Venture capital challenges

India and China aren’t just attracting entrepreneurs who are returning from over
seas, but also venture capitalists. During a panel discussion at INSEAD’s Asia c
ampus in Singapore, Chan Tze Hoe, a former investment manager in Singapore, said
that as markets grow in both countries, people who were born there but then edu
cated in the West are “coming back to join the scene.”
He noted that Asia is seeing a transition to venture capital-backed businesses f
rom home-grown ones. Speaking about the regulatory framework and environment for
venture capital, he said that while this is well developed in the the US and Eu
rope, it has only emerged in the past ten years in India and China.
Understand the culture
Shanghai photo
©iStockphoto.com/Robert Churchill
Chan said that, regarding China, it’s important to understand the culture and bu
ild up a network: “A VC fund, previously based in London, was trying to set up a
China office. They’ve actually set up their presence there for two years but ha
ven’t invested in a single deal … They told me they are taking a watch-and-see a
ttitude. When you want to start up a business in China, you really need to build
up your contacts and find someone who is familiar with the environment to partn
er with you to achieve some sort of success.”
Chan says that most of the active investors have been in China for some time: “Y
ou probably need a lot of local knowledge (in terms of business culture, local l
anguage, deal sources, regulatory framework and government/industry networks) to
source … deals that are not only right … but also where the business can grow o
r lead even with potentially undiscovered limitations/conditions. It is unlike S
ilicon Valley where the industry is well developed and structured so that inform
ation generally flows quite quickly among the few top VC shops.”
Chan told Knowledge: “China, in my opinion, is building up such a system of deal
flows – not just in VC but also gradually in private equity ... Having said tha
t, I personally do not think one can force-fit Silicon Valley’s style of venture
capital on the Chinese model, since investment success is very much driven by t
he people on the ground and when the cultures are different, rules have to be se
t differently.”
Taking a wait-and-see approach
Chan said that most foreign VCs are still adopting a wait-and-see attitude regar
ding China, although the advantage of having a local partner is that the initial
deal sourcing process is generally accelerated: “The question is whether these
foreign VCs can use the same business principles (investment culture/methodology
, corporate governance practices) in the Chinese context.”
Phil Anderson, Professor of Entrepreneurship, who hosted the Quality of Manageme
nt panel discussion, points out that many Western VCs are opening offices in Chi
na to help their portfolio companies – not to do deals as such – and these are t
aking time to learn about the region before raising funds to invest in mainland
companies.
Geographical nuances
India flag
©iStockphoto.com/Aravind Teki
Another speaker at the Quality of Management session, Jayesh Parekh of Sony Ente
rtainment Television and MobiApps, advises venture capitalists to spend a lot of
 time in India and China. He says he has VC friends who go to India twice a year
but that’s “not sufficient to discover” that country. As for geographic locatio
n, “each one has a nuance.” The West and North of India, he says, are more entre
preneurial, while in the more risk averse South and East, you’ll find “a lot of
loyalty and excellent skills, especially for technology, so it depends on what k
ind of start-up you want to do.”
However, he adds that companies are finding it difficult to attract talent with
share options in places like Bangalore, as most people want to work “for a stabl
e, major corporation that pays good salary and perks, rather than take the risk
with start-ups. Hence share options do not really help in attracting good talent
. Given a choice between more money or upside with share options, most professio
nals will chose cash.”
Private equity is developing rapidly
Parekh told Knowledge that venture capital firms in India are mostly interested
in retail, real estate, information techology/business process outsourcing/call
centre and services, rather than high-tech or intellectual property-related busi
nesses. “I think the private equity (rather than VC) scene is developing rapidly
in India. Both locals and foreigners are getting involved, and in some cases f
oreign VCs are partnering with locals as well. I think the time is excellent for
VCs to go into India,” he says.
Harish Parameswar, Managing Director of financial advisory and asset management
firm Lazard Asia, echoes Parekh’s views about private equity in India: "I would
say you ve seen a lot of private equity and buy-out firms come up in India but v
enture capital is relatively tough if you re at an early stage, unless you have
some Indian investors who are from (Silicon) Valley. It s relatively difficult t
o get early stage financing."
The Indian networking advantage
Parameswar told Knowledge that Indian venture capitalists have an edge over thei
r Chinese counterparts in terms of networking in the United States: “If you look
at the Silicon Valley Indians, they set up this organization called TiE (The In
dus Entrepreneurs, also known as Talent Ideas and Enterprise). This is a very, v
ery influential organization, which is primarily run by successful Indian entrep
reneurs in Silicon Valley.” The organisation helps VCs meet prospective companie
s, Parameswar says. “I would say the Indians have had a bit of an advantage over
Chinese companies on that front. It’s more organised, I would say.”
Silicon Valley companies have been looking at India as an outsourcing developmen
t centre, Parameswar says, with “almost every start-up in the Valley” having bac
k-end offices in India. “So when it comes to technology development, because of
language and skillsets, India seems to be the preferred option. But when it come
s to manufacturing and production, China still has the edge on that front.”
He adds the biggest difference between Indian and Chinese VCs has been that many
of the companies that were set up in India have been developing technologies fo
r the global markets rather than for the domestic market. “In China the market h
as been pretty much geared to the domestic market and that’s been a huge, huge p
lus, because a lot of these companies are able to get revenue traction without h
aving to spend as much money.”
Consequently, China has been able to attract a lot more venture capital than Ind
ia, he says: “Because of the domestic market, (companies) have managed to scale
much more rapidly and therefore venture capitalists exit much faster as well.”