If one looks at DFJ's logo, it shows the globe with a triangle, which stands for 'change the world'. Those are truly the types of companies that DFJ looks for, in the US, in India and across the globe. The key facets in making an investment decision are, generally speaking, the same, at a high level. They include:

1) Stellar team: Nowhere else is it more true than in India that an A team and B product will always beat a B team and A product. By the way, some of the best times I have had in India have been due to the stellar teams I have interacted with; and some of the worst times professionally have been due to teams on the other end of the spectrum.

2) Strong technology/differentiation: In India especially, differentiation often is less technology-led, but more execution-led, again reinforcing Point 1 above. But there has to be a real differentiated product or service which solves a significant pain point. The real challenge for an entrepreneur is to not only be ahead, but stay ahead, which becomes more and more difficult as and when companies scale. That’s why larger companies often acquire innovation rather than invent within.

3) Traction/validation: There has to be some level of proof that “the dogs are eating the dog food”. Ideally, that means revenue from loyal marquis customers. But often, especially for an early stage startup, that level of traction, or team or technology will not be present. In that case, surrounding oneself with team members, advisors and individual investors who lend credibility to the concept could be a form of validation of the concept. This is admittedly one of the biggest Catch-22s for an entrepreneur, but one that needs to be accepted and addressed. DFJ, for example, has invested in companies like Attero, Canvera and others which were purely idea stage companies at the time of investment.

4) Large and growing market: The play will be interesting, especially for larger funds, if there is a possibility of creating a sizeable entity, and that is usually possible in a large and growing market. If the market is large, there will be competition (so, don’t ever say there is no competition. If you do, chances are that the market is not all that interesting then). And therefore, if there is competition or alternatives in the market, then there has to be meaningful differentiation for a company to succeed especially to a meaningful scale. Size does matter, especially if you think of the fact that in a typical VC portfolio, roughly 1/3 of the companies will fail completely, another 1/3 may return the capital and it’s really the remaining 1/3 that will create hopefully a significant return for the venture firm. Since it’s that minority that generates most of the returns, a VC (especially one with a multi-hundred million dollar fund) can only invest in a company if he/she can convince him/herself that a $10 million investment could yield $100 million return to the fund; or at the very least a $5 million investment can yield $40-50 million. A $1 million investment resulting in a $5 million return could be a phenomenal return in terms of IRR (internal rate of return), but for a $350 million fund like DFJ, it doesn’t move the needle one bit.

The above is true for companies in general. But if one looks at Internet companies in India specifically, there are four key ingredients that a company generally has to deal with. I call them the ABCD of Indian internet business.

A is for Access. Basically, there needs to be connectivity and access to a website presumably for the transaction to be a possibility. Broadband penetration is still dismal, but some estimates now place the overall number of internet users in India at somewhere between 70 and 100 million, which is approaching critical mass. Mobile, of course, is the holy grail of sorts and to the extent the user experience can be made delightful, that could be THE medium for internet access, information gathering and transactions in India.

B is for Behavioural change, where some level of education and mindset change may be necessary for the consumer to get comfortable with a particular site and actually trust that once he/she pays for something online, that the product will be legitimate, as advertised, and actually be delivered. Although that is starting to happen in travel, financial services and other key areas, broad-base adoption of remote transactions via use of credit or debit cards may not happen for some time to come.

C is for Collection or payments. Indian internet user will require any and all options of payments from credit, debit, netbanking, prepaid card, mChek, pay-points (like Oxigen, Suvidhaa and bank branches) to cash-on-delivery and more which adds convenience for the customer but complexity for the entrepreneur. With further proliferation and use of credit and debit cards, that problem should ease, although I don’t expect to go away completely.

D is for Delivery. Logistics in India can still be a challenge, especially for small companies trying to get attention and a particular service level from the logistics provider. Crossing state lines is still non-trivial where shipments get stopped and under-the-table payments are required to proceed further. And in one case, one of the logistics providers for our companies showed up drunk for a pick-up.

Internet businesses can and usually do fall into one of three categories: free or subscription-based information or entertainment sites (games, news, jobs, matrimonial sites, banking, portals etc are examples); transactional sites where the product is a physical good that can be bought online and delivered offline (Flipkart, Infibeam etc fall in this category); and finally, transactional sites for digital goods (travel sites, digital content sites, for example).

DFJ has done extremely well investing in companies that have a potential for viral explosion, usually through the online medium. DFJ’s experience with companies like Hotmail, Skype, Baidu and others are testament to that thesis. I am convinced that similar examples will emerge in India, both on the internet as well as on mobile, with the latter happening first, for obvious reasons. Companies like SMSGupShup are an interesting example of that phenomenon.

The key success factors for that (viral) explosion has to be extreme simplicity of use, no brainer value proposition (or sheer entertainment value) and unrelenting stickiness (in other words, not only should it be easy to come on board, but there be no reason for the user to churn out of the system). An obvious example is Facebook, where the site has become the de facto medium for communication for hundreds of millions of people, and once that happens, there is no reason to leave. Although, even Facebook is not without its challenges, from privacy issues to the fact that my uncles and aunts want to be friends and I don’t necessarily want them looking at what some of my other friends are saying, showing or viewing.

India brings other sets of challenges, especially if one is to look at the internet as a truly mass medium. With the end goal of creating a billion dollar enterprise value company, it could be done either by targeting the top of the pyramid, but in a way that generates high ARPU (average revenue per user), loyalty and healthy margins (where customer retention and long term value of the customer are pre-eminent).

Scale can also be achieved through a mass market play which, in India, will be a combination of offline and online for some time to come. That could be because the booking may be online but delivery and/or payment is offline; or the fact that there will need to be education and hand-holding required to get the masses to adopt a particular online offering. I do see a time when 500 million people or more might be online or at least interacting with the internet and with each other via the internet. These will not be through broadband home connections necessarily, but via their mobile phones, kiosks, mobile communication centres, schools, universities and other media.

In achieving that vision, there will be challenges (and therefore opportunities, which are just the flip side of challenges) for entrepreneurs to create sizable companies addressing everything from distribution (bringing access to the masses), marketing (educating the masses about what is doable on the internet), payments/collection (mobile payments will eventually take hold in India), and content (creation and aggregation in multiple languages that India will require, delivery across devices both audibly and visually with increased interactivity as well as personalization).