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Deepak Kamra, General Partner, Canaan Partners, a Silicon Valley-based VC firm focused on early stage investments in India, led Canaan’s entry into the Indian market in 2001 with an investment in e4e and subsequently set up its office in 2006.

Entrepreneur (E) : What are the differences between Indian entrepreneurs and ones in the U.S.A.?
Deepak Kamra (DK): At a certain level, I do not think there is much difference. There has been much back and forth between Indian entrepreneurs, especially in technology. A lot of Indian entrepreneurs who have been successful in the U.S. have a connection here. They understand business and products. The level of sophistication is what matters.

In India, entrepreneurs do not really understand how a venture capital works, how to go about finances, lack experience of the level we see in the U.S. We take a lot of things for granted in the U.S., like how to raise money, staffing and conserving money are aspects which are better understood by the peers in the U.S. The level of sophistication and maturity is more in the U.S.

E: This makes it easier to deal with them?
DK: Yes, it does. There are certain things that we assume both sides know. If someone comes to present before us, we think they understand, for example, that market size is important. Here we do not always get that. We need a bit more sophistication in terms of how they approach a market and figure what they need.

E: What peculiarities do you see when an Indian entrepreneur approaches a VC?
DK: There is no typical Indian entrepreneur. You see a fairly broad spectrum of people. You see people who have dropped out of college, recently passed out of college and also experienced and serial entrepreneurs. The average entrepreneur here does not understand venture investing advice. There needs to be an alignment on how they approach the business. There are differences in how they view things and how we view things.

A classic case would be where an entrepreneur would want to start two-three different businesses but we may see just one area. There is a slight difference in how an entrepreneur may want to view things and how a VC would like to. The interesting thing for us is to find the right guy with whom we can align reasonably well. If we look at 100 companies, we may invest in about two or three. In many cases we may not invest in a company but continue to mentor it since we may like the individual or think it may have a potential in future. One of the difference initially, which is getting better now, is that entrepreneurs in the U.S. understand what a VC does in terms of adding value.

Here, entrepreneurs previously felt that VC is just money, more like a bank. In the U.S. it is an understanding that VCs are part owners of the company and they have a lot more at stake than giving out money. But the Indian perspective is changing, thankfully.

E: Is there apprehension on the part of Indian entrepreneurs about VCs?
DK: Yes. If you have never worked with a VC you may think that this person may be looking to control your business, take your company and fire you. Trust me, the last thing we want to do is run a company. We do not have the energy or the bandwidth. The reason we invest is because we think the entrepreneur’s expertise and acumen can make the business work.

E: Why did you enter India in 2006?
DK: I made an investment in India in 2001 from the U.S. In 2003, I came to India with a group of VCs on a trip and it was the rapid growth of the country which attracted us. Firstly, many of the companies in which we have invested in the U.S. are run by Indian entrepreneurs. So we knew what Indian entrepreneurs could do and did not see any reason why it could not be successful here. The venture market was open, the economy was growing and it was time to make an entry here.

E: In these four years, have your expectations been met in terms of investment?
DK: We are long-term investors and we did not have any illusions that we will have IPOs in a couple of years. The portfolio companies, eight in India, are all performing well. We invest in a 10-year cycle which includes early stage investing which means we are looking at investments in a company for four to five years before we see our exits and I think we are on track. It’s been about four years and all of them are doing very well.

E: Has the downturn made any difference?
DK: Downturn did not affect India much. It was more of a pause. We started focusing more on the portfolio during the period. Our approach was to make sure that the companies we had in our portfolio did well during the downturn. As we started coming out of this period the focus moved to striking a balance between old and finding new companies.

In terms of companies approaching us, we did not see any significant reduction in the number of individuals approaching us. On hindsight, the quality started getting better since only the ones with a serious idea would approach us. There was no significant change but companies have realized that cycles like this can be very sudden and need to be prepared for that. This was a positive learning from our viewpoint.

E: Which are the hot sectors now?
DK: What I see in the U.S. is different from what I look at in India. Digital media and its broad categories are doing well here. In the U.S., for example, applications based around social networking sites are doing well. Exciting applications are being built in the U.S. which include peer-to-peer lending and dating. Twitter is also a new platform. There is a lot of data coming out from Twitter and people are wondering what to do with these data. This is what I am focusing on in the U.S.

Our focus area in India is very similar to that in the U.S. where about 35 percent of our investment is in healthcare. We do not invest in healthcare here and our focus in this country remains on technology and services investment. Unlike the U.S., in India we have services investment which is doing well. We continue to like businesses which are enablers of technology. These businesses scale better, market themselves better and consume less capital.

E: How are exits in the US different from those in India; how do you see this evolving over time?
DK: In India, there have not been many IPOs of technology venture-backed companies. There are a handful who have managed it and that is a big difference from the U.S. The last three years have been nothing great for the U.S. companies but if you look back 10-15 years, there were huge number of IPOs.

Recently, there were four IPOs of venture-backed companies which clearly indicate that the market is bouncing back. In India, the focus is still on profits as opposed to growth. In the U.S. growth takes precedence above quarterly growths. Personally, however, I think it is best to have focus on both growth and profit. Indian companies, on the other hand, can go public sooner because of their size. Some of the companies in the IT space prefer to be $200 million companies before they go public.

The greatest problem is that the M&A market in India is very poor. In the U.S. you have Google, MSN and Microsoft as massive acquirers for the space we operate in. In India, we do not see that and as VCs, this is one of our concern areas. The M&A market is not as strong as it is in the west and IPO by default is the option for one to exit. The time is coming for us to exit and hopefully in the coming two to three years, the VC industry itself will see a boost.

©Entrepreneur May 2010

Tags:
Canaan Partners, Deepak Kamra, early-stage, Silicon Valley, VC