How to Invest In... India

Based in Bangalore, Sachin Maheshwari is a principal with Draper Fisher Jurvetson (DFJ). Founded in 1985, DFJ has backed such companies as Skype, Feedburner, Hotmail, and Baidu. DFJ India's investments have been in early and mid-stage companies in India's cleantech, IT, mobile, and consumer/media sectors. Maheshwari has an MBA from the Wharton Business School and has a background in wireless products and software.

When did venture capitalists start investing money in India?

Growth in India has been happening for some time, and doesn't go unnoticed. But VC as an asset class is fairly new to India — people have been doing it formally for just 3 or 4 years. We've been here 3 years. Global VCs started by setting up one-man shops or coming in on a quarterly basis. And while people have had small funds, few investments have got the attention of the world.

What kinds of investments have been popular?

The initial investments were in services companies, with the U.S. or other places outside India as a market. Venture firms also now invest in microfinance, logistics, and healthcare. But it's all over the board because you need to invest in core stuff before the derivative stuff — and because only these sectors are going to rapidly get returns similar to those you can get in the U.S. For example, take a payment infrastructure company that charges consumers using credit cards or other mechanisms. But a large part of the population doesn't have credit cards. How do you collect money from them? You have to build the infrastructure. So there are centers that collect cash from other people or through mobile phones.

What are the challenges of investing in India?

When you start moving into core sectors, and away from tech and software, the kind of people running those companies — and needed to be running those companies — are very different. You need to be savvy, to be able to interact with investors, and also very hands on in order to interact with government, employees, and other companies you need to do business with. Finding somebody who's a good mix of both is very hard. You fall into family-owned businesses where governance is difficult. Even if you take money from equity players, they want 100% ownership, so there are issues around control — and dictating what you like as an investor is also a challenge. You may have contractual rights but you cannot exercise them because there's no way to take someone to court.

Usually you don't take your own investee company to court! In the U.S., people have seen the value of VC, and similarly people over here in the tech sectors understand how to work with investors. But others are not open to getting advice from people from the outside because they may not trust them. When it comes to hiring at a senior management level, they're more comfortable bringing a son or niece on board.

Are certain regions better set up culturally for VC?

It's usually more difficult to work with companies in the north — in and around Delhi versus Bangalore or Bombay — because of the way people have been interacting and doing business for years. Bombay is the financial capital, so things revolve around finance or media and entertainment. And that's very different from hardcore businesses in the north, which deal in, say, logistics and recycling. Bangalore is of course tech, software, and the Internet.

What about working with locals?

You have to think about the culture over here, and respect people — because they're respected by thousands of people underneath them. You also have to have local connections. Many people have lost touch with the local language, and for them to build a record with local people will be very difficult. Likewise for investors and Indians who return. For example, I went to Delhi to meet with someone, and in his office I saw pictures of gods and goddesses on one side, and a religious tikka on his head. He was an old-school kind of guy. I switched the discussion into Hindi. The first 30 minutes were about where I was from and where he was from. At the end of the meeting, he said, "I know you're a person I can work with." That's the first level of diligence from their side. It's historical — India didn't have a strong legal system to impose contracts, so you needed to work with and hire people you can trust.

How do you target specific populations in such a large and varied country?

India has a lot of people packed together, and density is always good in terms of reducing distribution and marketing costs. But first you need to figure out who you're serving. There are so many different individuals – the rich are probably even richer than the Manhattan rich. And the poor may look poor to you, but you have to look at their facilities – real estate is so expensive that they're living in slums, but you'll still see TVs and refrigerators in the slums. So you have to define your product, who you're selling to, and what distributions channels you're using. For the rural population, for example, it has to be a low-cost product and a low-cost distribution method.

How has India's investment potential changed over the last few years?

First, you're very dependent on the amount of capital available. In 2006-2007, both macroeconomic factors and emerging markets were good from an investment standpoint. Everyone woke up to that fact and started pumping money into these markets. As soon as you have access to more capital, there's the urge to deploy much higher amounts of capital. In 2007, any company was getting 4-5 offers with crazy evaluations, and there was no time to do due diligence. Now, in 2008 and 2009, people have been more cautious. In the next few years you'll see investments take off, though I'm hoping people have some memory of what happened this year. If there's no discipline, it's bad for investors and companies — so many companies are being funded in the same space that without due diligence it's hard for companies to get market share. In 2010 we expect a recovery in the pace of investments. What happened has actually been good – the number of funds has been reduced. Hence the amount available for investing in startups has been reduced. This will result in fewer companies — and less competition for existing companies. And that will allow them to grow faster and bigger, and therefore see a successful exit in a shorter period.

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