04 Apr How venture development firms can help businesses expand in India.
Amber Malhotra (Mr.), Founder, Managing Partner & CEO Sam Circle Venture LLC
A Venture development model describes the development activity focused on using best-practices and activities of experienced and successful business professionals and pre-angel and venture capitalists investing in order to help create ventures and angelcapital-ready firms which promise to create significant economic wealth for a region, state or country including entrepreneurial wealth and jobs.
Venture development organizations typically are organized as not-for-profit corporations. They may manage for profit or not-for-profit seed funds. Their sources of financial support are corporations, local and state governments, universities, research institutions, foundations, and individuals.
1) As an experienced investment and asset management professional, you have worked with leading universities and healthcare systems of the world to codevelop and commercialize solutions for mass-scale social, economic, and environmental impact. What is your thought on the present-day market scenario? How should enterprises build sustainable business models that will have a larger impact?
Historically Indian education system post-independence worked in silos with academic and research kept separate. This created an environment where our education over the period became qualification and not skilled based. The prescription based curriculum hampered innovation. The industry moved ahead in terms of its needs with additional training, which got fulfilled through the emergence of private players.
In the US University Systems, the academic and research coexist with the latter having a strong industry connect. This has helped the US become one of the most innovative economies in the world as they can commercialize this research. Ed and Med assets are contextual to the geographical locations and therefore play an important role as a catalyst for the social and economic development of the regions they are situated in. They also interface with the government for policies & programs for a conducive environment for the capital to participate. This has resulted in a collaborative ecosystem and cities like Boston, San Francisco, Detroit, Raleigh are some examples. Their economies have strong industry institutions connect, with research from universities continuously fueling innovation and therefore employability and entrepreneurship.
It will be a challenge for India to become a $5 trillion economy if it does not harness research. We not just need to encourage and support research in our higher education institutes but also create pathways for this research to be commercialized. Indian higher education institutions can become place makers for the creation of IP and the government should start creating a mechanism to fund this initiative, as that’s the only way we will make people invest and manufacture in India. Co-creation of IP will be the crux and India should leverage US university systems considering its scale, sectors, and integration with capital &corporations.
2) In this fast-paced urbanizing and technologically changing world, where intellect, capital & management require collaboration between developed and emerging economies. What are the best solutions for the enterprises to take their business to the next level?
Currently, India spends only 0.7% of the GDP on R&D, in comparison, the US spends 2.8% and Israel 4.3%. The government should focus on developing an innovation district around universities and increase this R&D spend through a well-designed program. We need to develop our intellectual capabilities for co-creation of IP to make programs like make in India successful. The government should start spending money on developing programs, which creates an institutional framework to develop products, services, and IP which is owned or co-owned by Indian institutions. US universities and health systems are uniquely positioned to provide technologies and know-how in helping us set up Innovation District around universities by leveraging the cultural, geographical and historical aspects of the regions where they are situated. Once there is a programmatic approach, industry and capital partner will follow.
The opportunity for Indian & US institutions is to create a city level framework for the co-development of IP for creating solutions for their respective communities. While we need a customized solution, we should take advantage of US universities’ century-old innovation capabilities of commercializing research and creating enterprises of tremendous economic value. Further to provide employability and entrepreneurship to millions of youths in India, we can leverage US universities’ academic capabilities to create curated programs around specific problem statements to harness our talent for specific skills. This will also be beneficial for the US to export its intellectual capital not just in know conventional areas and high-ticket item, but to look at eventual IP utilization by around 583 million in the age group of 10-35 years for small-ticket items like research, faculty development and continues learning. US universities and health systems stand to gain additional revenues, which in turn can be utilized to invest in their local communities. These innovations districts should partner with specific US cities, thereby promoting a bottom-up approach to create a collaborative network of people & places, as a two-way street, as some frugal innovations from India will have potential commercialization opportunities in the USA.
3) Despite the availability of Capital, most start-ups fail in India. What should be the go-to strategy to use the funds most efficiently? Give us a few examples of start-ups that have shut-shops recently, because of its poor financial intelligence.
