India Has a Series A Drought

There’s been a lot of recent talk about the Series A crunch in the US. Having spent the last two days at the AVCJ conference in Mumbai, I’d like to propose that India has the opposite problem: there’s a Series A drought in India. Many Indian firms can write large ($500K-$1M+) checks but there simply aren’t enough companies looking for that capital.As with most conferences, the most interesting conversations tend to be on the sidelines and in the hallways. Across the investors and LPs I met, the sentiment seems to be that investors are “cautiously optimistic” about the rise of product companies in India. (Which is another way of saying “it’s not that we’re not interested, it’s just that we don’t want to look dumb later on.”)

When pushed for specifics, these same investors would often say something about the lack of exits and the distrust of entrepreneurs. Although I haven’t done the research, I’d bet that there’s a strong correlation between their pessimism and the year that they raised their fund: if they raised their fund five years ago and they haven’t had any good stories emerge from their investments, it makes perfect sense to now take the contrarian position on the market. Especially if they’re planning to raise another fund. In other words, when you can’t accept the responsibility of your actions, you might as well blame something else.

On the investor side (and, perhaps by extension, on the founder side), there are three main problems in India:

  1. The market for private companies is not well understood by someone that has the financial capability to write checks.
  2. There are other asset classes within India that have (and continue to achieve) high rates of return. (The Indian real estate market seems to be a good example of “up and to the right.”)
  3. The vast majority of VCs in India simply haven’t innovated in any meaningful way. (I spoke to one “early stage VC” that raised a ~$30M fund a few years ago and he’s written three checks to date. All for less than $1M.)

The point is that there aren’t enough early stage companies being funded in India. Which means there simply won’t be enough good ones that make it to the VC level of funding.

The obvious answer here is to encourage more angels to invest in early stage companies and/or for VCs to start writing some of those early stage checks on their own. (I’d argue that the first idea is the only viable one in the long-term but that’s another post itself.) I’m sure one or both of those things will start to happen as the Indian startup ecosystem matures. (I know that we’ll play our part in helping the ecosystem evolve as well: Pankaj Jain recently joined us in Delhi, we’ve announced our tenth investment in India and, amongst other things, I’ve been running angel education events all over India for the past year.)

For the Indian VCs reading this, what this all means for you is that access to few deals that make it to those larger rounds is going to be incredibly competitive. If you can’t (or won’t) write checks at the earlier stage, there’s an increasing likelihood that you won’t even be given an option to consider fast growing companies. Regardless of what happens, there’s one important thing you can do to improve your chances: build a brand. Preferably, a founder friendly brand. (One way to do that, as Naval once put it: less meeting, more tweeting.)