a 2,000-year-old professional advantage over you.
This does not mean someone from a traditional farming background can’t become a great doctor (many are), or that someone from the priestly caste can’t become a successful entrepreneur (many are), only that an ancient and rich heritage provides interesting data points to consider in modern day Indian dealings. There is nothing distinctly actionable about being informed of a person’s background except that one might expect (and sometimes strategize and better prepare for the possibility) that the simple chap from a famed business community across the table is likely to give you quite the ride during negotiations. Or that despite his hailing from a Rajasthani village and seeming to lack sophistication, he might be able to calculate and discuss financial outcomes that your Ivy League educated team spent days modeling out—and devise complex counteroffers on the spot. You may very likely also walk away after a day of tough negotiation with the distinct feeling that somehow the final outcome was something that simple chap had planned all along.
Finally, while patience is a virtue when doing business in any emerging market, in India, it is a requirement. With 8-9 percent growth rates (compared to 1-2 percent in the U.S.), the flow of capital is in the direction of the highest returns—and today that means crowded, competitive, chaotic India. While intensely exciting and challenging, most investors, particularly Americans, are unnerved and don’t understand how things get done in the melee.
In some ways, traditional venture capital and private equity are not suited to India, where growth trajectories and chartable exit horizons are not nearly as predictable, the regulatory and general environment is challenging, and while things do get done, they get done at their own pace and by their own road map. At the same time, Bombay (Mumbai), the financial capital of India, is known to be famously professional and punctual, demonstrating that this is a country filled with baffling contradictions. There are facts and counter-facts, and they are all correct. I have, on occasion, heard the odd American investor complain about the Indian ecosystem, Indian deals, and Indian delays—and some of them even lightheartedly threaten to prematurely abandon their Indian investment strategies out of frustration. But this belies a basic lack of fundamental market and cultural understanding about investment and company building in India; it’s just not as simple as overlaying an American template on an Indian situation and pressing ‘Go’ even if the fast pace of the country and some of the technology hubs do feel like Silicon Valley sometimes.
Over the years I’ve head many interesting pieces of folk wisdom relating to tackling the subcontinent, but one relevant gem comes from a successful investor who advised that doing business or investing in India as a foreigner required three things: the right attitude, unwavering patience, and a strong constitution. I think I might agree.