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Article by Mohan Babu


Where have all the VCs gone?

After the market crash, most VCs moved to the sidelines, so much so that now even entrepreneurs with solid ideas and business plans are unable to obtain funding. Being in a reactionary mode, VCs in the Silicon Valley are waiting for signs of recovery in the tech sector, writes Mohan Babu

It seems almost like yesterday when all the twenty-somethings who had anything to do with technology were dreaming of the next Hotmail or InfoSpace, working in their basements, garages or bedrooms. Despite the wide variety of ideas, the dreams per se were straightforward—think of the next killer idea or Web-portal, build a prototype and hit the venture capital (VC) circuit, hoping to make it big in what the veteran venture capitalist John Doerr called the “largest single legal creation of wealth in history”. Even VCs, generally a very conservative group of investors, let their guard down. Pandering to the prevailing quest for new technologies, hoping for a quick turnaround of anything and everything to do with e-commerce or dotcom technologies, they were more than eager to invest in ideas and technologies, many of them half-baked. The souring of the tech sector (and the global economy) left a bad taste in the mouth for most of us; more so, for the VCs who were vested heavily in new ventures.

While most VCs took in huge losses, many are laying low, waiting for another day. Contrary to popular belief, VCs are not a product of the dotcom age. Actually, they are savvy investors who have had a strong role in nurturing entrepreneurial activities dating back decades. A venture capitalist is a person or group of people who pool in their capital and invest in nascent businesses with products or services in the early stages of development, simply hoping to make it big with the growth of the idea. They are high-powered dealmakers who have the funds and the experience to truly help your business get off the ground. Glamour aside, VCs take on huge risks: by one estimate, only one in ten of a typical VCs investments can hope to get any returns, let alone break-even. This in spite of the fact that VCs diligently whet all the ideas that come to them. In a way, VCs are themselves dreamers who try to visualise the future of the products and ideas they invest in. Sometimes VCs get interested even in conceptualising ideas, taking on the role of “angel investors” by investing in the seed capital of small businesses, prompting other VCs to invest in the idea.

Unlike most other investors, venture capitalists are generally “hands on”. Banks or financiers generally lend money to businesses or ventures and step back, waiting for the returns on their investment. On the other hand, venture capitalists take an active part in business ideas they invest in, bringing much needed discipline and managerial focus. This is especially noteworthy because individuals who design and develop product ideas may not be very business savvy and will not be in a position to manage a business as well as they can develop new products or technologies. The e-commerce revolution really brought the tribe of VCs to the forefront. They were able to evangelise entrepreneurial ideas, and were instrumental in bringing new entrepreneurs to the forefront. Techies were content to develop new software or Web-portals or what-have-you and it was the venture capitalists that went about marketing the technologies, ensuring that they got some return on their investments.

After the market crash, most VCs moved to the sidelines, so much so that now entrepreneurs with even solid ideas and business plans are unable to get the much-needed capital. Venture capitalists in the Silicon Valley are currently in a reactionary

mode, waiting for signs of recovery in the tech sector. Having said that, VCs in the biotech and those investing in the field of security (physical and systems) are still active, hoping to ride the next big wave.

Indian entrepreneurs got a taste of global entrepreneurship and venture funding during the heady days of the technology boom. A number of entrepreneurs in the US and India managed to jump the bandwagon and pitched their ideas to eager investors. However, in spite of the presence of a number of high profile Indian venture capitalists in the US like Kanwal Rekhi and Vinod Khosla, India still lacks in world-class VC’s who will not only take the risk of funding new ventures but also ensure that they nurture the fledgling companies. May be it is the archaic banking system or the bureaucratic process that prevents the nurturing of a strong venture capitalist community. Take for instance, Vinod Khosla, a veteran entrepreneur-turned VC, co-founder of Daisy Systems and founding chief executive officer of Sun Microsystems, where he pioneered open systems and commercial RISC processors. He is more comfortable hobnobbing with his peers in the US but has shown little inclination to invest in India.

As the global economy emerges from the slowdown, companies around the world will look toward emerging technologies to provide the much-needed gains in productivity and growth. Businesses with the right mix of emerging technologies and know-how will be poised to reap the benefits. Needless to say, for Indians to compete in the global arena, we will not only need the right mix of innovation but also prompting from motivated VCs who can visualise the potential of nascent technologies. What India needs is a few Vinod Khoslas who will bring glamour to Indian entrepreneurship. Anyone out there?




About the Author

  • A Bio and profile of the author, Mohan Babu, can be found at his homepage
  • Mohan has authored a book on Offshoring and Outsourcing (Publisher McGraw Hill, India), a link to which can be found here
  • Mohan has also authored an Online book on "Life in the US," available for free download.
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    ©Mohan Babu: All Rights Reserved 2005

    Mohan Babu is an international consultant trying to find the ‘sweet spot’ where IT meets business. E-mail: mohan He is also the author of a recent book on "Offshoring IT Services"

    All rights are reserved. Mohan Babu ("Author") hereby grants permission to use, copy and distribute this document for any NON-PROFIT purpose, provided that the article is used in its complete, UNMODIFIED form including both the above Copyright notice and this permission notice. Reproducing this article by any means, including (but not limited to) printing, copying existing prints, or publishing by electronic or other means, implies full agreement to the above non-profit-use clause. Exceptions to the above, such as including the article in a compendium to be sold for profit, are permitted only by EXPLICIT PRIOR WRITTEN CONSENT of Mohan Babu. 

    Disclaimer: This document represents the personal opinions of the Author, and does not necessarily represent the opinion of the Author's employer, nor anyone other than the Author. This Article was originally published in Express Computers


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