In an earlier article, I had talked of the rapidly changing mindset of the Indian entrepreneur and how that augured very well for the Indian startup eco-system.Eco-system is one of those words that gets bandied about casually, like “entrepreneur”, like “awesome”, like “great!”; an all encompassing god-word that hides more than it reveals. As with all words that tend to become buzzwords, gross trivializations have occured with this word as well.
An ecosystem in biology refers to a living community – plants, animals, humans - that interacts with a non-living environment – water, soil, energy – via a complex set of interactions. There are external factors like climate, time, rainfall that play a role. Internal factors like types of species, decomposition of material, availability of shade also play a role. Internal factors both control the processes within an ecosystem and are also controlled by them.
Now look at the entrepreneurial ecosystem. The living members of the community – entrepreneurs, startup employees investors, lawyers, mentors and advisors, accountants, bankers and others interact with each other and within a non-living environment of agreements, governance expectations via a complex set of interactions conducted via meetings, events and discussions. External factors like laws, taxation, availability of funds and exits play a role. Internal factors like kinds of startups, their rate of growth, maturity, capital consumption impact the interactions and the processes of interactions.
All too often, entrepreneurs say, Indian VCs don’t take risks, don’t understand technology and the like. Others wearily talk of the implausibility of an international startup from India. While both these assertions are right, they betray a lack of understanding of an ecosystem.
An ecosystem, as we’ve seen, is not just about the entrepreneur and the VC. It involves lots of other living players. In addition, there are the external and internal factors mentioned above that are crucial for an ecosystem to function.
The Indian market is still maturing – internet penetration, credit card availability, logistics, access devices, formats, familiarity, laws and the like are still a work in progress. Hence - customer (those who pay!) adoption cycles are long and expensive. The M & A market isn’t friendly particularly for young companies; Getting to an IPO is a marathon. And investors need to make a return on their investment in a reasonable time frame, usually 5 years or so. If it takes longer than this to exit and if exit valuations aren’t attractive relative to the entry valuation, investors will, naturally, be very hesitant to invest. Remember, investors are not in the charity business, they invest to hopefully make a lot of money! Exits in turn are related to the financial performance of a company which in turn is a function of the market and customer growth.
Data compiled by Venture Intelligence, the leading research company on the Indian VC/PE industry, shows that over a 12 year period (ie 2000 Jan to 2012 March), only 158 VC and PE backed companies had an exit, including partial exits. Of these, only 20 companies exited via an IPO while 138 saw investors exit fully or partially via M&As. The median age of the companies at exit was about 8 years, companies were about 4years old at the time of investment and had raised a little over US$6million at the time of exit. For example, Naukri was set up in 1997 and went public in India in 2006, MMT was founded in 2000 and went public in the US in 2010; JustDial was founded in 1996 and is likely to go public in the near future.
It would be almost cruel to compare these numbers with numbers and examples from a highly evolved ecosystem like the US and I will therefore desist from doing so.
Large established Indian companies generally stay away from M&As. The newer generation of Indian entrepreneur run companies like Naukri and MMT don’t seem averse to strategic investments and M&A but it would be fair to state that startup M&As are generally conspicuous by their absence in India. So how does an investor and the entrepreneur exit? While the entrepreneur may want to bequeath the company to his/her next generation, the investor unfortunately doesn’t have the same luxury of time, bound as they are by return expectations.
While recognizable sets of investors are lining up along different points of a startup’s life cycle – seed to growth – the pipelining of startups towards an exit is still a long way off. Market and customer growth, management talent, the right kind of intermediary support system – lawyers, accountants & bankers, creation of stock exchanges that can support small companies and the sophistication and risk appetite of public market investors, all need to come together for the entire entrepreneurial story to be told in 70mm! It is therefore good to see the SME exchange as a welcome incarnation of a 20plus year old initiative, the OTCEI of 1990!
In short, building an ecosystem takes time, patience, effort and is an evolutionary process. We must appreciate this fundamental fact even as we put our collective efforts behind the entrepreneurship vehicle. It is the only vehicle that can create a Shining India.
What do you think?