No Seeds in the Wind

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.

“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.

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

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.

“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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