Sudhir Sethi: To the top, one step at a time

Sudhir Sethi, founder and chairman of IDG Ventures, one of India’s most successful venture capital firms, starts off telling me about the best places nearby for wildlife photography. He suggests a sanctuary near Mysuru, and Ramanagaram, one of the greenest sites near Bengaluru. I’m not going to say ‘no’ to tips from someone who has spotted many of the biggest stars in the technology space in India.

My father was in the Indian Foreign Service. A large part of my early life was influenced by multiple cultures, having travelled to about 20 countries before I reached 12th grade. I used to be among the top three in class when I studied abroad and among the bottom three whenever my father was posted in India (laughs). My early years made me extremely adaptable—nothing surprises me and change is welcome. I became comfortable with uncertainty.

My parents wanted me to go to New York as an undergrad, but I said ‘no’. I don’t think I have regretted that decision. As a result of all the travel, my sense of nationalism was high. In my school in Wellington, New Zealand, I had even organised a hunger strike during the 1971 India-Pakistan war. After college, I did my MBA from the Faculty of Management Studies, University of Delhi. I met my wife there.

I entered the industry at an interesting time. India was all socialism then. In 1977, then minister of industry George Fernandes threw out IBM. Seven indigenous companies started, and the Indian computer industry took off. This was an exciting time—computers were made in India. It was exciting and created opportunities for people like me. I was recruited to be on the shop floor of DCM Data Products [now called DCM Data Systems]. This was 1978 and I was being exposed to the highest level of technological innovation ever experienced in India.

I left DCM and joined HCL when Arjun Malhotra recruited me to sell computers. I got Najafgarh Road, which was full of flour mills at that time; Agra, which was full of steel mills; and Gwalior, which was full of Phoolan Devi. I was selling computers in these places in the early 1980s, when each cost Rs 5 lakh.

In those days, people didn’t know how to use computers and what to use them for. We changed accounting—we conducted studies, made reports, customised the machines, and taught our clients to use computers for accounting. Developing the software was part of the sales guy’s job. So, I did the research and told the coding guy what was needed. That’s how I learnt about various industries.

I later became a product manager for the first set of volume PCs launched in the country—HCL’s Busybee. In 1986, I came to Bengaluru, joined Wipro, and launched its first computer systems. In the early nineties, software started becoming big. We were all over the world selling UNIX-based skills. I still remember the first million-dollar order. And then came the Internet. I still remember the high-speed line we got at Wipro—a 1.2 kbps dial-up. Being the sales guy, I had to teach people how to use it.

The software industry was booming, but by 1996-97, I was bored because the job was becoming repetitive. There were a lot of opportunities and offers coming my way. I was on a Rs 18 lakh salary at that time and the last offer I refused was for Rs 36 lakh in 1997. It was tempting but I refused because it would have been the same kind of job. I was considering starting up, but no bank would give me a loan because I didn’t have any security.

In early 1998, I got a call from Somshankar Das, who was with a VC fund called Walden International in the U.S. He had asked Arjun Malhotra to suggest three names to lead a venture fund in India, and I happened to be one of them.

I didn’t have a detailed idea of venture funding. So I went to a bookshop and asked if it had any book on the subject. I got two dusty ones. The interview was on Monday, so my wife and I read them over the weekend, and prepared a PowerPoint presentation. Walden was looking for people who had technology experience. That made a big difference. You can study finance but operating experience in technology doesn’t come easily. They were selling to me what was happening in the U.S., in the Bay Area, and in Taiwan and China.

As part of the interview, Walden gave me a business plan and asked me to comment on it. I had seen Wipro’s business plans but this was different—an entrepreneurial business plan. The thesis was on the future and there was nothing on the ground. It wanted to build a $100 million (Rs 631.7 crore at current rates) business in five years. The thought that I was commenting on an entrepreneur’s business plan was attractive. I joined them in July 1998. I had taken five months to decide.

[After joining,] I didn’t even have an office for the first few weeks, in Mumbai. There were only very few of us in the venture industry at the time—Draper International, Citi, and we were the international ones. In my first year at Walden, I met 279 entrepreneurs. There’s no way you can get the kind of learning that you get when you meet entrepreneurs. You are trying to understand things not as they are but as they will be tomorrow.

