Is venture capital killing startups?

Just the other day, I had the somewhat unpleasant job of presiding over the shutdown of one of our investee companies. Not that it was a first – I’ve ‘lost’ a dozen or so companies in the last 15 years of investing, out of 50-odd companies that time and money has gone into, and I’m reliably informed that it’s a good ratio.

At the same time, the returns from the ones that survived and made it big have made us, I’m told again, among the best-returning funds in the country. Which made me wonder whether we were good in any way – or just the one-eyed in the land of the blind. But more on that later.

As always, we had documented the demises to our investors in our funds – the Limited Partners or LPs.

One common reason was “too early for the market”. And the next most common was “couldn’t raise the next round because the market turned”. Anecdotally, other causes were odd ones like “promoters didn’t get along” and we also had a couple we categorised as “governance issues” – officialspeak for “we caught them with their hands in the till”.

Nowhere among the reasons was that us VCs (venture capitalists) were to blame. While there certainly is much blame to go around our lot – one investor I know asked a friend’s company to morph into a copy of a US startup and then blamed the entrepreneur when it imploded – I’m sure I could write a long piece just on how misguidance by investors has killed many a startup – but the bigger issue is simply this:

That the VC fund structure simply isn’t good for startups – especially in emerging economies like India.

Here’s why.

Most VC funds around the world follow the US model in their tenure – they’re 8+2 or less often, 10+2 – which means they have 8 or 10 years to identify companies, deploy funds, nurture teams, take them to exit and then return money to their LPs, with a potential extension of 2 years for the entire process.

Here’s how the sausage factory works: if I raised money today – I’d have 3 or 4 years to find the couple of dozen startups to put the money in – and after that I’d have between 5 and 8 years to guide, help grow and exit all of those companies.

You can see the problem right away, can’t you? No Indian firm of any stature has had any real IPO (initial public offering) exit within 5 to 8 years of starting up. Even our new economy giants MakeMyTrip and Naukri took more than 10 years, while JustDial took more than 16 years to exit on the market.

Look at the big stocks on the BSE (Bombay Stock Exchange) – and make a list of those that had a meaningful IPO within 8 years of starting up. Your list will be an empty one. All the giants – whether it’s a TCS or Infosys in India, or a Google in the US, took much longer than 8 years to exit.

The fact is – it simply takes longer than 5 or 8 years to grow a company to a meaningful size and big public exit in India – and in most other parts of the world too.

So if you’re a fund that comes in at the start of a business and does all the hard work of finding the opportunity and promoters, helping them build their team and business, guiding them through thick and thin, and then growing them past their rivals to profitability and leadership – then you simply can’t get the benefit of staying till the end.