Venture Capital Opportunities in India
10 years ago: clear business models but small addressable markets. Now: large addressable markets but unclear business models.
Given a choice, I prefer the latter b/c strong entrepreneurs can solve for business models whereas the market size is outside everyone’s control.
The key Qs then revolve around the timing of
(i) business model clarity (what is the business model)
(ii) business model validation (initial tests/experiments)
(iii) business model proof (demonstrating that it works, at the unit level or on some part of the business).
Business model Qs are natural during periods of innovation. Historically these Qs would get answered during the Series A & B periods, with less than $15M of capital raised. Expansion capital (Series C and beyond) would then be available to scale a working model.
Exceptions to this were companies that we're executing against a known business model (few or no leaps of faith required) and management/investors were making a clear strategic choice about when to focus on revenue.
Companies that delayed executing against known business models typically could only do so with strong access to capital from aligned investors who shared the belief that this was strategically the right way to win the market. These were exceptions.
This is all in history. We’re back in an environment in which companies are raising $15-75M with massive leaps of faith in business models. That's fine if this capital is used sensibly to figure out many of the open questions.
But that's not what is happening, because it's easier to spend the money to grow instead of addressing more challenging Qs around business models. And the race for market leadership (ie scale) further reinforces a sole focus on growth.
So the business model viability questions keep getting pushed out. And we miss out on the opportunity to use this capital to build genuinely strong companies. Which is what we need to celebrate IPOs and repeatable liquidity events instead of paper mark-ups.
Author: Bejul Somaia is a business angel and partner of Lightspeed India investment fund.