entrepreneurship & venture capital

8/13/2019 Entrepreneurship & Venture Capital

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Entrepreneurship and VentureCapital


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I M PandeyI M PandeyI M PandeyI M PandeyI M Pandey: Welcome to the panel discussion on

Entrepreneurship and Venture Capital. I would like to

thank IIMAs Centre for Incubation, Innovation, and

Entrepreneurship (CIIE) and Entre Club for organiz-

ing this discussion and involving VVVVVi ka l pai k a l pai k a l pai k a l pai k a l pa for co-

ordinating the publication of the proceedings.

The purpose of this debate is to look compre-

hensively at the macro or policy level issues and toevaluate the role of venture capital in the development

of entrepreneurship in India. We need to understand

the kinds of problems which we face in this country in

developing entrepreneurship and finding finances for

good enterprises. To discuss these issues, we have a

distinguished panel that includes entrepreneurs,

venture capitalists and management professors. I

welcome Mr Vishnu Varshney, Dr Dinesh Awasthi, Dr

Rajesh Nair, and Mr Kaushal Mehta and thank them

for sparing their time and agreeing to share their views

with us.

Let me raise certain questions at the outset to

provide a basis for the discussion. We would like to

hear the experiences and research findings of our

discussants. What has been the contribution of

entrepreneurship in India? What

has contributed to or hindered

entrepreneurship development in

India? In the US, the economic

growth has been fuelled by

entrepreneurship. So, we wouldlike to understand the role of

entrepreneurship, if at all, in

economic development of this

country. What factors have

facilitated the growth of entrepre-

neurship in India? And if it has not grown to a

noticeable extent, as it has done in the US, Western

Europe or Japan, then what have been the hindrances?

We also need to understand if capital is a critical factor

in the development of entrepreneurship. Many think,

and perhaps rightly so, that cash is king. Hence, we

need to examine the role of venture capital vis--vis

entrepreneurship. Have venture capitalists played

their role as suppliers of venture capital adequately?

Have they played a role other than providers of finance?

Research shows that venture capitalists have a much

more important role in developing entrepreneurship,

particularly in developing countries like India, than

just as providers of capital. When we talk about the

presence of one-third of the scientific population in

India, then we need to know: what is happening to this

pool of resource in terms of creating enterprises? Where

do we stand in utilizing this resource? Are we able to

utilize our entire talent and if there are people who

have ideas and still are not able to really develop them

into business propositions, do we perceive some greater

role to be played by venture capitalists and governmentand in what direction? And then again, what conditions

are required so that venture capitalists could play their

role?

Our first speaker is Dr Rajesh Nair. Dr Nair is a

medical doctor. He holds a post-graduate degree in

management from the Indian Institute of Management,

Ahmedabad. He is a first generation entrepreneur and

is the co-founder of Indegene Lifesystems Pvt. Ltd., of

which he is currently the Managing Director.

Rajesh NairRajesh NairRajesh NairRajesh NairRajesh Nair: Since time immemorial, the test ofgenerating economic surplus has always been the key

variable behind enduring nationhood. Today, for

India, creating surplus to the maximum extent possible

has emerged as the prime economic task as well as the

basis of national surv ival and

development.

Empirical evidence points

towards a system that promotes

individual creativity within a

framework that allows free play

of market forces as the mostoptimal one for creating this

surplus. Technology has always

been a critical economic differen-

tiator, but the role of intellectual

property and ideas in driving

production efficiencies has been gaining importance

in achieving national competitive advantage.

While the Indian government has been successful

in building up monopoly services (ONGC, SAIL, Air

India...), the ability to innovate and succeed, given

competition, has been absent to a large degree. The

resounding successes of companies like Reliance,

Infosys, and Wipro within India in the past two decades

clearly points towards the fact that entrepreneurship

or intrapreneurship either in start-ups or within

corporate structures is the key driver of future national

growth. The governments role would increasingly

morph into that of a regulator, a facilitator, and a

maintainer of public services.

Culturally, entrepreneur-ship requires freedom. Itrequires a confident national

character that rewards risk-taking and accepts failure asan inevitable consequenceof starting-up.


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Trading at individual or group levels has always

been present in India. However, the lack of organized

commercial structures or companiescan clearly be

attributed to cultural and political issues. Culturally,

entrepreneurship requires freedom. It requires a

confident national character that rewards risk-taking

and accepts failure as an inevitable consequence of

starting-up.Openness towards external influences is also

critical for cross-pollination of ideas. The intelligence

and analytical capability of the Indian minds has never

been an issue. Neither is the ability to innovate within

constraints. The constraints have been a social system

that regulated economic behaviour via restrictions on

mobility (e.g. caste system pre-1947) or via social

promotion of risk-free options (government jobs). The

economic constraints were lack of access to capital,

high transaction costs (bribesand red tape), and

adverse policy regimes which promoted government

non-profitenterprise over private enterprises.

Socially, it required a generation of Indians who

had global exposure (e.g. Dhirubhai Ambani in Aden,

Narayana Murthy in Europe or Premji in the US) and

never felt the ignominy of being ruledby an external

power (post-1947 generation) to develop the vision

required to build a large-scale organization.

The liberalization of the Indian economy, coupled

with increasing access to global capital, has been a

critical factor economically. We have seen the firstphase of venture capital-based businesses. On the

whole, the net effect has been extremely positive. The

spirit of private enterprise has been let loose and the

nation has seen examples of high quality successes

along with massive economic rewards. More

interestingly, governments have seen first hand the

power and benefits of private enterprise in creating

jobs, providing positive externalit ies (Bangalore has

been turned into a high-tech city with rapid growth

prospects by Infosys and Wipro), and building national

competitive advantages (software development andBPO both have been foundby private sector). For

the entrepreneur, the financing options have suddenly

become wider making the process of transitioning from

idea stage to implementation easier. The mind-set of

the venture capital industry also has brought in a

performance-based work ethic that promotes equitable

rewards for supernormal efforts. However, we have to

accept the fact that the venture capital industry is also

learning and maturing. Things can only get better.

