The Changing Face of India’s VCs

A quick question–how long is ‘long long ago’? If the answer is ‘two

to three years’, chances are this reply will be deemed ridiculous. But if one

was to add that the reference is to ‘two to three Internet years’, the

answer would suddenly not seem so preposterous.

OUTSOURCING IS HOT: View Group chief Gopal Jain believes that outsourcing in the services area will be the hot mover for India. Outsourcing is a $600-bn segment, growing at 10% in the US. India is now validated as a delivery center

It does seem like a long long time since the ‘got an idea, get a million’

days. The sky rocketing NASDAQ, a dotcom with niggly revenues of Rs 1.5 crore

being valued at a jaw dropping Rs 499 crore, loss making companies being valued

at 100 times over their brick and mortar brethren…those really were the days.

Now, there is no more talk about valuation, it is just a question of survival.

Given the changed scenario and venture capitalists’ (VCs) huge lists of loss

making projects, are VCs really interested in India? It was expected that India

would see a downtrend in VC investments after the dotcom experience. However,

the good news for Indian entrepreneurs is that VCs are still flush with money

and India seems pretty high on their investment agenda.

Says ICF Ventures MD Vijay Angadi, "Of the total investments of $ 3.5bn,

India garnered $841m, Australia was a close second and China came in third with

$601m. Countries like Thailand and Malaysia received less than 5% to 7% of the

investments that India did." Others like Infinity Ventures promoter Saurabh

Srivastava talk of a billion dollars coming into India. "Given the

potential the country offers to the VC community, it is difficult to wish away

India," he says.

India still has the basic components to tempt VCs to part with their money.

The cliched ‘low cost high quality’ Indian work force is still an attractive

proposition for international companies to outsource to India. The ‘Made in

India’ brand is no longer looked down with suspicion. Another important factor

has been the positive image of Indian IT professionals in the Silicon Valley.

With the large number of Indians in the valley and many in the successful

entrepreneurial mode, global VCs are more comfortable betting on Indian

companies. Though the amount invested in India is insignificant compared to

global angel investment figures, it is growing rapidly. According to Nasscom,

the angel investment in high-tech firms in India has jumped up from $20 million

in 1996 to touch over a $1 billion by 2001 and about an estimated $10 billion by

2008. Today, India is already home to over 200 venture firms including key

multinational players like Draper International, Kliener Perkins and Walden.

These firms have sizable investment in India and walking away from the same is

not easy.

However, the bad news for wannabe entrepreneurs is that VCs have become a lot

wiser and are asking a lot of questions before parting with the money.

Spending in spurts



Caution is the name of the game today. Very few VCs have actually been able

to show profits on their investments after the first round of funding. The

majority is still licking its wounds after the dotcom massacre. According to

Gaurav Dalmia, co-founder, Infinity Ventures, "Playing the ‘bubble game’

was certainly was a question of timing. And in India, without any exit routes,

it’s highly unlikely that VCs could have succeeded in playing the bubble

game." Forget profits, VCs have even lost their principal investments.

Today they have no choice but to be cautious. This is also reflected in the

nature of funding. While early stage funding was the flavor of the season two

years ago, not many VCs are placing their bets on it today primarily because of

the high-risk involved. Investment is now directed at mid and later stage

funding. Agrees Srivastava, "The kind of investment made two years ago is

certainly dead." The dot-com hype saw many investment bankers (without any

clue of the business dynamics involved), turning into VCs overnight. Says Dalmia,

"In hindsight, we have all realized that we had all been pumping millions

of dollars in a bubble which was bound to burst."

As was the case with the IT industry across the globe, India too had joined

the valuation bandwagon. It was not uncommon for a $100 million company to be

valued at five times its revenues. And given the ‘assumed’ huge potential

for Indian companies, promoters were upbeat about their company transforming an

idea into a $100 million in just three to four years. Take the case of Netacross.

Today, after three to four acquisitions, the company is below the $15-million

mark and still remotely distant from the touted $100-million mark. VCs too had

adhered to the great fools’ theory. Having put in their money in ‘promising’

ventures, they were waiting to find a bigger fool who would buy from them at a

much higher valuation. In fact, many are still waiting. Then came along the

caution mantra and VCs started reducing the risk factor by picking up companies

at the mid or pre IPO stage. In picking up close to 5% stake in NIIT, a company,

which is already listed on the stock markets, Chrysalis Capital went a step

further in ‘playing safe’.

Says Pravin Gandhi, director, Infinity Ventures, "The focus is still on

funding start-ups because that is the essence of VC funding. But now, funding

has been advanced to a slightly later stage. Rather than funding pure ideas,

money is now released only after there is some grip on the revenues, a semblance

of management maturity and IPR." Few even question whether VCs as they are

known across the globe, actually exist in India. Says Dipti Chopra, MD,

Hansuattan Finance, "VC funding has given way to private equity."

