The case for venture capital: The true villain is not the VC but ‘Change'

Sandeep Murthy
18th January 2016

Entrepreneurs and investors are jointly trying to imagine and create a new world. There is no straight line to this process… it is a series of assumptions and iterations – a process of Experiment, Fail, Learn, Repeat.

The tension in the air surrounding the venture ecosystem is palpable at the beginning of 2016. The world has not gone to plan. Ironically this is not a new thing - it seems to happen with relative frequency.

Yet whenever it happens it causes large amounts of consternation. Entrepreneurs and investors get anxious. They have made promises to each other as well as employees and other investors, which they have to defend.

When external factors impact life, the easiest explanation is to find a villain. This is simple and convenient, but is both untrue and a wasted opportunity to learn and improve.

Entrepreneurs and investors are jointly trying to imagine and create a new world. There is no straight line to this process... it is a series of assumptions and iterations - a process of Experiment, Fail, Learn, Repeat.

However like all good stories, the characters of greed and fear (of missing out) enter the plot and irrational exuberance sets in. This creates market hype and bubbles. Eventually the dust settles and the excess ends. When the music stops only those businesses that focused on delivering a true customer value proposition survive.

So what happens to the others that were born out of greed and fear?

Like any Darwinian system, they adapt or perish. But warriors (and make no mistake, all entrepreneurs are warriors) will not go quietly into the night. India's venture ecosystem has lived through a period of extreme hype and is now entering a phase of rationalisation. This is normal and healthy. Unfortunately, so is the blame game that comes with this phase.

Players in the venture ecosystem like to believe that they control the world. We believe that we are Gods in our domains, bending the market to our visions.

If this were true, it would make life as an entrepreneur a cakewalk. Life is nowhere near that simple. Trying to control the market and drive timing of adoption of services is impossible.

The market has too many forces pulling it in varying directions that cause the best-laid plans to have to be continuously revisited. If we study history just a little bit, we will realise that extreme moves of markets (both up and down) are as natural as the waves in the ocean.

So the true villain in our fantasy is not the entrepreneur or the investor but that evil character known as change.

Understanding all of this is intellectually valuable, but it doesn't stop the emotional response that comes when things go bad. Entrepreneurs and investors have a shared vision of wanting to improve the world, but they have entered the game from very different starting points.

Investors got their ticket to play the "Build a Better Future" game by making promises to other investors of certain returns in a defined period of time. In contrast, entrepreneurs got their entry by sacrificing a comfortable job and a consistent paycheck. When the world is good, these differences are overlooked, but when the evil "change" rears its ugly head, these two different entry points become the source of friction.

In a David and Goliath world where the investor is viewed as a larger-than-life character who makes decisions on who gets a chance to play and who doesn't, the idea that "the investor made me do it" is an easy idea to sell, but this view is both naive and born out of bitterness and defeat.

When the markets turn they affect all people equally, but successful entrepreneurs aren't lashing out. They are by definition smart, visionary people, who have understood the base motivations of the people they work with. They know that while investors share a passion for changing the world, they have other constituents that they are responsible to.

So no matter how good the times are and how shared the future vision is there are other factors that investors will always have to contend with and so they need to take that into account when they make decisions on how to build their company.

The second truth is that once the investor gives the entrepreneur money, it is the entrepreneur who controls the hiring, spending and pace at which the business will scale. Investors can weigh in with thoughts and opinions, but the day-to-day decisions are driven by the passion of the entrepreneur - and that is the way it should be.

So, while I can appreciate the reasons for all of this anxiety and angst, the reality is that successful entrepreneurs have understood the value that venture capital can provide and have managed to use that money effectively in up and down markets.

The unsuccessful ones should take a break from finger pointing, look internally and consider how they can manage the situation better the next time around. If they are true entrepreneurs they will learn and the next time around they will let the success of the business do the talking.