I was at the IIT Mumbai eCell event on Sunday and had a chance to meet students from various colleges all over India. The event was an eye-opener for me, given how many students were interested in entrepreneurship. This event had over 1200 people this year, and that was a 25% increase from the previous year. It is exciting to see the uptick in interest from students on becoming entrepreneurs in India.
I was on a panel with Suvir of Nexus Venture Partners and Bharat of Aditya Birla PE fund. A quick poll of the audience indicated that over 70% of the students were interested in starting their own venture and a similar percent were keen to build a non-software, or Internet / Mobile venture.
I clearly disappointed the audience when I said I would never invest in a non software / technology venture, and I had over 20 students come to me after the event to express their dismay. They were also very upset that I would be so categorical about my position both on a personal level and also as an investor at Microsoft Ventures. While they understood that Microsoft would not be interested in a non software company, they were curious as to why I would, on a personal basis, avoid these companies.
This post is primarily me addressing the question as a seed investor in the early stages of a company.
There are 3 parts to my answer.
1. Expertise: I dont have any knowledge, connections and value to add in a non-tech company. I invest primarily small amounts of money in an individual capacity so I can help the entrepreneur grow their business, besides just give them money. I dont have the background and intrinsic know-how of domains such as healthcare (if you want to run a specialty hospital) , education (if you want to start a school) or a restaurant.
2. Growth: My personal experience has been with about 30+ companies that I have invested in over the last 15+ years. I had invested in a Sports bar (restaurant) and also a real estate company. Both companies were started by entrepreneurs who I knew well for over 10 years. They both returned about 12% in interest each year for 3 years. Which is great, but does not move needle. Software and technology companies, grow much faster and in a short period of time. As an example if you look at the 39 companies that are “Unicorns” with over $1 Billion in valuation over the last few years, on average they have taken 5.7 years to achieve the $billion valuation. For non technology companies that have gone public over the same period and have a valuation over $billion, the time period has been 9.7 years. Almost twice the time.
3. Capital efficient in the early days: Do a simple analysis of the need for capital among the companies until year 3 and you will realize most of need very little money in the early (<1 year) and tend to be fairly capital efficient until year 3. After that they take a lot of money to get to $1 Billion. Since most of the companies end up failing, I’d rather put less money early in more companies than more in fewer ventures.