Srivastava agrees but points out that investment bankers are doling out what

they know best — private equity. "But not everybody is into it," he

stresses. VCs are still sticking to their agenda of early stage funding. Adds

Angadi, "We have been focussing on first round funding and a large chunk of

our business comes from this segment."

It is ITES that’s hottest



Once again, the good news for the entrepreneur using IT at the core of his

business is that VCs are not averse to investing in the country despite the

multitude of infrastructure and regulation problems. Unlike large markets like

the US, VCs in India are yet to segmentize their investments in specific niche

areas. But today, about 70% of the VC money is flowing into the technology area.

The situation is similar in the US with the technology sector gaining a giant

slice of the VC investment pie.

The VC Checklist Here’s what VCs look for in new companies before parting with cash: The Team: This is the most crucial factor in getting VCs to invest in new companies. Forget the great idea, think the great team. The kind of experience the company’s core founders have, how well their skills are suited to grow the business, their understanding of technology and business trends and more importantly, their ability to implement them in a cost efficient manner, are critical issues. Scalable business model: Finding the right niche is fundamental to success. VCs are on the lookout for companies doing extremely well in few well-defined niche segments. However, companies need to chalk out a clear growth path for themselves within the niche and make sure they have the ability and infrastructure to take on market forces. Positioning: As a majority of players are focussed on the segment of ‘improving efficiency’, rather than cutting edge technologies, it is imperative for the VC to have a good idea about how the company is positioned to take on the competition.  Quicker Growth: Gone are the days of dreamy eyed projections. VCs want a realistic picture but expect companies to ramp up quickly. Given that the ‘Made in India’ brand is no longer an issue, VCs are expecting companies to grow much quicker, slowdown or otherwise.grow much quicker, slowdown or no slowdown.

So which aspect of technology is hot? Since cutting edge technology

development along the lines of that carried out in the US and Israel is still

not done in most Indian companies, most VCs are keenly looking at companies

focused on using IT to ‘increase efficiency’. This segment is important as a

huge market is available in the US to leverage on India’s low cost English

speaking work force. Says Gopal Jain, managing director, View Group, "The

focus is on global outsourcing in the services area with the delivery happening

from India. Outsourcing is a $600-billion sector growing at above 10% in the US

and India has been validated as a delivery center. So expect improved action in

the IT-enabled services segment."

IT-enabled services are definitely in. Services like eCRM and call centers

will certainly attract VC attention, especially if you have good global clients.

Companies like Daksh.com and customerasset.com have received good investor

response. However, finding the right niche is imperative. For example, while

medical transcription is low on the VC funding checklist, if a company moves up

the value chain by dabbling in medical coding, the probability of getting VC

funding increases manifold. Agrees Dalmia, "Medical coding, customer

interaction and tech support are reasonably attractive niches in the ITES

segment."

Another sector gaining VC attention is software, especially high end software

that could result in the creation of intellectual property rights (IPRs).

Companies working on wireless, convergence and telecommunication technology are

hot areas for VCs. Comments Angadi, "We are keen on investing in companies

that generate intellectual property in areas like security, storage,

communications and broadband." Agrees Rattan Joneja, CEO, Marigold Capital

Management, "Our strategy is to encourage deals in the IP area. We have

invested about Rs 10 crore in IP-related start-ups in the high-risk, high-return

on investment area."

Only the top product companies need apply!



Where does that leave companies focussed on products or those dealing

primarily in the domestic market? In the US and Europe, a large chunk of funding

is funneled for product development. Will the same happen in India and will we

finally see exciting products from Indian companies? Says Dalmia, "In case

of product companies, if you are not # 1 or # 2, you run a high risk of being

wiped out. This is not the case with a services company." Also, given that

the resources consumed by a product company are many times higher than a

services company, VCs seem reluctant to place their bets on Indian product

companies. Secondly, most VCs don’t understand the dynamics of the

international market from the products’ standpoint. This is in stark contrast

with the services market where VCs have been active for many years now. The

other important aspect of product development is the absence of a robust

domestic market. Srivastava explains that in the absence of a sizable domestic

market, products have to be created for the international market. And this is

where Indian companies are at a disadvantage. Product development is a totally

different ball game. Companies need to anticipate what the market wants 18-20

months later and build the product accordingly. But how do you make a product if

you don’t have a clue about the international market dynamics?

