Day three of our trip in New Delhi, we visited global venture capital firm Lightspeed Venture Partners. We met with Managing Director Bejul Somaia, who led us in a great discussion about how this venture capital firm is unique in its global positioning, about his experience and about his views of India.
What’s different about Lightspeed? It is only one of a handful of Silicon Valley venture firms that has taken a global view of its business. The same technology, transformations and disruptions that have played out in the U.S., Lightspeed anticipates will happen in other large markets, creating significant value. Lightspeed currently invests in China, India and Israel. It invests in everything that is technology or technology-enabled and was the first investor in consumer companies such as Snapchat, Google Nest, Grubhub and Honest Company.
Lightspeed is paving a new way for tech entrepreneurs. Historically, India was not a private equity market. Companies would capitalize themselves through bank financing and go public very early. When looking at public companies in India as a set, there is a massive long tail of companies that are small and not traded, but this was the only way they could get capital. The Indian banking system tends to act conservatively and primarily provides asset-based lending rather than cash flow-based lending. The cash flow-based lending is primarily fulfilled by showing balance-sheet performance to the banks, and still banks will be conservative in the loan amount they provide. Startups that don’t yet have cash flows or revenues would not get funded by banks. Furthermore, young entrepreneurs in the tech industry are developing IP businesses, so there are no assets, and thus banks will not touch them.
On the private equity side, most investors refuse to take a risk in capital loss to unproven business models. In many cases, entrepreneurs would go to large Indian business companies such as Reliance or Tata because these conglomerates had many relationships and large scale. However, entrepreneurs would lose ownership in their company to these large firms. Venture capital has been a facilitator and a way of enabling entrepreneurial technology companies in India; where entrepreneurs can start their own companies with financial backing and still maintain control.
Lightspeed’s strategy is investing in early stage consumer and enterprise technology companies. Its investments focus on the early stage of company formation — requiring seed capital needed in the pre-revenue stage. This capital is needed to get new companies off the ground that are considered high-risk investments with inflated ambiguity in technological risk, market acceptance and business model. Lightspeed bears the risk of capital loss in these new ventures. It is engaged all the way through to the board level and has a 20 percent to 30 percent stake in these companies.
Lightspeed’s first check for a new venture predominantly falls between $1 and $6 million, and subsequently capital is layered in over time as companies grow. Nevertheless, Lightspeed’s impact goes beyond financial help. It helps entrepreneurs identify and recruit talent, build teams, develop strategy and create milestones to take new tech companies from zero to IPO in its most successful cases.
When Lightspeed started investing in India eight years ago, there were 18 million internet connections, all land or wire line. Today, there are approximately 350 million internet users, and for the vast majority the internet is mobile. Many first-time users will experience the internet only through a mobile device and think of “the internet” as Facebook’s WhatsApp, with many not having any knowledge of a browser. Conversely, mobile browsing followed internet browsing on a PC in the U.S. and China, and both countries tend to utilize both simultaneously today. With India’s growth in smartphones about 100 million per year, Lightspeed’s investments in India are primarily around smartphones technology. Unlike China, which created its own versions of Facebook Twitter and Google, India has an open internet market in which Facebook, Twitter and Google are active players.
India is a market that will test everyone’s patience. Somaia said that for any business “you will only be in India if you really need to be, and if you’re there for any other reason you won’t last.” Lightspeed believes that to remain good investors in Palo Alto, it needs to have a good understanding of what’s happening in India and China because these markets are where the next billion internet users are going to come from.
For example, Somaia mentioned that Google entered the Indian market in 2001, and 15 years later the digital ad market is now 800 million. Many people argue that Google entered too early; however, today Google controls 60 percent of the entire ad market, with Facebook following at 35 percent. Additionally, of the 20 venture capital firms that entered the Indian market around 2006, only half remain. The key to doing business in India is to keep a long-term perspective.
Of Indian origin, Somaia grew up in Kenya, studied in the United Kingdom, completed business school in the United States and worked in the U.S. as entrepreneur and with a venture capital firm. His diverse perspective of the developed world coupled with his past 11 years of experience living in India gave us a unique perspective on where India varied from other countries in the tech industry. What we learned from him is that even in an innovative sector such as digital technology, the rapid rate of change and level of disruption are exponential, and it is essential to understand the economic environment in which you’re doing business.
Read the third post about the GLEMBA Class of 2016 international study tour to India: GLEMBA Class of 2016 Visit to Safran India Private Limited.