To make venture capitalists role in developing

entrepreneurship more effective, several factors need

to be taken into consideration:

One critical factor would be entry of experienced

industry hands into the venture capital industry.

Nothing can compensate for hands-on experience

of the issues. Fresh consultants,however bright,will go through a difficult learning curve.

The past boom and bust cycle has brought home the

fact that different businesses have different time-

scales to mature. An appreciation of this factor along

with an investment philosophy that exhibits

maturity would lead to lesser disappointments.

Networking is still missing in the Indian venture

capital sector compared to western markets. The

value addition to an investee company, which can

be provided by a venture capitalist who sits on theboard of potential partners and allies, is

tremendous, but one which requires real in-depth

relationships.

Market depth would help the venture capitalists

play a more effective role. This can happen both by

venture capital differentiation (angel, mezzanine,

pre-IPO, etc.) as well as an active primary market

(Indian as well as global).

Access to capital has shortened the company s

growth phase significantly. It has also been possible to

build out to a crit ical threshold via access to capital.The venture capital industry has also changed

drastically over the last two years and has definitely

shown better maturity.

I M PandeyI M PandeyI M PandeyI M PandeyI M Pandey: Thanks Dr Nair for your excellent ideas.

Our next speaker is Dr Dinesh Awasthi. Dr Awasthi is

the Director of Entrepreneurship Development

Institute (EDI), Ahmedabad. Before joining EDI, he was

Professor at IIM, Lucknow.

Dinesh ADinesh ADinesh ADinesh ADinesh Awasthiwasthiwasthiwasthiwasthi: I do not have the benefit of working

either as a venture capitalist or as an entrepreneur.Since I teach entrepreneurship, I will base my

deliberations on a few theoretical constructs. According

to me, there are four types of entrepreneurs. The first

are the innovativeentrepreneurs. Then there is a large

segment of entrepreneurs that is imitative.The third

are the Fabians who do not change their business

processes until they are sure that everything is finally

settled down and they are confident to make profits.


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Then there are dronesthat do not change even if they

realize that there are profits. They continue to operate

in their old mould and finally make an exit. The largest

number of entrepreneurs, even in developed societies,

falls in the category of imitators. The developing

economies have higher share of Fabians. Innovative

entrepreneurs are a minuscule minority. When we talk

of venture capitalism we talk of those in the firstcategorythe innovators.

Every self-employed may not be an entrepreneur

but every entrepreneur is necessarily self-employed.

To start an enterprise, one needs a different kind of life

history, a background before you go to Initial Public

Offerings (IPO). In our country, we do not have any

definition of medium enterprises; whatever is not small

is large. Any enterprise, which has an investment of

ten million rupees in plant and machinery, is a small

enterprise (barring a few selected segments wherein

the limit is 50 million rupees) and beyond this, every

enterprise is a large enterprise. We do not, therefore,

have medium enterprise sector in India. The

contribution of small enterprises

in manufacturing and industrial

services sector is pretty significant,

i.e., it contributes 40 per cent to

the industrial output, 35 per cent

to direct exports, provides

employment to about 20 million

people, and Rs 15 billion are itsexports figures. These figures

would go up by 20 per cent to 30

per cent if we include informal

sector as well. The contribution of

the entrepreneurs to the economy

is about 40 per cent of GDP.

Entrepreneurship was the major casualty during

the British Raj. The education system, introduced by

Lord Macaulay, was meant to produce clerks who

would support the British-put administration in place.

During those days, a government job was not only a

source of permanent income but also provided direct

access to power. People would respect a government

employee, a bureaucrat. Making money through

bus iness was co nsidere d dero gat ory. We never

respected those who made money. This is the kind of

social and cultural ethos we had. But all this is history.

Now things are changing very fast.

After Independence, our entire planning was led

by the public sector because of certain compulsions.

But if the public sector had not been there, today s

private sector would also not have been so resilient;

because, at that point of time, private capital was shy.

They did not have enough financial muscle to enter

into infrastructure sector. We had put all sorts of caps

on the private sector. However, at that point in time,

enamoured by Russian planning, we kept control onprivate initiatives to avoid concentration of income

and wealth in a few hands. Small industries were given

high priority. They survived because they were

protected from large industries in terms of product

reservation and preferential price purchase policy of

the Government of India. It gave them somewhat

assured markets. There was hardly any incentive to

upgrade technology or product as it needed additional

deployment of resources on the part of entrepreneurs.

Hence, quality became the first casualty. Whatever was

manufactured, the consumer had to take it or leave it.

The situation was almost similar in the large industry

sector. For example, there were only two kinds of cars

in the country for 35 to 40 years.

Naturally Indian industry

became not only inefficient but

the innovative spirit was also lost.

If we lose creativity, we lose

competitive edge. We did have a

very significant quantum of

technical manpower. But thosewho were better endowed left the

country for greener pastures in

the UK or the US. We were left

with people who were not

creative or innovative by and

large.

Another fallout of these policies, especially quota,

permit, and controls, was the emergence of a new, rent-

seeking class. This class took quota for raw materials,

sold off the same in the black market, and happily made

their money. After 1991, they were the first to go out of

business. Sickness in the Indian industry had seeped

in due to these kinds of people.

The government policies promotional and

protective did help a very large number of small-

scale entrepreneurs during the 50s, 60s, and 70s. Quite

a few of them grew and became large. After 1991, we

had a change in policy framework. We became more

liberal and open; we started encouraging transfer of

The main issue now is howto augment the supply ofglobally competitive entre-preneurs. Probably, theanswer lies in the education

system. One would be wiserby introducing entrepre-neurship in the educationsystem itself and come outof the Macaulay hangover.


