How venture capitalists behave

Book cover of The Economics of Venture Capital Firm Operations in India
Start-ups and “Unicorns” have caught the Indian imagination, finally. Governments at central and state levels are enthusiastically holding conferences to promote them. Universities, the Indian Institutes of Technology and the Indian Institutes of Information Technology have webinars showcasing their enthusiasm for them. Policy-makers see start-ups as a way to create employment among their talented youth and are eager for international (mainly American) venture capital (VC) and private equity firms to come and invest in their country or state.

And though there have been many books written about the venture capital phenomenon, most are written in the breathlessly enthusiastic tone of “Come, read this and we will show you how to attract venture capital and get rich quick!”

Kshitija Joshi’s book takes a different path and provides a calm, scholarly, reason-based analysis about the factors that make venture capital firms say yes or no to a project. The analysis is based on events in India and not about, as is usual, Silicon Valley in America nor even about Indian expatriates in Silicon Valley.

I have a special reason for appreciating this book. Over time many VCs have become personal friends and come by to chat when they visit India wanting to know what’s going on here. In conversations with them I have often tried to understand the reasoning that they use to decide on an investment opportunity or turn it down. Was it some industries that they favoured, something about the entrepreneur’s personality that they took to, or the business’s stage of life?

I got the answer from one of them, an 80-year old doyen of the Silicon Valley VC industry, whose father, he himself and his son have had great success as venture funders. Sitting one evening in his drawing room of his home in the Los Altos Hills overlooking Silicon Valley, I posed the same question to him. He drew a deep breath and said to me: “Ajit, I know you are looking for a scientific set of rules that I use to say yes or know to an investment. To tell you the truth, there aren’t any such scientific rules. I look at an entrepreneur, listen to him describe his business and his dreams for it and my gut tells me whether to say yes to him or give him a polite no. After all, I am not God to know everything that can happen to an industry and business in the next 10 years!”

We both then continued to sip our whiskies and gaze silently at the Los Altos scenery.

The Economics of Venture Capital Firm Operations in India 
Author: Kshitija Joshi 
Publisher:  Cambridge University Press
Price: Rs 795; Pages: 214

Ms Joshi’s book brings rigour to analysing the very same issues. I guess the rigour comes from the subject having originally been her doctoral dissertation at the Indian Institute of Science, Bangalore. The focus of her analysis is the venture capital-funded deals in India between 2006 and 2013. She managed to get interviews with partners of 72 VC firms who accounted for 70 per cent of the deals consummated in this period. She also used secondary data available about deals in this period on the internet.

She has classified the data she collected in a remarkably interesting manner. As a first step, the VC firms in the sample were classified into three segments based on their business focus: Early-Stage Firms, Growth-Stage Firms, Late-Stage Firms. As is apparent, at the time of investment very little data is available about the Early-Stage Firms whereas a lot more becomes available as the firm enters its later stages.

As a next step of analysis, the VC firms were classified as Indian origin or foreign origin (branches of foreign VC firms). As a further step, VC firms were classified on whether erstwhile tech entrepreneurs figure among their partners or not. Then the VC firms were classified on where their primary office was located in India (Mumbai/Pune, Bangalore, National Capital Region, and so on) and by how many years each has been operating in India. Then the VC firms were classified by the number of deals they did during the 2006-2013 period and the number of exits they got in the same period, whether they were corporate-owned or not (most were not) and whether they were government-owned or not (most were not) and also whether they were registered with the stock market regulator or not. She has also collected a large variety of macro-economic and policy signal variables to use in the analysis.

The analytical technique is equally interesting. For example, she does a logistic regression with the dependent variable as to whether the VC firm is of foreign origin or not and the independent variables were those I listed above and achieved a very high degree of accuracy to show that foreign-origin VC firms behave very similarly to each other.

She also employs a large number of other statistical analyses, such as Exploratory Factor Analysis as well as Cluster Analysis techniques to see which of the various independent variables she has assembled made a difference in VC firms’ behaviour patterns.

It will make eminent sense to use this book as course material in business schools, and it should also be of valuable assistance to all those who want to see VC investment in India blossom.


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