Recession is by and large a signal to end the old ways and start the new ways, says Silicon Valley veteran Kanwal Rekhi
Bangalore: Silicon Valley veteran Kanwal Rekhi’s belief that an economic slowdown is about the best time to invest in technology start-ups stems from his own experience. Rekhi started on his own with Excelan, a firm he co-founded and later sold to Novell Inc., after being fired from three short-lived jobs in a weak US economy in the 1970s.
Rekhi, an investor in early-stage companies since 1994, is now managing director of Inventus Capital Partners, a venture capital firm headquartered in California, US, and focused on India.
Inventus, which has made one investment since it raised a $1 billion (or Rs5,158 crore now) fund a year ago, plans to increase deals this year. It has already lined up two investments—Bangalore-based online bus ticket service provider redBus, and an hospital automation service provider—says Rekhi in an interview. Edited excerpts:
In the current environment, are venture capitalists (VCs) freezing money?
I don’t see that. VC money is the money that has been tapped from institutions with a promise of very high returns. And that means you have to put it to work. If we sit on the money and get 2-4% returns, we are not doing what was expected from us—(that is,) to produce 30% returns. (VCs) manage funds of investors and it is normally a 10-year cycle. If the recession lasts three years (and) I sit it out for three years, as a VC, I am in trouble if I don’t put the money to use.
By the way, this is the best time to be a VC. Best entrepreneurship happens during the recession. Recession is by and large a signal to end the old ways and start the new ways. That is a signal where entrepreneurship thrives, where resources are freed up, expectations are moderated, the discipline starts. So you end up with an environment where entrepreneurs who start during this (period) are very disciplined. They are not fair weather entrepreneurs and for a VC, it is also better because the valuations are lower. For an entrepreneur, the environment is full of resources—he gets cheap land and people.
So, you are investing now. What is the money you are allocating?
We are doing more investments this year than last year. We are a small fund of around $1 billion. We are in the early stage of investments of around $1 million each. Since we opened up our business in last March, we did one (investment) in nine months. We have done two-three (already), and by the end of this year, we would have done five or six.
Which are the companies you have invested in India this year so far?
In the technology area, we will make announcements in the next few weeks. One is in the health care sector (with focus on) small hospital automation. (A) lot of small hospitals in India are not automated. This is a company offering services to small hospitals— right from patient information, lab management to drug management, they make the hospitals as efficient as any of the major hospitals in a cost-effective manner. The other one is (an) Internet bus ticket service provider in Bangalore.
Is it redBus?
They already make Rs30 crore of revenue (annually). We are in the process and the term sheets are being prepared. It will be done in a few weeks.
Are you also seeing more entrepreneurs building products for the local market than for the Western world?
Both are there. Local market is getting excited. The market here is growing, while the Western market has slowed due to the recession. You also can build, test and validate technologies in the local market. They can also look outside; the US is shrinking now, but look at places that have similar conditions—Africa, South-East Asia and Latin America.
Are there still expectations of 30-40% growth from companies in the current environment?
No, small companies are still in the high-growth phase. What happens is, slowdown affects people who are big and been there…30% on Rs5 crore is Rs1.5 crore, while 30% on a Rs500 crore revenue is Rs150 crore. So small guys won’t feel the slowdown.