Sorry Mr. VC, You Should Have Seen This Coming

As the party starts to wind down, are we taking away the right, hard lessons from the unravelling of the VC-fuelled fantasy that we saw in the last three-four years?

I read this interesting article in Forbes India by Nexus-Venture Co-Founder Naren Gupta. Interesting because it is a concise though somewhat gentle narrative of everything that went wrong and maybe some right in the 3-4 year boom to bust period.

What Gupta does not address squarely is who is responsible for the mess?

He speaks of the great Indian opportunity, India’s world-class entrepreneurship and then, somewhat contradictorily, slips in his disappointment on the behavior of both investors and entrepreneurs.

He starts of by saying that many Indian investors often invest in areas that are ‘hot’, and shun larger, longer-term opportunities.

“The result is an over-funding of hot areas, with a concomitant funding dry-up a short time later. Indian investors also tend to value companies based on short-term metrics rather than an understanding of underlying technologies, business models and defensibility,” he says.

He then argues that post-funding, the investors’ focus seems to be on preparing for the next round of funding in preference to building sound, market-leading companies.

At this point, it is not clear whether he is speaking of his personal experience with his portfolio companies or not. Which is a little unusual given that most of the cowboy capital has come from funds that are similar to his.

Either way, having come this far, perhaps he could have been a little bolder.

To be fair, none of his peers are doing so either, presumably given that the five stages of grief that accompanies the process of marking down investments has just begun. In case you didn’t know, the five stages are denial, anger, bargaining, depression and acceptance.

Nevertheless, it takes some guts to speak out, for which you have to credit Gupta.

He then hits out at Indian media and accuses it over-promoting `hot’ business opportunities and founders, setting them up for disappointments and eventual failure.

He says that when the lofty, unrealistic projections are not met, the media is equally expeditious in trashing the companies and their founders.

It is either boom or it is bust, he says, referring to the coverage. “Over the last five years, the media coverage of microfinance, mobile VAS, media, ecommerce, food delivery, and other business opportunities, together with their founders, shows the immaturity of the Indian startup ecosystem, he says.

He then makes a plea: “I hope that the media will provide a more balanced coverage in good times and bad. The press should take a leadership role in helping potential customers discover innovative products and services from early-stage companies; something these companies do not have the resources to do themselves.”

While I totally agree (as a journalist) with him about media over-promoting hot business opportunities and founders, I totally disagree that media has to play a good Samaritan role in propping up immature (his definition, not mine) companies or investors.

Media does not and will not play a “leadership role” nor is its job to help customers `discover innovative products’, except in small parts.

If there is an exciting sounding story, media will report. If not, it won’t.

Gupta then says he has observed rampant short-term orientation in Indian founders. “Do irresponsible investors and the media drive this behaviour?” he asks, admitting he does not know the answer.

The answer is pretty simple actually. It is irresponsible and reckless investors alone that are to blame. Why drag media who only chases a story when it sniffs one?

Gupta also feels Indian founders lack a culture of mutual support and brotherhood/sisterhood with other founders. And he narrates examples of early stage companies saying how moderately successful startups are their worst customers.

Finally, he talks of sharing and sacrifice. And how Indian founders lack it.

Now the good news is that venture capital is by definition private. So if you invested in a fund that invested in a grocery delivery startup that rightfully imploded in two years, then it is really your problem. You can’t expect media or the citizenry at large to join your tearful post-mortem.

The issue is larger and leads to some fundamental questions:

How did we assume that Indian founders suddenly became smart, trustworthy and scale-worthy geniuses just because they were young and talked of data stacks atop disaggregated markets?

This is not to say Indian promoters are either good or bad but to assume every youngster with a business plan was a NR Narayan Murthy or Sunil Mittal in the making is utter foolishness, to mention statistically impossible.

The value of a business is its ability to generate profit. Most businesses were never going to reach there. The venture capitalists knew it and went ahead anyway because the gains were to be made on flipping the venture. So why blame the eco-system now?

The fault at the end of the day, lies with those who lavishly funded enterprises (if they can be called that) which had no reason to exist.

Sure, it’s your money and feel free to sprinkle it around. The country does benefit, even if it distorts labour markets and it’s only for a short while. But to then carp about the market’s immaturity is only revealing your own shortcomings.

Naren Gupta’s own experience as founder of a software products company called Integrated Systems actually makes for inspiring reading. And mirrors that of many Indians who built successful businesses or rose up the corporate ladder in America.

He says he ran the company for 15 years as president/CEO and says how he did not take outside board seats or make any startup investments. The company went public and subsequently got acquired by Intel. Gupta speaks of the many hard lessons he and his company learnt along the way.

It’s a pity he did not apply them in his avatar as an investor in Indian startups.