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‘Indian VC market is under-invested’

Chris Yeh, co-founder of Silicon Valley firm Wasabi Ventures and co-author of Blitzscaling, a book on profits and pitfalls of startups scaling rapidly, spoke about India’s uniqueness as an investing market and how despite record funding year after year, India may still be an underinvested market. Edited excerpts:

What have been your biggest learnings from this first India visit?

Before this trip, I had not appreciated the incredible speed at which this ecosystem is developing. What’s most exciting is that many of these companies are India-specific or building for India. The market dynamics here are so different from the rest of the world. VCs sitting in their fancy offices abroad try to apply the same playbook everywhere, but if they come here, they will realize that the US or China playbook cannot be applied here.

But along with growing quickly, in India and globally, what about the risk of growing too quickly?

One of the things we say in Blitzscaling is that it is definitely risky to prioritize growth. But what is the potential reward also has to be asked. If you can balance the equation only then take the risk. Very often where companies go wrong is that leadership—founders or outside CEOs brought in—say that we will invest in growth alone and it is the only factor, instead of asking, “If I invest now, how will I get a payback later?” They need to think rigorously about whether the market dynamics will enable that payback.

A lot of VCs are saying that in the US,SaaS is all that anyone wants to invest in these days. Are you seeing that as well?

The venture capital industry has a remarkable tendency towards overreaction. There have been waves over and over where VCs say consumer internet is dead. One of the big perils of the venture industry is pattern recognition. But that is something which occurs at the surface level. Personally, in 2008 I had a chance to invest in Dropbox. And I said, “these online storage companies have never succeeded. Now Dropbox succeeded for many reasons, and if I had met Drew (Houston) I would have realized his vision. But my pattern recognition told me this will never make money, ignore it.

On the one hand, we have seen excess capital ruin companies, but it also gives entrepreneurs a better chance than ever. How do you balance it?

This needs nuance. There is no better time to start being an entrepreneur. But it is not the best time to become a successful entrepreneur where capital is flooding the markets. If you look at the history of the most successful companies, they weren’t founded in the best economic era. They were founded post the dot com bubble, or post 2007. Because then you can go against conventional wisdom and lock up the market when everyone else is looking elsewhere.

Is there also less focus on governance than ever?

There has been, unfortunately, a tendency for VCs to be “founder-friendly”, which translates to forgoing governance. That’s why we’ve seen dual-class shares, for eg. Now that’s great if you have a genius entrepreneur who knows what’s best for everyone. But it is dangerous. The reason we have a democracy is because giving one person power is dangerous. So, everyone would love a “benevolent dictator” but that’s not realistic and it is very rare that autocratic rule produces better long-term results than democracy.

Have the amount of VC investments been justified by the returns they have generated so far?

It’s an important question to ask. This is a $50 billion a year industry but we saw a $100 billion exit value, so that lines up well for now. But I could argue the Indian VC market is under-invested. VCs are investing in the future, and ideally with a 10-year horizon. It has been shorter recently but it should be 10 years. With India’s population of 1.3 billion, and if you look at venture capital as a percentage of the economy projected out 10 years, then the capital deployed here doesn’t come close to equivalents in the US and China.

Source: Livemint