“India looks more like 1999-2000 than the US does”

I was in the Bay Area recently on work and met a host of VCs and tech investors. The bubble talk was one of the first conversation starters, not surprisingly. To think of it I was discussing this with the same set of people around nine months ago on my last trip but this time the chatter was significantly louder. The answers though were more or less the same.  A lot of the stuff that I gathered from meeting these investors—some of them are actively chasing deals in India as well– spread all across Sandhill Road was ‘on background’.

I’ve been trying to convince these folks to come on-record but I’ve hit the wall most times. It’s pretty much the same thing being played out in India, too. Privately held companies and investors in these companies are holding off the most relevant and also vital information from the press which is working very well for them. All you get is a string of platitudes when people come on-record. It’s a big concern which tech journalists in the Valley are starting to highlight because it gives a lot of cover to companies and investors.

So I’ve decided to put this one interview out I’d done with a top VC who after going back and forth decided he did not want anything at all out in the media. I chose to use my blog instead to publish some parts of our conversation where he tells it like it is. I think he summed up the irrational exuberance among his Indian brethren and also among entrepreneurs pretty accurately.

Let me know what you think? Why is it that so few or none of the investors publicly admit to failures, talk about valuations being out of whack or say anything critical about entrepreneurs? In India these issues are even more pronounced.

Issues in the US tech market?

There are no simple answers for the US like it’s a bubble or no or that it’s different this time. It’s too simplistic. So, there are a lot of interesting things that are worth investing in while the opposing force is that there is over exuberance and sloppiness  among both entrepreneurs  investors. Surrounding the good opportunities is a lot of noise, and unsustainable or bad behavior. So we have to pick through all of this. However, we should feel good about being a VC right now because there are lot of great ideas and businesses to invest in. It’s just that our job has gotten harder because we have to sift through a lot of ridiculous stuff to get there.

What are the big issues?

There are some fundamental bad habits like some entrepreneurs are micro optimizing and getting caught up in the hype cycle. They are thinking that they can do the same thing like Facebook or Google did. That is a bit unrealistic. But things will come back around. People who have the mindset which is that they want a good investor, find a partner, thankfully there are lot of such founders. However, there are some who are not in this for the long run but are in a quick hit kind of business. It’s the same with some investors who have too much money but not enough attention and help to offer to entrepreneurs. Along with that they are doing their bit driving up valuations as they are not in it on a persistent basis, they come when markets are frothy and go away. We have to contend a little bit cause this is the only business we’ve always be in. Sometimes watching someone do a bit of a silly deal, that’s the price you pay for being part of this market. But if I had to make any prediction, I’d say invariably if you have this much noise and sloppiness, and too many companies being funded and prices being out of the whack, there’s an inevitable correction that is bound to happen. It’ s not like a bubble that bursts and totally caves in on itself, it’s a correction. That’s the normal thing that should happen. If you zoom out the longer term trend line though is on the rise.

How different is it from 1999-2000?

It was different because everything that was being built was unsustainable. Right now, there are many companies with big valuations, but at the core they are good businesses, they may be running too fast and burning too much money but they still have a viable business proposition. Instead of a massive correction in stock market, what will happen is screws will get tighter, and people will get more disciplined. I don’t think there will be a massive implosion. I look at our portfolio and compare it to 1999-2000 at that time  everything looked flimsy. Right now, all of these are very good companies, even if they get valued at 50% of what they are valued at today, it would be a bargain as opposed to going from billion to zero like in the original bubble of 1999-2000.

Unicorn hunting

There’s never been so many of these billion dollar technology companies. Where will they all go? So if you have a recurring revenue model with a strong consumer proposition you can work just as well in a downturn because you have real stickiness, product for which consumers will pay. It’s companies that have no real business and are valued at a billion dollars and they are thinking someday they will invent an ad model- that’s problematic. Consumer businesses are the flimsiest businesses. I think the ones you see the most likely to be hit are so far ahead of themselves with audience and engagement but no money. So when things start tightening these consumer facing companies will be disproportionately impacted.

Where does India stack up?

India has bigger challenges than the US. It has two things that make it very exciting and scary at the same time.On one hand, it’s so early in what’s potentially a massive domestic market that you get excited about investing in products and services that will address that market. Where will you see from 10 to 100 kind of growth? Also, there’s some thread that connects China and India. The challenge I see is that there has not been any prescribed path to liquidity in venture investing in India. Whereas here in the US, you can think of selling your company, or going public. So there is no evidence of an Indian multi billion company exiting and that’s a big bet to take on huge dollars going into these companies. How are you going to go public ? How do you get out? Who’s going to buy it? There’s lot of risk in India. Also, all these companies are buying the hype a little bit too much—no one has forced them to prove that they can make profits. It’s one thing to lose money but know you can make money, and another thing to lose money and always lose money.

Investors are treating India as the flavour of the day and making a big splash there. A lot of people are coming in doing crazy deals which makes me feel India is poised for a bigger and more dramatic correction than the US.Companies there burn a ton of cash, they have very thin management teams and have not shown an ability to withstand a downturn so what happens when the money dries up. It could look more ugly than the US, India looks more like 1999-2000 than the US does.