Interesting discussion here on issues around early stage technology investing in India. Many valid issues that have been discussed there. I particularly like the perspective around “distribution” being a killer app in India – but more on that sometime later.
Earlier this year, we analyzed the investments made by 11 early/growth funds in India (across 144 companies and 156 rounds of investment) to understand how those companies were doing – clearly a qualitative exercise with subjective judgment around what is headed north versus south.
That data led us to believe that the case for stage diversification is far stronger than sector diversification. The success rate on pre-revenue early stage investments (call them seed) seems very low, in the 15-25% zone. Once you get to some revenue, or some profitability (at time of investment) the success rate seems to climb above 50%. The 3x fall off between the seed stage versus post-revenue early stage investments doesn’t seem to get compensated by valuations available at those respective stages. This doesn’t say that we won’t do seed investments – just that there needs to be enough diversification, and the bar on seed stage investments needs to be really high.
Broadly speaking, IT investments (Internet, VAS, software) seemed to underperform BPO/KPO/consumer services etc. However, that was partially because the seed stage investments were biased towards IT than others. On a stage adjusted basis, IT seemed to generate as many successes as others, perhaps with a potential to actually outperform on exit value, due to often higher multiples commanded by those businesses.
Of course, the debate of how innovative these IT companies/investments really are is yet another dimension. Short of that, we are continuing to find the broader early stage technology investing landscape interesting.
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Ouch…my comment assumed (obviously incorrectly) that you had applied the same set of metrics to judge success for both sets of companies. My bad!
Sumanth – remember that seed investments so far are only “successful” in the sense of perhaps getting to the revenue stage so far, so the odds of making it from there still apply. In that sense 25% is not the eventual success rate. From an investment standpoint, if only 25% of seed companies are going to get to the next level, then the next level has to pay 4x in valuation term for it to pay back – I dont think that is reflected today in pricing of revenue stage early companies.
Fair enough!
Even by these subjective metrics, if 25% of the seed stage companies covered in your study are successful, it is an amazingly positive outcome…presumably these are the ones that have managed to traverse the valley of death between product and business!
However if only 50% of companies that were already profitable at the time of the investment are now regarded as successful, it would be a cause for concern as it potentially represents a scaling problem/risk as opposed to a concept risk that seed-stage investments are weighed against.
Possibly sounds counter-intuitive but I hope you get the gist…
ha ha! Sumanth – as I mentioned that is subjective, based on our understanding of the progress the company has made, and the confidence around investors making reasonable return on their investment. Clearly debatable for any individual company.
Alok,
Just one question, if I may – how did you define success in your study? Cheers,
Sumanth