Imran Khan, former captain of the Pakistan Cricket team and now an active politician, once said: “Fast bowlers are special. Once you find them you preserve them in cotton wool.” What is true of fast bowlers is also true of entrepreneurs. Very few economies are able to produce entrepreneurs in large numbers. India is that paradoxical economy where, in spite of a hostile environment, entrepreneurship thrives. Not convinced? You need to look no further than this year’s line-up of Forbes India’s Hidden Gems, our pick of unlisted companies that we think will go places. These range from the unfashionable but big business of metal recycling, imaging systems for cancer treatment, homegrown anti-virus software, water management solutions and crop protection.
Hidden Gems is an attempt to capture the purest face of entrepreneurship. This is the phase where the entrepreneur has been able to break away from the life-threatening revenue fluctuation of the early years but has not yet lost his innocence to the public markets. He/She hasn’t stopped taking bold business decisions because the stock might tank.
Our hidden gems this year have been picked from a list of venture capital and private equity investments that were made or committed to during the last one year. There is a reason to use the smart money route to create the list. The financial disclosure and management quality is tough to judge when a company is unlisted. It is better to use the diligence and the analysis done by the venture capital and private equity industry that invested $10 billion in India last year.
Now, if the smart money is good at investigating and investing, we also know that they are not infallible. They make mistakes as well. India doesn’t have too many funds that have given supernormal returns to their investors. The common rule of thumb is that 8 out of 10 venture investments fail or do not deliver high returns. How then is one to proceed? One good way is to look at the critical needs of the Indian economy and its citizens’ willingness to pay for it. This shortens the list and after that the job is to simply pick the leaders in each of the need areas. So, we know that with high metal prices there will be a need for recycled metal and enhanced pressure on increasing farm yields will need better crop protection. Once the leaders are identified, they are vetted through conversations with people who know these companies to understand if the management team has the passion to execute and deliver the results.
At the end of the process, the list had companies that frankly surprised us through their entrepreneurial track record and their ability to grow even in adverse conditions. That’s what holds out hope for the Indian economy. When the chips are down we can call our entrepreneurs. Can China do that?
A Word From Our Knowledge Partner, VENTURE INTELLIGENCE
When Forbes India approached us with the ‘Hidden Gems’ project suggesting the use of private equity/venture capital investments as a filter, it resonated with what we at Venture Intelligence have observed for long: PE/VC fund managers tend to sniff out businesses that are ripe for rapid growth. And they tend to do so well before “the crowds”.
Whether it’s BPO (the Spectramind in 2000), wind energy (a still privately held Suzlon in 2004) or second-hand truck finance (Shriram Transport Finance in 2005) by ChrysCapital or microfinance (SKS in 2007) and gold loans (Manappuram General Finance in 2007) by Sequoia Capital India, Indian PE/VC fund managers have earned their spurs by “boldly going where no investors have gone before”. And the best of them have been rewarded handsomely for their efforts—with each of the above-named investments bagging at least a 5x return.
Last year, as part of our ‘Private Equity Impact - 2011’ study, we compared how PE/VC-backed companies fared against their non-PE backed peers and indices over a 10-year period on compounded annual growth rates of key parameters such as sales, profitability, wages, foreign earnings and R&D. The PE/VC-backed companies were ahead on literally every single parameter, barring foreign earnings. We hope the list we have helped Forbes India put together helps uncover companies that will shine brightly in the years to come—and hopefully light up the readers’ portfolios as well.