Watch out for Institutional Investors Date:   Friday , July 26, 2013 Venture Capital Ecosystem in India Although there is a vibrant venture capital ecosystem in India, the market we invest in is vastly understood both by equity as well as debt and working capital providers. Much of the early stage investment money in India is directed at technology, e-Commerce or mobile, and there are very few institutional providers of capital at a Series A (i.e., $1-3 million) in our spaces, although quite a few that can provide growth capital once our companies reach the point of requiring a Series B or later rounds of funding. We do see a trend of more funds and domestic family offices pushing down market into our space, which we view as positive not only for entrepreneurs but also for the sector more broadly as significantly more money is needed to help develop the early stage ecosystem across sectors. Focus Our view is that in order to support businesses in our sectors, a different style of venture capital than what is commonly found in Silicon Valley is necessary within the Indian context. For one, we cannot take lots of small bets in the hopes that one might become the next Google and make up for the write-offs in the portfolio that have flamed out. That strategy may work in certain technology sectors, but it won't work in logistics and secondary hospital chains in Tier II cities. Second, the exit time horizons need to be somewhat longer as the unit economics can take a longer time to play out. Although all our companies utilize sophisticated technologies as part of their operations (i.e., patient monitoring and truck routing) we tend not to focus on models that derive a significant portion on their revenues from high technology. Instead, we generally focus more on highly scalable 'nuts & bolts' models within the SME segment. We focus intently on unit economics and believe that to build a sustainable business in India it must be built deliberately from the ground up and not via significant cash burn models that can be typical to technology plays. Although we like 'nuts & bolts' plays, that does not mean we tie up cash in hard assets or real estate as we seek capital efficiency across our investments. We also like mass-market, consumer-facing businesses that create stickiness with customers, erect high barriers to entry, and that can achieve high brand recall. Lastly, we view distribution as a significant challenge for small firms across numerous sectors in India. Accordingly, we tend to avoid single product or device companies much preferring scalable "platform" plays that provide the basic infrastructure that can act as product and service distribution points. We like deeply integrated supply chain and logistics networks. New Avenues of Opportunities We see numerous opportunities for driven entrepreneurs across several sectors, with agricultural supply chain and healthcare delivery being two areas of especial interest. India is the world's largest dairy and second largest producer of fruits and vegetables, procured by smallholder (less than 1.5 hectares or owning 1-2 buffalos) farmers. In both cases efficiency and output are low even by emerging market standards, and the procurement and aggregation functions of both are often inefficient and disjointed. We do not see dramatic land consolidation occurring and whether or not FDI in retail fully takes hold we do not believe that large-scale corporate farming will represent any meaningful contribution to the current equation in our lifetimes. Therefore, nimble players that can help improve yields through the provision of better quality inputs as well as aggregate and procure at the farm gate by integrating supply chains will be of value to retailers that lack the expertise to carry out these functions on their own. Secondary healthcare remains an enormous, although largely unorganized, segment in India as it is largely dominated by independently run 'mom & pop' nursing homes. There are very few brands in this space as much of the private sector activity has been focused on tertiary healthcare models in the major urban metros. The low price points of rural primary healthcare as a standalone entities make it a difficult space to identify scalable businesses. However, hub & spoke models in secondary healthcare operating in Tier II & III towns and peri-urban areas that can offer tertiary level quality care at lower price points represent a large opportunity. Most common ailments can be treated in a secondary care facility, and do not require a trip to a specialist hospital. There is large scope for players to utilize better technology, procurement, and streamlined operations in order to lower the cost of care while keeping quality high. My Advice If you have decided to take money you need to be extremely sure of whom you are bringing into your company, as an institutional investor will likely have a board seat or two along with rights that can be exercised if the business plan is not fully executed. This truly has to be a partnership as early stage venture capital is about more than just the provision of capital — more than money you likely need someone that can help support your vision, make customer introductions, identify key hires, put operational processes in place, and bring in later stage investors at the right time. Investors promise a lot of things, but find out for yourself by meeting with the portfolio companies of the fund and asking them how their experience has been, especially in situations in which the business may have hit a rough patch or where the plan has diverged from projections. Also, do not underestimate the amount of time it will take to raise money. You may think that you have got the greatest idea in the world (and you probably do) and that VC's will beat a path to your door. But, venture capitalists have short attention spans and the more likely scenario is that it will be a long and lonely slog in which you will repeatedly tell your story over and over again for months, often times to the same person. Keep at it, and if it does not seem like it is a fit for the fund in question do not leave the meeting without asking the investor for an introduction to a fund that may be better suited. If you keep hearing the same concerns voiced over and over again, take them to heart and work to address them. This could entail developing more paying customers, proving your revenue model, or making 1-2 additional key hires. Investors want to test your stamina by determining whether or not you have got you have staying power and can roll with the punches, proving them is a lot more powerful than telling them.