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technologies which resulted in the emergence of a lot

of hi-tech ventures. Take the example of software

industry. Last year, its exports were around US$ 6.5

billion (2003); this year they are estimated to be about

US$ 8.5 billion and the estimates for the year 2008 are

a whopping US$ 50 billion. It is partly because people

took advantage of the opening up of the economy and

partly because of the B-to-B (Back to Bangalore) factor.The growth of Bangalores IT sector is mainly due to

the capital provided by the people who are working in

the USthe NRIs.

The question as to which factors presently

determine entrepreneurship is difficult to answer. A

recent study by Global Entrepreneurs Monitor, based

on the perceptions of

entrepreneurs, indicated

new business oppor-

tunities, participation of

post-secondary education

programmes, cultural and

social values, and strong

physical and professional

infrastructure as some of

the factors which deter-

mine entrepreneurship

supply. The main issue

now is how to augment

the supply of globally

competitive entrepren-urs. Probably, the answer

lies in the education system. One would be wiser by

introducing entrepreneurship in the education system

itself and come out of the Macaulay hangover. A

conducive policy framework that fosters emergence

and growth of entrepreneurship should be made.

Finance, one of the most critical factors for fostering

entrepreneurial supply, will have to be made accessible.

The emergence of venture capital in India would surely

go a long way in nurturing entrepreneurship. New

ideas will have to be encouraged even if they look

somewhat crazy. These are the likely ideas that have

potential to revolutionize the world. They would need

both policy and financial support. They would need

angels (investors) and they would need venture

capitalists. It is a challenge before the financial sector.

If we do not respond proactively now, it could be never.

We may get relegated to a country that produces drones

or at best Fabians. Let us help the emergence and

growth of innovators.

I M PandeyI M PandeyI M PandeyI M PandeyI M Pandey:Both Dr Nair and Dr Awasthi have brought

out the importance of government in the development

of entrepreneurship. We may go into the debate about

the role of government and then whether we had real

entrepreneurships or not in this country. Some argue

that India never had a dearth of entrepreneurs; the

Indian government, particularly after Independence,

has done a good job of supporting entrepreneurship;

and a number of excellent enterprises have been created

that have helped in wealth creation. A number of entre-

preneurs became rich as they worked hard. Why is our

economic development still so slow? For example, let

us compare ourselves with a country like Japan. In

spite of the disastrous

effect of World War II,

Japan reconstructed itself

and grew fast and becamean economic power. Why

are we taking so long to

grow? Can t we learn

from the experiences of

Japan and the West ern

countries and reduce the

learning curve and the

time cycle of achieving

growth? We need to look

at some of those factors

which are impeding en-trepreneurship, enterprise development, and economic

growth in this country. Let us give its due to the

government or if you want to criticize, let us criticize

it. But now, things are changing; there are people in the

government and bureaucracy who think differently.

What policy initiatives are needed to leverage these

changes?

We now have yet another entrepreneur to share

his views with us. I introduce Mr Kaushal Mehta to

you. Mr Mehta is the CEO of Motif (India) based atAhmedabad. He has MS in Electrical Engineering and

an MBA degree from the US.

Kaushal Mehta:Kaushal Mehta:Kaushal Mehta:Kaushal Mehta:Kaushal Mehta: One global rule that any country

should follow is that the government should not be in

business. It is the avenue of entrepreneurs. I am

definitely of the opinion that entrepreneurship in our

country is inherent and massive in scale and is second

to none on this planet. In fact, when we go out on the

Why is our economic development stillso slow? For example, let us compare

ourselves with a country like Japan. Inspite of the disastrous effect of WorldWar II, Japan reconstructed itself andgrew fast and became an economicpower. Why are we taking so long togrow? Cant we learn from theexperiences of Japan and the Westerncountries and reduce the learning curveand the time cycle of achieving growth?


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streets of Ahmedabad versus Silicon Valley, we see

entrepreneurship in all its forms. The Silicon Valley is

a hot bed of successful start-ups. There are very few

people originally from Silicon Valley. Everyone comes

here from India, China, Pakistan or some other place.

The very same Indians go from India to the Silicon

Valley and become successful entrepreneurs. They have

the same academic, social, and cultural background.What matters is the infrastructure that exists in a

particular environment. HP and Intel are the forefathers

of Silicon Valley. Many of these companies had spin-

off companies started by managers who, after working

for many years, left to start another company. That is

how the engine of growth started. The value venture

capitalist can add is that he can suggest a bank, refer

legal attorneys who provide legal services for all their

investee companies, etc.

I disagree with the notion that every new company

means a new idea (there is a difference between a new

idea and a new company). For example, Microsoft has

four product lines. The windows

operating system is a remarkable

innovation but MSN is an ISP kind

of a player. The company did not

invent that, it imitated me too.

We look at innovation; there is the

new product line, the X-box, which

is a game machine. First it was

Nintendo, then Sega, then Sony,and then Microsoft. Each of the

newer businesses is now two

billion dollar revenue stream for

Microsoft. At least two out of four

are me-tooproducts. So who says that you have to

have a new idea/product to start a new company?

After working for seven years in the Silicon Valley,

I had some great ideas too. I thought that my food bills

are taken care of so I should experiment for two or

three years. For an investor, a person having some

experience in an industry is a factor to be looked into.

I would define an entrepreneur as someone who can

find a need in the market, provide a service, and make

money. But to make it really rampant you have to have

individuals who have some kind of exposure.

Take the example of Mr Narayana Murthy. Before

Infosys, he started his career at IIM, Ahmedabad as a

Systems Administrator. So people spend time working

elsewhere before they venture out to start a company

of their own. I am not saying that a 19-year kid with a

bright idea cannot start a company. But the investors

do look at the experience of a person in a particular

industry.

