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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?
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