Over the past 15 years Promod Haque, Managing Partner at Norwest Venture Partners in Palo Alto, has created an unrivalled investment track record.  Forbes honored him as a top dealmaker for 5 continous years and crowned him as the #1 venture capitalist based on performance over the last decade.  In a remarkable break from the overall industry, his firm sold 11 portfolio companies for a combined total of over $1.6 billion since 2001.  He was an early investor and a board member of Cerent (acquired by Cisco), Siara Systems (acquired by Redback Networks), OnDisplay (acquired by Vignette), Winphoria Networks (acquired by Motorola) and Extreme Networks.  While he continues to invest in the U.S., he is also seeking winning investments in India.  On September 13, he shared his views of investment trends and advice on creating winners with a full house of TiE Boston members.  Here is a brief summary.

India Dealflow:  You tend to see three different kinds of startups in India – Services, Consumer Internet, and New Product.  Investments in knowledge-enabled services have been the staple of venture investors in India.  Recently, there is more interest in consumer Internet businesses.  Often, these are adaptations on business models that have already worked in the US and other countries.  Take travel for instance.  Over the past few months, venture firms have invested in MakeMyTrip, Travel Guru, Clear Trip, and Yatra Online.  The third category consists of companies building new products for the domestic and the global markets.  

U.S. Still Important:  Despite the flurry of activities in India, the US market will continue to be dominant.  I’ve been closely following the global investment trends in new technologies.  Last year, the American corporations invested $490 billion in technology.  The corresponding figures for China and India are $23 billion and $17 billion respectively.  That is why the Indian product companies will position product management functions in the U.S. – that is where the early adopters are.  But India can be a great place to implement best practices gleaned from other markets.  Ambanis are creating a nationwide retail chain of stores and you can be sure that they will execute every piece of technology that gave competitive advantage to Wal-Mart.  There are examples of other technologies, particularly wireless, where other countries moved quicker than the U.S.  Yet, product companies cannot afford to distance themselves from the U.S. markets.

Venture Model for India:  In the past year, there have been numerous announcements of new India-based venture firms.  Several leading firms in the U.S. have raised India-only funds and formed local investment teams.  Sequoia acquired an existing Indian venture firm.  But that model doesn’t give the local venture teams the benefit of experience and wisdom that have accumulated over the years in the parent teams located in the U.S.  Therefore, I do not think that’s a wise way to seed and develop a new venture market.  My approach is different – make the Partners based in U.S. select and manage investments in India.  It’s hard work and you’ve to travel a great deal.  But if you want to really add value as a VC and build highly quality businesses, you have to do it yourself while you simultaneously mentor local investment teams.

Distributed, Efficient Enterprise:  Thus, venture firms and early stage companies are increasingly operating across borders.  This is truly a flat world where you tap resources where they are best available for the best price.  It has implications for what skills you seek in an early stage company.  When we’re seeking senior executives talent, we often see if the candidate has an ability to manage distributed teams and works with multi-cultural teams.  Distributed operations are also capital efficient.  These days I do not want to invest in a software startup if it is going to require more than $25 million investment.  The exit opportunities are not what they used to be.  Similarly, a hardware startup must get to break-even in four to five years with no more than $45 million financing.

Not Just Capital Saving:  There are several reasons why venture funded companies often seek India-based employees.  When one of my companies first hired engineers in India in 2001, we were not even aware of the labor-arbitrage opportunity.  Winphoria, which was based near Boston, was expanding its operations but couldn’t find engineers it needed – people were just not available.  After a lot of cautious deliberation, the Board allowed the company to hire engineers in India.  Lower wages were an extra benefit that allowed the company to ramp up much faster than it otherwise could.  So, startups go to India and other emerging countries because they can find talent there.  Offshore development also leads to lifecycle acceleration.  This is key.  Product lifecycles are getting squeezed and companies cannot stay competitive if they are not shrinking their product development times.  Several venture funded companies have outsourced product development jobs to our portfolio company Persistent Systems because they want to introduce product rapidly in the marketplace.

Long-term Outlook:  I have several concerns regarding the future of the U.S. engineering talent.  Fewer American kids want to study hard sciences and engineering while foreign applications to our universities are declining.  Our universities graduate about 70,000 engineers per year while China and India produce 600,000 and 300,000 each year.  Consequently, large corporations are increasingly hiring abroad.  IBM announced that in two years 30% of their global workforce will be located in India.  Most other technology corporations are aggressively expanding their workforce in India.  Over time, the skill shortage in the U.S. can seriously hamper the growth of innovation taking place in the U.S.

Breaking out of competition:  The venture industry is bigger today and it is sourcing and funding entrepreneurial talent globally.  As a result, the startups have to deal with more intense competition and uncertainty.  When startups stumble it can mean one of two things – either the market is ready (and there is a lot of competitive pressure) or it’s not.  If the market is not ready, then the startup needs to conserve resources so that it can stay alive until demand grows.  If the market is ready, then speed of execution is key.  It needs to raise funding, hire talent and accelerate product and market development.

Outlook for India:  I’m very optimistic about India’s growth prospects.  You can see examples of true innovation and dynamism there.  In addition to high-tech, I believe that India can also do well in the pharmaceutical and biotech industries.  The Indian companies have a strong resource base as well as skill and cost advantage that the pharmaceutical industry sorely needs.  

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