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No Seeds in the Wind

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DQI Bureau
New Update

The slowdown is finally ebbing away, but life will never be the same for the

innovators and dreamers in the IT industry. For the streams that watered these

dreams seem to have dried up along the way. We are talking about the venture

capitalists (VC), which have harnessed their magnanimity and would prefer to

wait till the crop is harvested instead of throwing seeds to the wind.

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“We foresee a 25% drop in VC investments”

S Srivastava president, Indian Venture Capital Association

The VC industry started out with a boom about a few years ago with the dotcom

mania catching fire. Indulgent godfathers were ready to believe in dreams and

ideas were selling like hot cakes. A number of projects took shape under their

benevolence and quite a few made staggering profits reiterating the VCs belief

in the IT cause. But as the markets eroded and business suffered, many were

forced to shut shop because there were no returns to boast of and the big

daddies wanted rewards for their dear money that was in those projects. New

investments were blocked rapidly and only VCs with long term goals stayed on.

Saurabh Srivastava, president of the Indian Venture Capital Association (Ivca)

states that the association actually foresees a 25% drop in the total funds

flowing into the country in the current fiscal. Srivastava attributes this to

the performance of the investments made last year and the current

politico-economic scenario. The VC's answer to the slackening in pace of the IT

industry is to opt out of doling out of hard earned greenbacks to novices.

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The action could be moving out of the IT space. Greener pastures like IT

enabled companies, biotechnology, the pharma sector and retail are now being

considered.

But Sanjay Anandaram of Jumpstartup maintains, "Investments in these

sectors will lack visibility". Anandaram says that you cannot quite write

off VC investments as on the decrease in 2002. He maintains that they have the

probability of staying flat vis-à-vis 2001. But Subinder Khurana of Infinity

Ventures says that the industry will grow normally in 2002. "This is

because new funds enter the industry and investments are made in more

experienced management teams" he says, estimating investments to be to the

tune of $1 billion or more in 2002.

Almost all VC money comes from overseas funds. Some VCs may invest in ‘Indian’

companies structured as non-Indian entities for flexibility and ease of

operation. Indian regulations are also expected to be eased in order to make

investments or exits easier. So there is a possibility that a lot of VC funds

will be invested in cross-border deals in this fiscal.

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“All the same, funding worth $1 billion is likely to happen in 2002”

S Khurana principal, Infinity Ventures

"But despite the downturn, VCs have continued to show committed resolve

on behalf of the entrepreneurs", maintains Ashutosh Yadav, managing

director, Ideas to dotCom Ventures. "It is significant to note that about

81% of VC investment in the latter part of the year 2001 went to follow-on

investments," points out Yadav explaining that VCs are trying to ensure

that real value is created in down cycles by sticking to committed entrepreneurs

with strong business models and the tenacity to see their ideas through.

So, the first half of 2002 will see more mergers and acquisitions (M and A)

fuelled by both proactive risk mitigation drives and a reactive approach by

firms who are fighting for survival. Analysts contend that the foundations for

several of these transactions have already been laid and will materialize in Q1.

"The proactive approach will be by smart promoters who are trying to

acquire size or clients or are looking for synergistic potential or geographic

diversification for risk mitigation. The reactive approach will come form

cash-strapped promoters fighting for survival," says Yadav.

VCs maintain that 2002 could be a year of hope and planning and the winners

will be those who are ready to act when the curtains go up for recovery. The

industry’s wannabes are about to lose out on a large share of their pocket

money. But again, they are being offered the carrot in the form of newer options

to toy around with like retail, biotech etc. It remains to be seen if they

prefer to stick with the carrot or opt for the raw end of the stick!

Dhanya Krishnakumar in New Delhi

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