VC Survival Kit Fewer, bigger deals Unlike the gold old days where the Indian brandname could loosen purse-strings, there is only one reason why a global VC would agree to dole out money today–returns. If India can provide the returns, funds will come in, or else, there will always be other markets. In such times, VCs have to strike fewer, possibly bigger, deals rather than dishing out loose change to all and sundry. Nurture existing investments Time to show that you are more than a mere avaricious VC. Offer whatever help is possible to your portfolio members in order to help them survive the current troubled times. If possible synergies exist, this is the time to force them to merge or be acquired to have larger and more sustainable operations. Reassess portfolio VCs are already reassessing their investments and trimming them down. While this may entail some write-offs, it is still better than releasing additional funds just to keep the company afloat. Adhere to tough performance measures or exit from the venture as soon as possible. This works better than trying to feed the white elephant and hoping that it will turn into a nimble horse. Cash reserves at new highs Time to hoard cash. The money reserves will determine the survivors and give the flexibility to pick up good investments later.Â

Another interesting feature is the VC preference to invest in ventures in

southern and western India. Since VCs need to track their investments on a

regular basis and interact with company officials, they prefer geographical

proximity. Says Joneja, "We believe in working closely with clients and

restrict the number of deals we do, lest we lose the bandwidth to nurture these

companies." Since a majority of the Indian VCs are based out of Mumbai and

Bangalore, they are keener to invest in companies located in the southern and

the western belt. Another reason is that a major chunk of the IT related

activity takes place within these two regions. As a result, companies located in

the northern and eastern regions find it difficult to get access to VCs.

So, where does that leave wannabe entrepreneurs in the 20-30 year age group

bubbling with ideas? Well, the idea could be brilliant, but the going will still

be tough. VCs today consider the execution of the idea more important than the

idea itself. So it’s imperative to first have a team in place. Even an

industry veteran like Suresh Rajpal, in his avatar as CEO of Mumbai-based Trigyn

Technologies, found it tough to get VC funding when he spun off eVector as an

independent company. "While VCs were ready to invest in the company, it

took about five to six months for the actual funding to come in, primarily

because we had not formalized the team and the CEO for the new company,"

recalls Rajpal.

What are VCs really looking for?



VCs are still flush with funds but dreamy-eyed millionaire wannabes will

have a hard time convincing them to part with cash. VCs are comfortable with

entrepreneurs with hands on experience in the international market. Says Jain,

"Successful entrepreneurship in the technology area has come in only from

one of the following sets of people- IT professionals with global exposure, ex-MNC

employees, and NRIs." International exposure helps in ramping up business

and this is a key VC requirement. New companies do not have the luxury of

following Infosys’ low cost model of working onsite and gradually bringing

more and more work offshore. As Dalmia says, "I keep telling companies in

my portfolio to grow quickly." VCs admit that even in the current scenario,

they are ready to dole out big money, but only for the right candidate. Agrees

Joneja, "We are willing to guide them in developing business models, help

expand operations in specific geographies, control and monitor budgets, evaluate

strategies and recommend areas for future investment, growth and

acquisition."

Angel founders are an important source of capital and have contributed

greatly to the success of companies like Intel and Microsoft. However, India has

only seen a wee bit of the global money coming in. After burning their fingers

in the dotcom inferno, VCs are moving to India’s traditional IT strengths and

are keen as ever to invest in software and IT enabled services. The problems are

many but the market is maturing. The VC experience so far, has not been

positive. Comments Gandhi, "Projects are taking longer to mature and the

growth of the Net has been disappointing. Exits have been few and far

between."

A few VCs have shut shop and moved out of India. Indocean Chase for instance,

has relocated to Singapore. Another company–eVentures, has closed down as

well. But there is still a glimmer of hope. The caution displayed by VCs today

will force large-scale consolidation, mergers and acquisitions and the creation

of IP in areas like wireless, communication and security. Until that happens and

India moves into high end product and technology development, VCs will continue

to pour money into Indian information technology’s traditional bastion–software

and services.

Yograj Varma in New Delhi With inputs

from Sarita Rani in Bangalore and EaswarDas Satyan in Mumbai

Reinvent to Survive

In

the dot-com era, Delhi-based ETI travel started off with the concept of becoming

an online travel company. The idea was to create a one-stop travel shop that

would cover locations, offers, reservations, booking and tours. Soon, the

company found that the market for individual transactions was not really strong

and quickly reworked its model to focus on the corporate segment. With a booking

engine already developed and in place, the company refocused and tied up with

corporates to take care of their travel needs.

The Internet-enabled travel management service can replace both the in-house

travel desks as well as contracts with travel or ticketing agencies and tackle

the travel needs of all employees of the organization. After preliminary

research by the company indicated that costs would be reduced by 5% to 30%, it

was a ready market for the company. The company’s proprietary products BIBPâ„¢

and TRACCOMâ„¢ helped travel management and reduce cost.

Today, the click and mortar company boasts of clients like Videocon, LG, JP

Group, Monsanto, Xansa, Arthur Andersen and HFCL. It would have not been

possible to meet the estimated revenue target of Rs 50 crore without modifying

its business model and changing its focus according to the needs of the market.