VC FUNDING: Seeking Opportunities

Hey came, they saw, but they failed to conquer. Yes, we are talking about the
dot-coms... which fast turned into the dot-gones. Propelling them forward were
the venture capitalists who swore by the sureshot success business model of
their investments. This trend was, of course, not just common in India, but it
held true much more strongly across the globe.

The current status–the majority of them have already gone under, while the
remaining few are gasping for the oxygen of moolah. VCs were just following the
their traditional high risk, high return philosophy. Only this time the risk
completely outweighed the returns.

Has this all seen a complete cash scarcity on the venture capital market? No,
the bedrock of VC funding, the US market, continues to see capital billions of
dollars being raised for VC investments. Of course the diehard optimists that
they are, VCs, globally, seem to have found a new love–life sciences. Slight
rumblings are already being felt in the country.

Net-specific deals still hot

Before one rushes to announce the death of Internet-related
companies–this doesn’t necessarily mean dot-coms–here’s the surprise.
According to the US-based National Venture Capital Association (NVCA),
investment in Internet-specific companies still tops VC investments in the US
market. This segment had a 28% share, still the highest, of the $10.6 billion
handed out by VCs in the Q2 of 2001. This, however, is a far cry from the nearly
50% share of the VC funding for the segment only a year back.

In terms of investments, the second quarter of 2000 saw
funding to the tune of $13 billion, while in the Q2 of 2001 this figure had
dropped dramatically to only $3 billion. The failure of dot-coms to generate
revenue and of disillusioning business models has seen the steady erosion of VC
confidence in the segment. Investments in Q1, 2001 were placed at $4 billion
though they dropped about a billion dollars in the next quarter. Also in terms
of number of companies, this segment still tops the list.

In Q2 of 2001, of the total 982 companies where VC funds
where pumped in, 301 belonged to the Internet-specific segment. According to
Jesse Reyes, V-P, Venture Economics, " The death of the Internet has been
greatly exaggerated. While its true that VCs are no longer backing every
Internet idea out there, they are continuing to invest in the future the
Internet promises."

In terms of other segments, IT still continues to hold
promise for the high risk VCs. This is clear from the share of computer software
and services segment remaining steady at the 16-20% range of the total
investment with about 229 companies receiving 21% of the Q2 investments.

However, the fast-emerging joker in the pack is the life
sciences segment, including companies in the medical, health and biotechnology
segment. The 137-odd companies that VCs funded in this segment saw $1.5 billion
going in their kitty. Compare this with the near $1 billion a year back or about
$1.3 billion in Q1, 2001. Life Sciences–the new love we mentioned earlier–is
probably the only segment seeing a steady growth in terms of actual investments
in the current lean period.

This constant need for finding new avenues has seen VC
investments as one of the key employment creators and revenue generator of the
US economy. The numbers–employment opportunities of over 4.3 million jobs and
$736 billion in revenues. According to a survey commissioned by the National
Venture Capital Association, venture backed companies represented 3.3% of the
total US jobs and 7.4% of the gross domestic product in 2000. To give a small
example, familiar names like Intel and Compaq have seen their glories thanks to
the VC clan.

The Indian story

Can we do the same in India? Well, commissioning such a
survey would be very premature given the young VC phenomena and also due to lack
of availability of data. Like the US-based VC monitoring agency NVCA, India
Venture Capital Association (IVCA) has taken a similar role in the Indian
market. But since the market is very young, data is still hard to come by. We
are still working according to the yearly cycle and getting data quarterly is a
far cry. However, there is no disputing the fact that the slowdown is also
having reverberations in India.

First and foremost is the shift from pure play dot-coms.
Software and services companies are still hot as is evident from the investments
in the past month. VCs have invested in companies like Pramati Technologies and
Usha Communications among the few ventures in the past month. On heels of the
global trend, investments are moving in more traditional nuts and bolts area
rather than the glamorous technology startups. Also, there is a clear shift from
the much-hyped ICE segments to other segments of the economy. According to a
survey done by Ventureahead.com on VC outlook 2001-02, in response to change in
focus by VC, nearly 25% of the respondents expected to change their industry
focus. Key observations by VCs were, "Attention may shift from IT start-ups
to more established players" or "We will now be even more focused on
investing in companies with strong IPRs rather than companies having a pure
services model." Other rules of the game include deals above the $1-million
mark. Earlier, VCs hedged the risk by spreading the money across many
investments, the traditional stock market rationale of investing in few but
quality companies is the latest trend. Many VC players like Walden
International, Jumpstart and Infinity Ventures have made their new emphasis
public.

Globally and locally, the dot-com fiasco has taken its toll.
Gone are the days where any idea was capable of getting hard cash. Today, the
thrust is on either salvaging the existing investments or investing in mature
enterprises. This could severely impact innovation. A recent article, ‘Innovation
Drought’, in BusinessWeek, says, "Last year, when venture funding reached
$100 billion, it accounted for 55% of the money spent in the US on
R&D."

Yograj Varma in New Delhi