The investors also look at how much of his own

money the entrepreneur is willing to invest. The Silicon

Valley in the US is instrumental in wealth creation.

Everyone there has stock options. This is one thing wehave followed at Motif. Everyone, including the office

boys, is a stock option holder. The idea is whenever

Motif has an exit, there would be wealth creation.

Amongst the few hundred employees we have, even if

five want to start their own company, the success of

those five new Motif entrepreneurs would be the

measure of our success. That is how a chain reaction is

started.

What is the value of venture capitalists to

entrepreneurs? There were so many areas in which I

thought I could have never pulled it off without the

active support of my venture capitalist. For me, this is

my first company, but for the

venture capitalists who have been

investing in companies for more

than 40 years they had been

there, done that before. They

know the processes like setting up

a company, contract negotiations

with customers, infrastructure,

etc. It took Infosys ten years toreach where they are now. The

company was worth nine crore

rupees in 1982 and Rs 900 crore in

1992. So, for ten years, there were

talks about the founders thinking whether they should

continue or not. The point here is that there are certain

value additions that our investors or venture capitalists

give us.

For instance, when we learnt that our very first

customer, Priceline Webhouse, which sold groceries

online, was closing down. We heard on CNBC that the

company had closed down and we were about to hire

200 employees for them. The first one to call me was

one of my venture capitalists who told me not to worry

as these things will happen. That is where you have

the comfort level that these people are going to stand

behind you in times of cris is , because they have

invested in the individual, not just the business plan.

They told me You think we look at the business plans

I would define an entre-preneur as someone who canfind a need in the market,provide a service, and makemoney. But to make it really

rampant you have to haveindividuals who have somekind of exposure.


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and ROI? We first look at the individual. Can we trust

this person, can we work with this person? I had e-

mailed to my venture capitalist a financial report of

about 16 pages. Within 30 seconds he said that item

four on the third page regarding depreciation amount

did not seem to be right. That is the level of experience

he has when he looks at numbers. Whatever the

entrepreneur assumes as cost is always underestimatedand whatever is assumed as revenue is overestimated.

There was a talk about people returning to the

country and some examples were given. Interestingly,

I purchased a book for my son on Indian leaders and

that included freedom fighters. On reading that book,

I realized that 80 to 85 per cent of the leaders, who had

actually gone out of India, more likely to Cambridge

or Oxford, experienced what independence meant and

came back to India and told the British to leave the

country. So I fully agree that sometimes outside ex-

posure is necessary.

I M Pandey:I M Pandey:I M Pandey:I M Pandey:I M Pandey: Contribution of entrepreneurship in India

is tremendous when you go by some of the statistics

like about 40 per cent contribution to GDP and

employment generation, etc. For example, just four to

five years ago, our exports were quite small. They have

grown tremendously during last seven or eight years

to US$13.5 billion. Today

half of that is being

contributed by IT industry.

It is a matter of pride andachievement. However,

when you see longitudi-

nally, we do find that there

has been tremendous

progress in the IT sector.

But let us face hard facts.

What we export as far as

IT is concerned, is one per

cent of the worlds total

export of software and related services. It is one third

of Microsofts revenues and the largest software

company in India, viz., TCS, is half of the 25thof the

software company in the US. We are still so small in

spite of whatever growth has taken place in the IT

sector. How do we accelerate pace of entrepreneurship

in India?

I now invite Mr Vishnu Varshney to speak and

throw light on the interface between entrepreneurship

and venture capital. Mr Varshney has an MBA from

the US. He is the CEO, Gujarat Venture Finance Limited

(GVFL) and is amongst the first venture capitalists in

this country. He has significant contribution in

developing venture capital in India.

VVVVVishnu Vishnu Vishnu Vishnu Vishnu Varshneyarshneyarshneyarshneyarshney: Any entrepreneur contributes to

the society in which he lives. Entrepreneurship can be

divided into three different eras. One was the pre-British era, where there were lots of entrepreneurs and

artisans in various sectors. All these artisans were

outstanding and famous throughout the world. There

were merchants from Gujarat and Kerala travelling all

over to East Africa and other countries. In my

childhood, I had read that agriculture is number one,

business is number two, and working for somebody

else is the worst; it is next only to begging. So, in India,

our ethos has always been entrepreneurial. It is part of

our culture. When the British started establishing

themselves here, entrepreneurship flourished. But it

flourished only in those areas which were not

competing with their own industry in Europe. The East

India Company was founded to exploit this country.

There were about a hundred textile mills in India and

the oldest one started in 1860. The jute industry of

Bengal is more than 150 years old. There were other

industries also but the

British allowed only jute

and cotton industries to

grow. The US capitalismstarted after they achi-

eved independence. In

India, we started properly

after 1947 or 1950 to be

precise.

The difference bet-

ween China and India is

this: Chinese are better

entrepreneurs because

they love money more than anything. In India, we are

told that if you are rich, you are a baniyawhich issynonymous to being bad. This happened because

during the colonial rule, government jobs were

considered as securities. Except for Gujaratis and

Marwaris, every Indian felt secure in a government

job. Lord Macaulay created an education system which

was a major impediment to our innovative process.

India could not create innovators or inventors as there

has been a tremendous conditioning of Indian minds

What we export as far as IT is concernedis one per cent of the worlds total

export of software and related services.It is one third of Microsofts revenues,and the largest software company inIndia, viz., TCS, is half of the 25thof thesoftware company in the US. We are stillso small in spite of whatever growthhas taken place in the IT sector.


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in the past 150 years. People have become risk-averse.

Besides, social factors also impeded entrepreneurial

development. People, even today, think that taking up

a job is much better than taking a risk and starting

your own venture. If you take up a job after college,

you will soon have a comfortable existence. You go to

work in the morning, come back late, you work very

hard and help build up a company, but for somebodyelse. You gain no gratification, except your ration-

alization that you worked for such and such a company.