Companies were being built on eyeballs at the time [Internet business were being sold to investors and advertisers on the metric of eyeballs, a legacy of selling space or time for newspaper and television].

One day a guy walked in and made a presentation on some sound-related business. First slide: “This business is not about eyeballs.” Second slide: “We are different.” Third slide: “This business will be built on eardrums.” We saw all sorts of things. We also saw very little revenue.

In 2000, the bust started. Entrepreneurs took failure badly back then. The average age of entrepreneurs was also much higher. Between 1998 and 2002, we made 11 investments and half of them didn’t work. We invested in the likes of Webdunia, a local language play in which our hypothesis was completely off the mark and way ahead of its time.

But among the rest was Mindtree Consulting, which gave 10-fold returns. Broadly speaking, the investor community in the U.S. used to think that what worked in the U.S. would work in India. We were trying to invest in the software industry in India, but the trend in the U.S. was to invest in the Internet.

My Wipro upbringing was based on asking questions on revenue and profits, which I never found in the Internet space in India at the time. The proposal for Mindtree was refused three times before it got accepted.

In 2003, I tried to raise capital again, but it was tough. I left Walden and joined one of the companies in which it had invested. But I used to visit Bengaluru and see entrepreneurs every second week, which kept me in touch with the ecosystem. In 2006, I decided to put together a fund again. It was still difficult but much easier than it was in 2003. The India story had started.

The one thing we learnt at Walden was that the decision to invest couldn’t be done outside the country. As a venture investor, part of me is intuitive and part of me is analytical. Creating a decision-making body in India sounded intuitively better, especially for venture. I can understand it being different for the PE industry.

As I was putting together the plan for the fund, and thanks to a pleasant set of coincidences, I got a call that a gentleman named Patrick McGovern wanted to meet me. That set off a series of events that can only happen to the fortunate.

McGovern was then the chairman of IDG, a publishing behemoth. He had given me half an hour at the Oberoi in Bengaluru. I was raising capital and I pitched hard. We came out of that room two and half hours later. He said he liked what he saw and asked me to send him a formal proposal. Later he got back and conveyed that IDG had decided to back me. I was hoping to raise $100 million but he said, why don’t you take $150 million. I will never forget that.

In September that year, we started IDG Ventures. In the first six months, I was figuring out what kind of a firm we wanted to be—things like how we would learn to say ‘no’ to each other, because it was important for the team to say that if they didn’t want to back an investment. I wanted this to be an institution full of what I call “venturepreneurs”.

To differentiate our brand, we also decided that we wouldn’t just say ‘no’ to an investment, but also explain why. Entrepreneurs must know the reason even if they don’t agree with us. Otherwise, the market will stop communicating. Last year, we were in talks with 1,300 entrepreneurs but invested in 10.

Initially we invested in 20 companies. Some failed. But those who succeeded are now market leaders, and that makes me proud. Manthan [an analytics firm] was our first investment. We exited from it recently and that has given us, in dollar terms, 5.5-time returns. Myntra was bought by Flipkart and now we are investors in Flipkart. We also have companies like Lenskart, Zivame, FirstCry, Forus, NewGen, Yatra, and more.

To get outsize returns, we have to fund extremely disruptive entrepreneurs. Disruption doesn’t come to you, you have to go seek it. India is an entrepreneurial country. It is up to us to pick the most disruptive companies and see if we can work with them. We invested in a medical devices company call Perfint. We are about to fund a wound-management company. Are there other companies like that in India? No.

It is interesting how the entrepreneur has grown in India. The construct in the 1990s was that Indian software services companies gave rise to entrepreneurs [like Mindtree]. Fast forward to the mid-2000s, when MNCs were setting up global development centres. Those who worked there were well travelled, came back with ideas, and started up. [Perfint is an example.]

Today the entrepreneurs are people who are working in, say, Flipkart, and have seen it grow rapidly. They are probably heading departments, and figuring out that they can do a better job as entrepreneurs.

There is nothing today that Indian entrepreneurs don’t think of attempting. A Team Indus trying to build a moon lander wouldn’t have been possible a few years ago. The confidence is enormous. They are all saying ‘I think I can do it’.