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Dear Indian VCs, Your Herd Mentality Is Killing Innovation

20/04/2016 8:17 AM IST | Updated 15/07/2016 8:26 AM IST
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Here's a bit of a dialogue I recently had with a partner at a well known venture capital (VC) firm:

Random VC1: "How many people do you expect to hire in this time frame?"

Me: "Around 35."

Random VC1: "Don't you think that's slow?"

Me: "Well, we'd like to remain lean plus our business model allows us to be so. Have a look at my projections sheet."

Random VC1: "Ah! Has random VC2 gotten back yet? We'd like to chip in if they commit."

Me: "Not yet."

Since then, random VC1 has been MIA despite demonstrating solid interest in the business to start with. So much for respect of a founder's time and effort! Imagine what would happen if we did take funding from firms of these kind! Guess we'd be forced to become a churn-ware factory in no time.

I've been told by an analyst at one of these funds that they are specifically told not to meet with companies that are attempting something "absolutely new".

I've raised capital from some of the most active and marquee angel investors over the last few years. But actively raising institutional money over the last couple of months has brought me closer to an odd gap in the investment marketplace. There are a very few investors actually vying to be first to discover hot new tech startups or create new markets. Instead, they're always trying to find an American/Chinese replica or blindly follow the investment decisions of other firms.

I find this abysmally ironic.

Most entrepreneurs want to start companies solving problems in a never-done-before way and go where others haven't... but these venture money people are the exact opposite --their mantra is "I'm going to do the same thing everybody else does, because they might be doing something right." This herd mentality runs deep in VC firms globally but in India, where venture capital is limited and hard to come by, its stifling innovation.

In fact, I've been told by an analyst at one of these funds that they are specifically told not to meet with companies that are attempting something "absolutely new". They go by a shopping checklist to satisfy their LPs and follow the few cool cliques; sentiments are created by this bunch, and the overall effect is a herd mentality. And not to forget, a lot of these partners are super-fearful people. They just don't want to be singled out for the blame if anything goes wrong. So much for supporting entrepreneurs who're largely a fearless clan.

Just as a spunky and bold attitude is unconditionally a must for a successful entrepreneur, these traits are absolutely necessary for VCs as well.

While most VCs talk about bottom line fundamentals to the press, they actually value me-too businesses and lottery tickets over solid ideas that need more visibility.

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Image credit: Mike Keefe, Cagle Cartoons

No wonder, it has led us to where we are:

1) Several (not all) VCs continue to invest in under-developed business models just because the coolest fund around led the start-up's first round of funding.

2) Meanwhile, other VCs will now follow the trend and fund any start-up that is doing 'something similar' because they have a deep-seated FOMO.

3) A few months down the line, cracks begin to appear in the team, business model, total addressable market (TAM) etc. and many other copy-paste startups have already cluttered the ecosystem.

4) Now, this causes other investors to shy away from the space to the detriment of other better companies that need funding to accelerate growth. And, of course, the lousy start-ups that got funding at undeserving high valuations struggle to raise more capital without creating any real value in the process, leading to negative sentiments.

Another thing I've identified during my fundraising journey is that I connect more with VCs who were entrepreneurs before. These people tend to be supportive from the go, communicate better, have a vision, and behave more like partners rather than gods. Most importantly, they tend to be more sincere and clear about what they want out of the time they spend with the management. But such entrepreneur-turned-VCs barely exist in the Indian ecosystem.

All in all, excessive attention by VCs to some specific spaces and virtual neglect of other business models has led to underinvested opportunities in India.

Indian VCs really need to become less fearful, gain more vision, become more open minded and relook their methodologies. Just as a spunky and bold attitude is unconditionally a must for a successful entrepreneur, these traits are absolutely necessary for VCs as well. And this has to translate to more than just B-Plan analysis and risk taking--it is the courage to support radicalism, and not listen to the herd. It takes an effort and a solid vision, let's face it-- it's never easy.

All in all, excessive attention by VCs to some specific spaces and virtual neglect of other business models has led to underinvested opportunities in India.

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Image credit: Gallerily

The best performing funds/investors aren't influenced much by the opinion of other investors. A lot of investors claim that the key to success is finding the next Facebook. In my view, this is the very reason why all the VC firms in India have failed to build the next Facebook. It can never be about discovering the next Facebook or AirBnb-- it's about positioning your fund to celebrate radical game-changing ideas.

What do you disagree with? What do you agree with? What did I miss? Let me know in the comments below.

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