This kind of a mindset has to change. Families also

play a very important role. Even families are risk-

averse. You have to have an independent thinking, you

should really have a passion and commitment to start

your own business and be on your own. Once you fall

into the comfortable existencetrap, you will never

be able to get out of the cycle. The other scenario could

be that you work for four to five years and then start

your own venture. This re-

quires a lot of commitment

and courage to leave the pre-

sent job. As time passes by the

risk-taking capacity goes

down.

The cultural issue is that

failure of any kind is con-

sidered a stigma. Anyone who

declares bankruptcy is ostra-

cized. After Independence,the government, in a socia-

listic pattern, associated itself

with entrepreneurship. But

the bureaucrats became very possessive and did not

want to lose their control on businesses. In 1951, the

Government of India created State Finance Corpora-

tion Act and money was given at a subsidized rate.

But we have also adopted a culture of not paying back

and not being answerable and accountable because of

a poor legal system and corrupt institutions.

I would also like to comment on the role venturecapitalists have played in developing and funding new

ventures. Venture capitalists have lost a lot of money

during the recession and there has been no regulatory

support. In fact, this is the only country where venture

capital is regulated. In the US, it is not bound by rules

and there are no guidelines. I struggled for ten years to

get the regulations in India streamlined. Ideally, there

should be no regulator. The venture capital industry in

this country, which was worth two billion dollars about

two years back, is now worth 500 million dollars. The

total number of companies supported by venture capital

is more than 2,000. We have been unfortunate in that the

venture capital movement started only in 1985-86.

In the US, there are more than 1,200 venture

capitalists. The mission statement of many of the

venture capitalists is to build businesses and not justget rewards. When you build businesses, you

automatically get rewards. Venture capitalists are now

playing safe. They are investing in companies which

are already well established and are moving away from

providing seed capital to start-ups. The motive is purely

commercial. Very few have the purpose of building

businesses and this approach is not right. It is an

anomalous situation in this country that the venture

capital industry, which was started at the initiative of

the Government of India, is declining due to govern-

ment apathy and indiffe-

rence.

How can we make ven-

ture capitalistsrole in entre-

preneurship more effective?

We should follow the Israel

model. In Israel and in the

US, a law was enacted as per

which the federal govern-

ment refinanced all the

venture capitalists. Of coursethere were bankruptcies. But

what was the percentage?

Even if 20 per cent of the

companies go bankrupt and 20 per cent are frauds,

we will still end up making money. So, the government

should come forward to fund such companies. And

funds need to be better utilized. There is a Rs 10 billion

fund lying idle with the Department of Science and

Technology which is supposed to be disbursed among

innovative, technology-oriented companies. In Israel,

there are a large number of venture capitalists that arefunded by the government to promote innovation and

technology. Private investors question the wisdom of

investing in a technology-oriented, small start-up

because of the risk involved and lack of incentive. The

thinking is that in all likelihood, the company is going

to fail. A private investor will never invest in such a

company. It is the government, which should take the

initiative and it should follow the Israeli model. Funds

Venture capitalists are now play-ing safe. They are investing in com-panies which are already wellestablished and are moving awayfrom providing seed capital tostart-ups. The motive is purelycommercial. Very few have the

purpose of building businessesand this approach is not right.


9/14

should be disbursed through such agencies as SIDBI,

which in turn, give money to the small, regional funding

agencies. Venture capital business is a localized

business. Based in Ahmedabad, I think it is not wise on

my part to make an investment in Chennai because

monitoring and nurturing becomes very difficult. We

have to create regional vehicles through which money

can be disbursed.When you give government money to companies,

do not hold them accountable for losing it, if it has

been lost honestly. We have to accept that venture

capital money will be lost. Only 30 per cent of the

companies become successful and provide returns even

in the US and Western countries. In India, only 20 per

cent companies will do so. The government has to take

the initiative for another ten years to promote

innovation and support venture capitalists in this

country. Hopefully, by then, the industry would have

matured.

The entire enterprise culture

of US is based on venture capital.

I t never had any subsidized

interest rate or term lending

institutions like GIIC, GSFC,

UPFC, etc. Entrepreneurs have to

go to venture capitalists. Venture

capitalists evaluate their com-

panies on their merits and they are

ready to write the amounts off ifthe company fails. But they also

have the backing under SBIC. In

India, insurance companies and pension funds are the

highest contributors to venture capitalists. Indian

entrepreneurs are highly individualistic and are very

bad team leaders. They cannot form a team. They are

very secretive about their work. They would promise

me that I will get ten times of my investment but if I ask

them for details of the complete process, they would

refuse as they are scared that I will reveal the technology

to a third party.

Another issue that I would like to highlight here is

that despite the fact that we talk about very high ideals,

we have lost our ethos. The value system has

deteriorated because of a weak legal system. We have

a very inefficient legal system that does not inspire

confidence of outside venture capitalists. Why is

Foreign Direct Investment (FDI) lower in this country

than China? It is because we have a very time-

consuming, corrupt legal system. If a lawyer from my

side gets better fees from my opponent, he may start

defending him. In civil suits, it takes several years for

a case to come on board and then for hearing. So people

are not interested in following the legal course due to

the time consumed and the high cost. People pursue

short-term goals. The quick-rich mentality is really

spreading very fast. There are some exceptions though.As a venture capitalist, I have helped many entrepre-

neurs who have made very successful companies

through their honesty and hard work.

I M PandeyI M PandeyI M PandeyI M PandeyI M Pandey: Thanks Mr Varshney. The question is:

how do we leverage our advantages? Dr Nair and Mr

Varshney have raised very interesting issues. They

talked about our higher education system and its

strength. If we have one-third of the scientific and

engineering talent in this country, are we able to harness

it optimally? All of us have the data what is actually

happening! Of course, Mr. Varshney brought out very

clearly the issue of legal system

that hinders development and

financing of enterprises. There-

fore, we need to know what do

we do? Do we have enough incen-

tives to innovate in this country?

