In India, Focus on the Fundamentals

By Sandeep Singhal

At Nexus Partners’ weekly videoconference last week, we compared the U.S. investment climate to India’s, given that we are a venture capital firm that operates both in Silicon Valley and Bombay.

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Highways, round-the-clock power, and basic infrastructure investments are the best bets in India.

My colleagues in our Menlo Park office in California observed that Silicon Valley venture capitalists were primarily investing in cloud computing, specialized e-commerce, ways to optimize online advertising, social gaming and the use of social media in the business environment.

When we compared that to our transaction pipeline in India — apart from a smattering of Internet, mobile, and software providers — there were companies in financial services, light manufacturing, logistics, education, power equipment and energy efficiency. The swift realization we came to was that, while the U.S. VC industry is seeking to maximize sophisticated consumer experiences (I suppose cloud computing also is about productivity), we in India largely see opportunities in the fundamentals.

In both places, investors are searching for 25% to 30% annual returns. But what are the factors that influence these different approaches?

Economic growth in developed markets like the U.S., where basic infrastructure is mature, is 1% to 2% a year. Consumers already have access to a range of financial products, high-quality housing, superior highways, round-the-clock power, fast and ubiquitous broadband, vast amounts of content and various technologies to consume it, and highly organized retail channels to pay for their consumption.

Companies have spent a significant amount of money over the last three to four decades deploying various productivity-enhancing tools like enterprise-resource planning and customer retention management software. They have seen labor productivity jump in that time, which has freed up time for consumers to look for new experiences.

In this environment, investors have to dig deep into sub-sectors within a particular industry to get double digit growth opportunities. VCs have to search for disruptive ideas that can give exponential returns because most traditional sectors grow at levels that can be funded through internal accruals and bank debt, or by a mid-market private equity industry that expects lower returns.

Contrast this to India, where we expect a return to 9% real GDP growth this year, and where industrial production jumped 17.6% in April. In this market, one can get venture firm-sized returns at the broad sector level and across many sectors.

Sandeep Singhal

We have seen engineering services, packaging, agriculture, consumer products and auto component companies, to name a few, growing their top and bottom lines by more than 50% each year. The basics of venture investing – backing the right entrepreneur and/or founding team, looking for sustainable differentiation and seeking capital efficiency — are more important than finding the next big disruptive idea or that next tweak in social networking.

India is therefore a very fertile ground for entrepreneurship across many sectors and that is why Nexus can exist as a sector-agnostic fund. As an entrepreneur, the key is to find some differentiated idea that is fulfilling an unmet need, build a good team around you, and be willing to take some risk. You don’t need to be from an Indian Institute of Technology or have an MBA; the most important thing is to make sure you execute well on the idea that you pursue.

Great Indian companies have been built on sustained execution and not just a brilliant idea.

There were many companies that took the original licenses for the cellular spectrum, but Bharti Airtel was one of the original few that scaled up. Many companies started in the online travel space in 2000 but Makemytrip is the only one that stands out today from that batch.

Great execution starts with having a very clear understanding of the problem that you are trying to address, having a plan to meet that need, and building a strong team to execute against the plan. It is about being able to create and sell a compelling value proposition to your customers, always seeking feedback from them, and being flexible based on what you hear. It is about being aware of what competitors are doing and being a step ahead of them.

As the founder of Medusind Solutions, a healthcare outsourcing provider targeting the U.S. market, I had to address all of these challenges, and that experience has made me a better investor. As a new member on the Chief Mentor panel, I am hoping to write about that experience as an entrepreneur and as an investor across multiple sectors.

–Sandeep Singhal is co-founder Nexus Venture Partners, a venture firm with $320 million under management. Nexus has an active portfolio of over 20 companies across several Indian industries including technology, consumer services, media, outsourced services, the Internet and mobile, alternate energy and agribusiness.