Innovating Venture Capital - A new model?
I came across this interesting article from IEEE which takes a close look at why VC's are traditionally risk-averse when it comes to true innovation. Although the article's scale of innovation is self developed and debatable, I agree with the gist of its analysis. Institutional investors chasing better than stock market returns would like these returns within a fixed time frame ( say 3-5 years) and with greatest possible certainity. They don't care about technology. This forces general partners to avoid risk and invest in startups which are riding the wave.
What if , instead of institutional investors, retail investors were roped in to raise funds? One way this happens already is the stock market, but to IPO a company needs to reach a certain level of maturity. Is it legally possible( in India, or in US?) for a private VC firm to raise money from retail investors for investment in seed/early stage startups?
I haven't done much analysis, nor am I a financial expert. But if you had invested 500 rupees in Bharti Airtel when Sunil Mittal was just starting , you can imagine how much that would be worth today. To put it in perspective, Warburg Pincus realized 1.6 billion USD from a 300 million USD investment they did in Bharti as late as 1999.
India's strength is in numbers. Delhi's population alone is 130 million , if you get 1 million to commit 1000 rupees as a one time investment you have a 1000 million rupee fund. How many seed stage startups can it sustain today at 1-10 million INR per startup? 100-1000. Let the fund make bold , but not stupid, investments which go beyond ecommerce and travel portals. Let the fund hire full time engineers to evaluate opportunities. The question is how soon those 1 million retail investors are looking for returns on their 1000 bucks. 1 year , 5 years or 10 years? I bet you could convince them to wait much longer than an average institutional investor. 1000 bucks is the key.
I know this is all in theory but the idea sounds intriguing to me on three fronts. First, retail investors get a piece of action in VC space. Second, seed stage funding is no longer a pipe dream.
Third, innovation gets a kick.
Do chip in with your comments.
1 comment:
I'd wondered about this as well.
Unfortunately, regulators are traditionally averse to letting small investors participate in more risky investments (like venture capital, and in India, real estate funds). The presumption is that the small investor is ill-equipped to judge and bear the larger risks that this investment entails. I'm not sure I agree, but that's the way the powers-that-be think.
Also, the investors ability to hold the VC accountable for his actions becomes less potent the smaller he is (the prinicpal-agent problem that economists talk about). Yale's endowment fund can make VCs squirm, but Ramu from the nukkad has only so much leverage with them.
Assuming we get around all the regulatory hurdles, the cost of acquiring a million investors would be non-trivial. How do you sell a VC fund to a million people? How do you convince them to pick your fund over several others'?
Karthik
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