The role of bureaucracy has been

directly or indirectly questioned.

It creates more problems rather

than playing a facilitating role.How do we change the mindsets?

What is the governments role? If

you say government did a good job or that it did badly

in certain areas, what do you expect the government to

do now if you want to develop entrepreneurship?

In the context of venture capital, Mr Varshney

mentioned that venture capital contributes towards

the development of entrepreneurship. What kind of

risks are involved in financing new enterprises, par-

ticularly in high-tech where the risk is high? Venture

capitalists make money in 20 per cent of the enterprisesand the remaining fail. Are there incentives for venture

capitalists to continue financing high-risk enterprises?

Isnt that the venture capitalists have to perhaps play

a far greater role in developing high-tech enterprises

in India? Our research of high-tech enterprises in India

and other countries reveals that the entrepreneurs look

for more than financial support from venture capita-

lists. The high-tech entrepreneurs would like venture

Do we have enough incen-tives to innovate in thiscountry? The role of bureau-cracy has been directly orindirectly questioned. Itcreates more problemsrather than playing a facili-tating role.


10/14

capitalists to help them in building their image; to

provide them flexibility in raising funds, particularly

when they reach the growth phase; to identify good

people to work in their organizations and influential

persons to be members of their board; and to introduce

them to the networks of customers, financial insti-

tutions, consultants, poli-

cy makers, etc. Entrepre-neurs certainly do need

initial financing and nur-

turing; they do want ven-

ture capitalists help in

IPOs, but, later on, more

important for them is the

flexibility of financing and

networking. They want

venture capitalists to intro-

duce them to a large vari-

ety of financing avenues

and facilitate raising of

finance from various sour-

ces. They want help in re-

cruiting good and vigorous people. They have ideas,

but they are not known. They want venture capitalists

to make them known to those who matter for the growth

of their enterprises. Hence, for developing the pace of

entrepreneurship, we need to develop a vibrant venture

capital in India which is capable of not only providing

finance but also providing help in management andstrategic thinking of entrepreneurs.

Edi to rEd i to rEd i to rEd i to rEd i to rs Not es Not es Not es Not es Not e:::::We are also including here the written

comments of Mr Rakesh Rewari and Professor K

Ramachandran on the topic of Entrepreneurship and

Venture Capital. Mr Rakesh Rewari is a post-graduate

in management from Jamanalal Bajaj Institute and is

currently the CEO of SIDBI Venture Capital Limited

(SVCL). Professor K Ramachandran has a Ph. D. in

Entrepreneurship from Cranfield University, UK. He

has taught at Indian Institute of Management,

Ahmedabad and is currently Professor in Entrepre-neurship and Strategy, Indian School of Business,

Hyderabad.

Rakesh RewariRakesh RewariRakesh RewariRakesh RewariRakesh Rewari:Entrepreneurship is linked to risk-

taking and finding innovative ways of doing business.

Innovation can be in any field and need not be restricted

to technology. Growth is closely linked to entrepre-

neurship and any successful case results in better

products, improved ways of doing business, and

employment generation. Success stories encourage

greater entrepreneurship. The role of entrepreneurs

in making the Indian software industry global has

played a major role in economic development in India.

The increase in professionals willing to take a risk

and become entrepreneurs has been a positive

development. The break-

ing down of trade barriersand benchmarking com-

panies at a global level are

positive signs for deve-

loping entrepreneurship.

The change in mindset to

set up professional com-

panies, observe global

markets, benchmark com-

panies with international

standards, and profit

sharing with manage-

ment team have contri-

buted to the development

of entrepreneurship. The

system needs to accept that failures will occur and are

closely linked to entrepreneurship and risk-taking.

The success stories of Silicon Valley and Israel are

examples of how venture capital has fuelled the growth

of entrepreneurship. Entrepreneurship requires risk-

taking and financing such enterprises, which may

result in failure. This can only be done by venturecapital. Entrepreneurship may develop without

venture capital in micro level projects. In such situa-

tions, venture capital is needed to scale up growth.

Venture capital has played a major role in

developing entrepreneurship in India by building up

professional companies which compete globally. It has

made smart money available for projects which cannot

be funded by conventional methods.

The quality of entrepreneurs has improved

considerably in the last decade. Entrepreneurs have

the motivation to compete globally and the necessaryattributes to build successful companies. There is a

need to provide considerable level of handholding to

build up such companies in India particularly at the

seed stage.

We need a critical mass of venture capital funds

looking at early state, start-ups, and incubation

projects. This needs to be supplemented by angel

funding. The global models of private/public

The high-tech entrepreneurs would likeventure capitalists to help them in buil-ding their image; to provide themflexibility in raising funds, particularlywhen they reach growth phase; toidentify good people to work in theirorganizations and influential personsto be members of their board; and tointroduce them to the networks of

customers, financial institutions, con-sultants, policy makers, etc.


11/14

partnerships like the SBIC

model needs to be replicated

in India. This will increase the

number of entrepreneurs

being financed at the early

stage. The role of venture

capital in developing entre-

preneurship will evolve oncewe have the critical mass avai-

lable in India. We need to

reach the level of venture

capital being a partner with the entrepreneur in the

enterprise. This can be achieved only if we have the

above framework in place.

K RamachandranK RamachandranK RamachandranK RamachandranK Ramachandran:Venture capital has played a pivotal

role in breaking the myth that entrepreneurs are not

born, but can be created, a new paradigm for the first

generation high-tech entrepreneurs to draw confidencefrom. The IT driven boom in industrialization in India

in recent years and the resultant wealth creation has

given further fillip to the growth of entrepreneurship

and venture capital industry, each supporting the other.

