Alok Mittal, a partner at Canaan Partners, in the company's office in Gurgaon, India. We got his perspective on early-stage investing and specifically the challenges and opportunities for a venture starting out in India.For the sixth in our investor interview series, we went east to India to chat with
Listen to the Interview
Download the MP3.
Your Guide to the MP3
This will help you choose the questions that most interest you and get you to those points in the MP3 audio:
- 0:22 -- How is early-stage financing doing during this downturn compared to the last one in 2001/2002?
- 1:20 -- How is the VC model changing, if at all, and how does the global financial crisis impact this change?
- 3:30 -- What percentage of your investments targets a local or regional market versus a global market?
- 9:10 -- What advantages or disadvantages does a venture starting from India have?
- 13:00 -- If costs are lower in India than in the US, how does this affect the amount of funding required?
- 14:48 -- What market segments are you excited about today?
- 16:00 -- What one or two of your ventures do you want to tell our readers about?
Your take-aways and insights may be different, so do listen to the audio. Here are the ones that were interesting to me.
Early-Stage Investing in India
Early-stage investing is "holding up well" in this downturn compared to the last, Alok notes. This echoes what every other investor has told us. However, the contrast is probably even starker in India for two reasons. First, in the last boom cycle, India's VC boom was incredibly short-lived. In the latter days of 1999 and very early days of 2000, a hype-driven boom in VC deals totally evaporated when conditions got tough. A few pioneers had started as early as 1994, and some of them did well, but they were very, very few. So, the VC funding bust in 2001/2002 was even worse there than in the Valley (hard to imagine anything worse!). Secondly, India and other emerging markets, such as China, are so clearly the growth engines of the global economy now. So the upside from Asia's perspective looks even better.
The Software Products Opportunity in Emerging Markets
Alok described three legs to his company's investing strategy:
- Internet and wireless digital media. This is a local opportunity in India.
- Software products. This is a regional opportunity specific to emerging markets.
- Outsourcing. This is a market focused on America and Europe.
We decided to focus on the second leg because most of our readers would be less interested in purely local opportunities in India and most would not be that interested in outsourcing. But anyone who builds software products for global markets needs at some point to consider the unique challenges of emerging markets.
Historically, a global software products company looked at global roll-out in the following way:
- Start in America. "If you can make it there..."
- Then go to the UK. Its style of business is as close to America's as you can get, and no language issues.
- Then venture into foreign languages and go after big developed economies, such as Germany, France, and Japan.
- Finally, go after the emerging markets.
So, for a US-based software business, it is very late in the roll-out cycle. For an India-based business, this roll-out looks quite different. You start in India and then move through the following:
- Southeast Asia
- Middle East
- Eastern Europe
- Latin America
Three companies (not in Canaan's portfolio) that exemplify this strategy are:
If that is your game, listen to this part of the interview; Alok has some interesting insights into how these markets differ.
SaaS Does Not Change the Market-Access Disadvantage for India
Moving on to software product ventures that start from India but have global ambition, I was interested in Alok's take on the notion that SaaS changes the game for India-based ventures. The theory is that with the on-premise up-front license model, you had to hire a US-based sales team, and US companies do this better than Indian companies. But with SaaS, adoption is "one click at a time," and no sales team is needed.
Alok does "not entirely buy" this theory. His view is that the subtle market needs that you have to bake into your SaaS solution come from the day-to-day contact you have in the market, the conversations at conferences, and casual interactions over drinks and coffee. So an India-based venture is still at a disadvantage.
When I mentioned Zoho as an exemplar of this theory, Alok pointed out that its product management is in America.
Cost Arbitrage Is Not Where You Might Think
Alok had assumed that the cost of financing a startup would be much less at the seed stage (because developers are paid less). That was my assumption, too. He found that that was not the case. In America, there is a start-up discount. Developers will happily take less pay in return for equity, as will landlords, advisors, lawyers, and the others who you need when starting out. That is not (yet) true in India -- perhaps even the opposite: you may need to compensate more for the startup risk.
But later in the venture's life, the sales and marketing costs can be much lower in India.
This was an interesting, counter-intuitive insight.
Talking Up His Book
Here are the three ventures Alok wanted to bring to our readers' attention:
- UnitedLex: legal outsourcing,
- iYogi: direct-to-consumer desktop support (disclosure: the author of this post has an interest in the company),
- Bharat Matrimony: you could describe this as similar to Plentyoffish, except that you had better be serious about popping the question and mom and dad had better be involved (as is the way with marriage in India).
Listen to the Interview
Download the MP3.