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