Incidentally, we have been having risk capital support

for private sector initiatives in economic development

as I M Pandeys research (Venture Capital: TheIndian

Experience: New Delhi: Prentice Hall of India, 1996)

suggests, most of it coming from family and/or some

public institutional sources.

The spurt in the growth of venture capital industry

and high-end entrepreneurship is a part of the growth

phenomenon in the small-scale sector that we have

been witnessing in India over the years. The small scale

sector has grown at rapid rates in terms of numbers,

turnover, and employment since long, disregarding

major changes in the techno-economic environments

at different points in time. The wide spectrum of

activities that cover small enterprise sector has f irms

with different combinations of technology and financial

intensities. Traditionally, venture capitalists supportventures with potential for high growth but with

perceived high risk, and technological and financial

intensity. Such consistent growth of the small enterprise

sector is a reflection of the inherent supply of entre-

preneurial pool available in India. It is also a reflection

of the potential to have high quality entrepreneurs once

the facilitating environment turns more friendly and

networked.

A large number of

factors have contributed to

this growth: The key to any

entrepreneurial success is an

attractive opportunity that

provides for decent returns

and growth possibilities. The

growth in the IT sector,particularly after the arrival

of the Internet in the second

half of the 90s, is a mani-

festation of the role of market attractiveness in

generating entrepreneurial activities. Since the role of

a product/service is to offer solutions to customers

problems, a key quality of a good entrepreneur is to

identify areas where the existing products and services

that offer solutions to customer problems are

inadequate. Often, this is not articulated but an entre-

preneur spots them. New frameworks and methodo-

logies now exist to assess market attractiveness of a

new product (Ramachandran, K How to Spot Winning

Opportunities , New Delhi: Tata McGraw Hill,

Forthcoming).

The phenomenal growth in the services sector in

recent years is a reflection of the latent need that exists

among customers to have better solutions to their

problems, particularly in hospitality, travel, tourism,

and healthcare industries. On the same lines is the

growth in IT-enabled services sector that is beingexperienced now, reflecting possibilities of taking

advantage of the potential of the Internet to save costs

through outsourcing; this has caught the attention of

venture capitalists in a big way. This is also a reflection

of the current trend among venture capitalists to move

away from high-risk investment while focusing on high

market returns. Whether this is because of the

dominance of bankers and financial experts in the

venture capital industry now is an intriguing question.

In the Indian context, formation of venture capital

companies such as ICICI Venture (originally calledTDICI) and GVFL (Gujarat Venture Finance Limited)

in the 1980s created the driving force to push up high-

tech entrepreneurship in India. The 90s saw awareness

about venture capital growing multi-fold, particularly

in the latter half, when more people started seeking its

support, which led to a spiraling growth in the venture

capital industry in the country. Simultaneously, the

government removed many of the hurdles that existed

Entrepreneurs in India have themotivation to compete globallyand have the necessary attributesto build successful companies.There is a need to provide consi-derable level of hand-holding to

build up such companies in Indiaparticularly at the seed stage.


12/14

in the regulatory environment that prevented flow of

overseas funds into the venture capital pool. The net

result was multi-fold growth in the size of the industry,

with several new venture capital funds from India and

abroad springing up within a short period of time.

Unfortunately, the year 1999-2000 saw this industry

going on an over-drive when the entire industry

competed to find and invest in any firm with a dotcomtail added to its name. The implications of these are

elaborated later. However, a major gain out of this

process was the widespread awareness that it created

about the attractiveness of choosing entrepreneurship

as a career option for highly qualified and competent

individuals.

While venture capital facilitates the birth of a new

entrepreneurial baby, it is the availability of appropriate

quality infrastructure that provides the walkersfor

it to climb up and grow. In-

dustrial estates as a concept

provided the vehicle for

rapid start up for a number

of entrepreneurs who other-

wise would have found the

journey tough. Indeed, in-

dustrial estates were set up

indiscriminately in many

places, with the hope that

entrepreneurs would flock

there. This assumption pro-ved wrong in many cases;

one of the problems with

this strategy was over-em-

phasis on economic infrastructure without caring for

social infrastructure. Industrial estates flourished in

places which were otherwise attractive but lacked both

economic and social infrastructure. Again, IT is the

best case to illustrate. The key attributes of economic

infrastructure for IT industry are high quality Internet

connectivity, dust-free cool work environment, and

commuting facilities. The software technology parkscreated both in the private and public sectors have

facilitated the formation of a number of IT companies

in several cities. The reason for the growth of IT

particularly in Bangalore (the same strategy is being

followed by Andhra Pradesh) is not only because it

provides world-class economic infrastructure but also

because of its attractiveness as a place to live and relax.

We can notice a similar trend towards synergizing

economic and social infrastructure for promoting

biotech enterprises, which is another industry that is

attracting a lot of venture capitalistsattention now.

The 1980s saw a major initiative driven by the

government and its industrial development agencies

(IDBI and SIDBI in particular) to promote entrepre-

neurship across the country. Although it did not focus

on high technology, it created widespread awareness ofwhat entrepreneurship is and the process involved in

creating business ventures. Despite its weaknesses, it

had a salutary effect, and entrepreneurship was no longer

considered taboo by the time we reached 1990s. In some

ways, the entrepreneurship development programmes

of those days provided the right impetus for a take-off

of an entrepreneurship culture in India. This was

supplemented by focused initiatives made by several

other agencies. For instance, the Department of Science

and Technologys National

Science and Technology

Entrepreneurship Develop-

ment Board (NSTEDB)

promoted the formation of

entrepreneurship parks in

technology institutions.