The historical model of venture capital and private equity is made on the assumption of infinite growth. It is opportunistic and work on the premise, fail fast and winner takes it all. It is akin to a derby race where time, acceleration, coordination between the horse and jockey is the key. The lucky one on a given day is the winner. This transactional model is based on customer acquisition and the capital allocation for sales, marketing, facilities, and human resources. It took years for the USA to perfect this model and emergence of Silicon Valley as the Mecca of unicorns, nurturing innovations was in a sense end result, where physical proximity engulfed the whole region as a mindset for innovation and entrepreneurship. The principal driver behind this in the USA was the technological commercialization office in the universities to a very large extent. Further technological parks around university settings, for commercialization brought industry and academic in close physical proximity and accelerated venture creation. Intellect, capital, and execution happened in close physical proximity to create solutions, which by and large define today’s world.
India’s start-up industry is a front-end photocopy of this model to take advantage of a developing country rising income & consumption opportunity. The funding premise is based on what has worked in the west, modified to suit local needs with a local team. But all business models are not replicable around a single theme. India with its large population, rapid urbanization, cultural and geographical nuance is not one size fit market. Therefore in a scenario where there is an absence of ecosystem for research, development & commercialization of intellectual capital to develop business models, which are India specific, capital only play will have limitations in the long run. Without going into specifics of any particular start-up failure, if the underlying technology solutions is not innovative, solving any underlying problem or creating new pathways for delivery of goods or services and primarily based on an acquisition of customers, may have some success stories but not healthy for developing a robust ecosystem for venture development.
4) ‘Small is the new big,’ how can start-ups catch up to the big players in the emerging market? Throw light on the aspects that help start-ups grow faster.
When a company grows and becomes large, they also develop organizational & reporting structures and leadership is incentivized to generate profits. Bigger the company more hierarchical and bureaucratic it becomes which does not foster creative thinking and fast decision making. We have examples where companies were caught napping from dominant positions and in no time ceased to exist. The reasons are, large companies with capital rarely have a board or c-suite strategy backed by the right program, budget, and team, which acts as a start-up to stay ahead in the innovation curve. They are not hungry as they have a cushion to fall back on.
Start-ups on the other hand also require the right program, team, and access to right capital providers to create a disruption. It is where venture-backed start-up are better placed as it’s not just the capital but the mentors, network which puts them in the right place at the right time. There is no backup plan for a start-up to fall back on and most of the successful one has this hunger, perseverance and focus where success is the only end result.
But having said so, to make a big ecosystem of 58.5 million entrepreneurs in India organized around a venture development model, we need an institutional framework of collaboration between IP, capital, technology providers, so that a pathway for commercialization is created in a systematic manner
5) Give a comparison study, why venture-backed companies grow much faster versus non-venture-backed companies?
Venture back companies get access to navigation tools in the form of mentors, advisors who have done it before. They know the downside risk and can control that by letting the entrepreneur chase the upside and therefore scale much faster. Eventually business is all about managing revenue and cost and all business needs paying customers, whom you cater to by a product and services in the form of a solution.
But in the last decade, we have also seen an approach where all the money spent is on customer acquisition, and not necessary on developing a technology or process, with the hope that the rest of the field will be left far behind. In these companies, the business model is replicable, as there is no product disruption or differentiation and it is capital, which is trying to put it in a dominant position by eliminating all competition. But these are trends, venture capital is also herd driven where nobody want to be left behind.
6) On a concluding note, based on your robust industry experience and knowledge, what message do you want to put across to the readers/investors/business partners/start-ups/budding entrepreneurs?
In a fast-changing technological world with social and political alignment in thinking there is a need to revisit tools like GDP, a post World WarII development to measure the health of the economies. Growth cannot be infinite when resources are finite. In this global context, there is a need for a balance between climate change and development. The key question, especially for emerging economies like India, is to address promptly the basic needs of billions with right livelihood, having a home with access to electricity, water, sewage system, healthcare, and education. For developed economies like the US, to address the livelihood needs of its population with the shift in the way business is done in this technological changing world. Countries like India especially should learn from the mistakes of the west to create business models that are local but with global appeal. We need to make sure inequality does not get out of hand and our demographic dividend does not become a social problem in years to come.
If that is to be the case, then we need to also relook at how ventures are planned and built and accordingly change the approach of venture capital and private equity. Maybe it’s time to pay emphasis on tortoise strategy, where slow and study wins the race. Venture development is not a sprint but a marathon and it is time to look at business models, which pays equal emphasis on people, planet and profit. It’s not a winner takes all but there is a just and equitable distribution of wealth creation.