It?s empathy and credibility that Alok Mittal brings to the table while dealing with entrepreneurs and start-ups as managing director, Canaan India. Prior to joining the venture capital industry, Mittal co-founded JobsAhead.com, a Web-based recruitment business, which was later acquired by Monster.com. ?Being an entrepreneur helps in appreciating how he (entrepreneur) is thinking, how we fit in his scheme of things, and the best way to coach and advise. And, as the entrepreneur knows that you have run a business before, he trusts you to add value to his business,? says Mittal. At Canaan India since 2006, Mittal has advised Canaan Partners in their investment in Bharat Matrimony, iYogi, Cellcast, UnitedLex, Chakpak and MotorExchange. At home at Canaan, Mittal says he has no intentions of floating his own fund right now, ?This is my own fund; I am a partner. I like the global platform, and driving value for entrepreneurs and investors.?
So how was the transition from being an entrepreneur to funding entrepreneurs? ?What changes here is that you are not building your own business, and it?s very important to be comfortable with that idea.
At the same time, you get an opportunity to participate in multiple businesses, so the challenges you face are all different, even though you are all in the same entrepreneurial space. One meets new entrepreneurs bubbling with new ideas and energy, which is very energising. We like the fact that entrepreneurial aspirations in India are high. Entrepreneurs are not saying they want to create a R100-crore company and get out; they want to create a billion-dollar company and want to figure out how to get there.? Co-founder of Indian Angel Network, which today boasts of 150 members and 30 investments, Mittal shares with Sarika Malhotra how being in the midst of shooting entrepreneurial activity in India has been truly fulfilling. ?We can make money in other places as well, but what drives us is seeing an entrepreneurial environment flourishing and we see ourselves as enablers for that. People keep asking why India has not produced an Apple or a Microsoft. We want to be the ones who are backing that bid.?
For someone who has seen the VC space evolve in India from the beginning, how do you see it at this point?
In 1999, sparked by the dotcom boom, some genuine attempts were made at private VC funds in the form of ChrysCapital, Infinity and eVenturers, which did generate reasonable returns. However, most were either unable to survive the bust or move on to the next stage of growth investment. It was hard to raise follow-on money in the VC category and investors moved on to growth stage investments. During 2001-05, there was little availability of venture capital, and it was only in 2006 that VC players started to come in, including Canaan. Some companies that were invested in, in the past, got good exits. Jobsahead.com, Baazi.com got acquired, Naukri was on its way to going public, Indiabulls had a reasonable outcome and Indiagames was beginning to show traction.
So while there was not much venture activity, whatever happened, even to a limited extent, had reasonable outcomes. Since then, there have been some peaks and troughs, with 2007 being a peak year, 2008-09 a trough, and now a settling down in the middle. If you take the typical four-six year investment cycle, post-2006 investments are just coming into play and will mature now. So today we are facing the second test: Does venture capital work in India? If we pass that test as an industry, we will see new entry of capital; if we don?t, it will come back in five-seven years when the environment is more conducive. Venture capital itself has been taking that timing risk on India.
So do you see it working this time around?
If you take last year, there were many venture-backed exits that were meaningful, and in the time frame that venture capital looks for. For instance, MakeMyTrip from their second takeoff from SAIF Partners, Dr Lal PathLabs, SKS Microfinance, all of them gave attractive returns in a four-six year window. This year, too, there are multiple companies that could generate exits and valuable outcomes in the five-six year time frame. We are seeing enough data points in the making that should validate the venture model more and more from an Indian standpoint. And if that happens, we will see a push of new funds. It would open the gates for investors who, today, are more cautious investing in the venture capital class and are more comfortable doing growth capital in India. Incrementally, investors have become more open, but we are not at the tipping point, which will ideally have 10-15 exits. We are on the path to accomplish that as an industry.
Of late, there has been considerable churn, with fund managers quitting and starting their own funds. How do you rate this trend?
It?s happening more in the private equity domain as there is enough capital available. At one level, the misalignment between the performance of the fund and rewards to the fund mangers is getting rectified through these departures and new fund launches. Over time, however, there will be platforms that start differentiating themselves. Also, it?s a team and not just an individual that investors are willing to back. But in the early stages, where India is today, you will expect a lot of this mobility in trying to define what platforms are stable, and how fund managers are compensated in relation to the value they create.
Performance orientation of this industry is great in the long term. It?s a very dynamic market in terms of aligning performance with the ability to sustain or not. It?s beginning to happen in the private equity segment, and will start applying to the VC industry in India five-seven years from now, as returns will be visible in the VC space.
But what do these new funds spell for valuations and entrepreneurial activity?
On the VC side, there is an under-supply of capital at the market level, so there are more credible plans around than the capital available. Canaan goes through more than 1,000 businesses every year, eventually backing five. There is enough deal flow in the market to support more funds. Early stage investment is about risks, and how each of us understands, mitigates and calibrates risk differently. So, more money coming to the same funds doesn?t have the same effect as more funds being raised, as the latter gives entrepreneurs more chance of convincing someone to back their plan. I hope we get to a point when there is enough capital chasing ventures.
How do you see the VC space unfolding from here?
The exit market will get more vibrant, both for IPOs and M&As. More advisors and mentors will come into place, more angel investors; the market should become effective and friction should go away over time. The bigger draw would be what opportunity set are we addressing as an industry today, versus what we can address, especially in tier II and III towns. Today, we are addressing a very thin slice of entrepreneurial action. The education and healthcare sectors, which are on the periphery, will become mainstream, just like what happened to microfinance. Six years back, commercial capital was not chasing microfinance, it was only developmental capital; now it?s come within the ambit of commercial capital.