NSTEDB did provide the

technology flavour required

for growing high-tech entre-

preneurship in India and, in

turn, the venture capitalindustry. These positive fac-

tors have to be considered

after factoring in the impact

of a number of hindering variables, some of which are

mentioned below:

The term entrepreneur has always been as-

sociated with a number of indicative adjectives such

as cheating, unscrupulousness, greed, opportunism,

and selfishness. Making money that too through

business, was always looked down upon by most of

the Indian society. As a result, entrepreneurship wasnever considered a serious career option for most bright

and capable people. It was considered as an option for

otherwise unemployable people. We have travelled a

long way from there, but there are still many among us

who believe that entrepreneurship is a gifted quality

that too for a few people belonging to select com-

munities. The venture capital industry has immensely

contributed in smashing this myth by shifting the

Entrepreneurship was never consi-dered a serious career option for most

bright and capable people. It wasconsidered as an option for otherwiseunemployable people. We have tra-velled a long way from there but thereare still many among us who believethat entrepreneurship is a gifted

quality that too for a few peoplebelonging to select communities.


13/14

emphasis from mere financial resources to intellectual

capital as a critical success variable for business.

Controls hamper natural growth. This is true with

governments too. In its anxiety to preserve and

channelize resources in the most efficient and equitable

way, the post-Independence governments in India

relied heavily on controls while encouraging

industrialization. Unfortunately, most of these controlsbe ca me hu rd le s to free flo win g en trep re ne ur ia l

activities. The Licence Raj played the spoilsport for

many budding entrepreneurs. It is only in recent years

that we have seen signs of any movement from this

position towards a more open approach based on trust.

The role of a facilitating environment is particularly

important for a society, which is largely anti-

entrepreneurial. The rapid growth in IT entrepre-

neurship is often attributed to the absence of govern-

ment interference in it.

Finance being one of the limiting factors of

entrepreneurial opportunities, banking institutions

have played a major role in the process of creating

entrepreneurship in India. Although banks have

provided both long-term and working capital to firms,

their capabilities in assessing entrepreneurial needs

and responding equally fast have been questionable.

Several studies (Morris, et al; Overcoming Constraints

to the Growth and Transformation of Small Firms, New

Delhi: Oxford University Press, 2001) have underlined

the need for banks to follow a flexible strategy whileservicing entrepreneurs. In some sense, this lack of

sensitivity is a reflection of the traditional conservatism

of banks, but also a lack of capabilities in adequate

measures to understand and respond to the needs of

entrepreneurs. This is where venture capitalists score.

In other words, we have been living with an anti-

entrepreneurial culture and an institutional network

that have not been sufficiently proactive to compensate

for the cultural shortcomings and pull the entre-

preneurial talents hidden behind.

It is against this background that we have to analysethe role of venture capital in the development of

entrepreneurship in India. Some of the key attributes

of a good venture capitalist are his/her own entre-

preneurial mind-set and willingness to travel with the

entrepreneur not only as a financier but also as a mentor.

This is particularly important for developing entre-

preneurship because of the global average of about 80

per cent start-ups failing in the initial few years. Succe-

ssful venture capitalists have always played this dual

role effectively. In fact, such grooming is part of esta-

blished family businesses all over the world, where the

entrepreneur and the mentor belong to the same family.

Venture capitalists have facilitated technology

intensification in the economy. Often, it is a paradox

that people who have money do not have technical

and managerial expertise and vice-versa. Venturecapitalists have to plug this hole by offering funds and

other inputs to technology-savvy entrepreneurs who

otherwise do not have much of capital to spare. Many

of the successful high-tech firms in India have been set

up with venture capital support. My own study

(Management Strategies of Venture Capital Funded

Firms, Jo urna l of En treprene ursh ip, June 2001) of

companies funded by ICICI Venture and GVFL have

shown that but for the support provided by these

venture capitalists, many of the successful firms that

we see today may not have been born or at least would

not be where they are now.

However, it is dangerous to assume that entre-

preneurship would not develop without venture

capital support. In some ways it depends on the way

venture capital is defined. Not all the people with great

ideas go to venture capitalists nor all ideas with great

potential attract support from them.

The major contribution of venture capital in India

has been building confidence among youngsters that

they can do it. Both venture capitalists and youngentrepreneurs, that too with a strong technology and

management background, very often speak the same

language and share the same passion. This has

facilitated the process of creating trust between these

groups much faster.

Unfortunately, the talent pool in the venture

capitalists is not very rich in India. Venture capitalists

in the country do not have the right mix of capabilities

to be called a venture capitalist. Most of them have

background in finance and not in enterprise

management. Several of the seniorexecutives hardlyhave any industrial experience to count. Experience

of starting and running enterprises during the dotcom

era has to be taken with a pinch of salt as it is an

aberration and not a normal phenomenon. The mad

rush to invest during the dotcom days has to be seen in

this backdrop.

There should be concerted efforts to build

entrepreneurial capabilities in venture capitalists. They


14/14

should be able to build entrepreneurship and provide

the mentoring support. This requires wide experience

of handling a variety of situations. There should also

be a dialogue among entrepreneurs, technology R&D

laboratories, and venture capitalists. At present, all

these three groups of high value-added growth operate

independently. Harnessing of the energies around

technology, finance, and entrepreneurship can unleashthe growth process immensely.

This may be a process of evolution of the industry

because it is impossible to get all the capabilities in

place before we embark on the journey. We need more

angels who may or may not bring capital to the table

but who would provide high quality mentoring inputs

that are scarce now. This angel pool of managerial and

entrepreneurial expertise blended with high quality

project finance and capabilities of venture capitalists

can be very useful for the next phase of growth of

venture capital industry in India.

My own interactions with entrepreneurs and

venture capitalists and research in this area point tothe need to have platforms to share experiences and

learn from each other. Indeed, the current flux should

lead to a state of stability when prudence is expected

to prevail and high quality entrepreneurs will grow

with the support of venture capitalists.

entrepreneurship & venture capital

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