Venture Capital - a largely misunderstood term in India

3:21 AM Suvir Sujan 0 Comments

Have idea? Will seek venture capital. This seems to be the mindset of many Indian entrepreneurs seeking venture capital in India today. Over the last few years, we have seen plans from entrepreneurs looking to start a restaurant, a coaching class, a web 2.0 project, a power plant, a budget hotel, a boating company, a travel agency, a pre school, a real estate brokerage, a jewellery shop, a nursing home, a dental clinic, etc. Many of these ideas can translate into successful businesses. However, they may not be suitable for venture capital.

What many entrepreneurs haven't understood is that Venture Capital is also a business at the end of the day. Venture Capital funds have a responsibility to its investors to maximize the returns on capital invested. The investors in the venture capital fund have chosen to invest in this asset class vis-a-vis other asset classes like public stocks, later stage private equity, with the expectation that it is a high risk righ reward asset class. Given the inordinate risk that a venture capital fund takes when backing an entrepreneur with a new idea, it is only fair that the fund expects a disproportionate return on that investment. Chances are that several of the investments may not yield the returns expected, so therefore it is even more important to be disciplined about the return expectation as the investments that do provide the expected returns need to make up for the ones that don't in order to be able to generate expected high returns for the investors on this high risk asset class.

Therefore when a venture capital fund evaluates a new business idea, it is looking for the possibilty of a "super normal" return. Many businesses don't pass that filter as they are typical linear growth cash generating businesses that most entrepreneurs think of. And therefore they have to turn down an investment proposal of an entrepreneur who has a perfectly viable business plan.

As an ex-entrepreneur, I empathise with these entrepreneurs as they have entrepreneurial dreams and are seeking start up capital to get their venture off the ground. What India needs is more angel/seed investors that are investing their own monies and are willing to help these entrepreneurs get started without the expectation of a super normal return. Typically in India, a family member or relative would provide the start up capital to another member in the family to start a business. What is important that is that start up capital is available beyond the family so that first generation entrepreneurs who could otherwise not dream of starting a company can now do so with this seed investment available.