Skyrocketing smartphone usage, a rapidly spreading internet, a burgeoning middle class, and massive online distribution platforms – “It’s really obvious from the demographics,” says Dave McClure, founder of 500 Startups, “that there’s going to be a feeding frenzy in India.” He was referring to how entrepreneurs and investors will be falling over each other in this largely uncharted market within five years, by which time a lot of the friction from logistics, payments, and infrastructure would have got sorted out.
“We (the VCs) are just not ready for it,” he says on the sidelines of Nasscom’s Product Conclave in Bangalore. “Valley VCs are too focused on the US. Most people there think going international is a waste of time.”
There are exceptions like Tiger Global, DST, Rocket Internet, Sequoia, and now SoftBank, who are betting big on emerging markets like India. And 500 Startups itself, which is an early stage investor, is rapidly expanding its India portfolio. It has made 25 investments in India in the past couple of years. But the number of investors is still too small for a market of such potential, according to McClure.
One reason for investor caution is the low level of mergers and acquisition (M&A) activity out of India compared to thriving ecosystems like Silicon Valley or even Israel. But McClure still thinks there’s irrational bearishness, given the huge opportunities online businesses have for making money in India.
McClure explains to Tech in Asia:
I understand the dynamics around not having clear paths to exits. There are not as many of those in India. But I think if you are investing in revenue-oriented businesses, you can mitigate some of that. It is not the case that all ecommerce businesses are operating in negative margins. That is just not true. It is certainly not the case that all startup businesses are unprofitable. Even if you limited yourself to the startup businesses that have positive unit economics and significant growth, you will still have a ridiculous number of opportunities. So it is hard for me to analyze why people are not more bullish here.
“A lot fucking harder five years ago”
The San Francisco Bay Area venture capitalist feels it’s much harder for an entrepreneur to make it in America today than in India. “The US market is so much more saturated, there is so much more competition. On a relative basis, an entrepreneur in India has much less competition and a much larger market.”
But what about the friction points you find only in India? Such as the stipulated two-stage authentication process for credit card payments that Uber has yet to find a way around – the Reserve Bank of India has just given Uber another month’s grace period to sort this out. But McClure quickly puts such problems into perspective:
Yeah, there is corruption, challenges in payments, challenges in everything else. So what? You think it was harder or easier ten years ago? It was a a lot fucking harder. So relatively the change that has happened in the last five years is absolutely phenomenal.
See: Seeking funding? Here are 10 venture capital firms in India you should meet
“I know there’s a big dip coming in China”
McClure thinks that it is China where a big bubble is building up. “There is far too much capital going around in China, particularly since Alibaba had this huge IPO. It is the late nineties in China, people are just throwing ridiculous amounts of money at Chinese companies.
So, does he think there’s a dip coming there? “Yes. [Laughs] I don’t think, I know there is a big dip coming in that market. The behavior in that market is completely unsustainable.”
The contrast with India couldn’t be greater. Even the active Indian and international VCs are too risk-averse in this market, according to McClure: “Most VCs are undersizing their portfolios by a factor of 10.”
McClure’s investment thesis is to spread the money out widely, especially in the early stages. He thinks VCs delude themselves with their crystal-gazing ability to spot winners early – after all, they’re proven wrong nine times out of ten, because only five to 10 percent of VC-backed startups become big winners. India would be better served by lots of micro VCs making small bets, given the large number of startups sprouting up.
McClure has a formula for how Nasscom, India’s software industry body, can reach its goal of 10,000 startups in its program of that name. His idea is that 500 VCs each invest US$500,000 per startup into 20 startups a year, which makes US$5 billion in 10,000 startups. The figures may be daunting, but the idea is simple enough. Spread the investment around, then weed out the losers and follow up strongly with the ones gaining traction with their businesses.
Of the 25 investments in India that 500 Startups has made in the past couple of years, McClure thinks at least five of them are doing really well, and another five to ten have a reasonable shot. But the caution in the local market has forced him to change tack.
“I know there are companies in our portfolio which we think are doing well, but they are not having deals thrown at them. We have had to shift strategy a little bit to focus more on Indian entrepreneurs doing global businesses, and not on domestic market businesses. Because for the global businesses we can bring them to the US and they get funded OK. If they are limited to the domestic market in India, then they are subjected to the sentiment of the local market, which in the last year or two has been very bearish, though I think the sentiment is beginning to change now.”
Dave McClure: hard to see why investors are not more bullish on India, there will be a feeding frenzy in 5 years
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