Entrepreneur: Lord, I’m a struggling entrepreneur, and I’m feeling so frustrated. I have a great business plan for a great company, but I can’t raise the million dollars to launch this opportunity. I’ve talked to so many people, but they all say no. It seems like I’ve been trying to raise a million dollars for a million years! Voice: Don’t despair. Entrepreneur: Is that you, Lord? Lord: Yes, it’s me, the Lord, and I want to tell you not to give up hope. Remember, a million years to you is like a second to me. Entrepreneur: Really, Lord, a million years to me is like just a second to you? Lord: That’s right, so keep trying. Entrepreneur: Lord, if a million years to me is like a second to you, what’s a million dollars like to you? Lord: A million dollars to you is like a penny to me. Entrepreneur: Lord, can I have just one of your pennies? Lord: Yes, in a second! |
That’s how the investment scenario also goes today dot-com entrepreneurs
versus venture capitalists–VCs aren’t funding those dot-coms.
There was a time when a well-presented e-business plan was a sure ticket to
becoming part of a VC’s portfolio. Now that looks like the story of a crazy
world that existed long, long ago. A world where the VCs were ready to dole out
money and investors’ appetite too for such stocks never seemed to be satiated.
The valuations kept on moving only in the upward direction). Of course, what was
missing was an element of sanity. Or how could a dot-com company like Indiaworld
with a revenue of Rs 1.5 crore be valued at a stupendous Rs 499 crore? And why
would loss-making dot-coms be valued at 100 times over their brick-and-mortar
brethren?
The reason was partly that VCs were flush with money, they still are, and
were too eager to invest. For them, the strategy seemed to revolve around the
law of averages. All they needed was a few multi-baggers among the numerous
companies in their portfolio and they would strike gold. Moreover, Nasdaq’s
tech stock seemed to be ever sky-rocketing and there was a never ending queue of
dot-com IPOs. Not only did this create ever-expanding VC funds but also made
Nasdaq the next stop for most dot-coms.
In India, we all know that barring Rediff, none of the other big dot-coms
have made it to any IPOs, leave alone the Nasdaq, even after spending several
crores on marketing and advertising.
Reality checks in
But all good things must come to an end. And so it happened with dot-coms. It
seems that one fine day investors woke up and started talking about profits and
long-term viability of the dot-coms. Earlier, entrepreneurs as well as VCs had
believed that setting up a Web site meant a better business model just because
they were selling online versus offline. Also, their value was really based on
high growth expectations, assuming flawless execution without any competition in
the next 4—5 years–a highly unrealistic scenario. And then it was like a
house of cards. Suddenly the whole dot-com business seemed fated to collapse.
Big, global names started to crumble as investors refused to part with more
money without proof of profits. The scenario seemed to have changed suddenly. In
order to stop bleeding, layoffs started becoming common among dot-coms.
Soon dot-coms were being shooed away from the investors’ portfolio. India’s
lone dot-com listing on the Nasdaq, Rediff, had been oversubscribed by over 18
times and had peaked to $26 around June 2000. But since the dot-com meltdown,
its scrip witnessed continuous new lows to reach its nadir of $2.5 by December
last year. The current price–$4.6. So, while current dot-coms are scampering
to find new revenue models and even newer VC partners, the VCs, after burning
their fingers are licking their wounds and moving to catch up with other trends.
India still a viable option
The short-term good news is that VCs are still flush with money and India
seems pretty high on their agenda. And the long-term good news is that they have
become a lot wiser, thanks to the dot-com experience.
India, sans dot-coms, remains a priority for most of the VCs as it has the
potential to give them the multi-baggers. Says Pravin Gandhi, director, Infinity
Technology Investments, "Yes, India remains a key market for investments
from venture capitalists and it is verified by the fact that a sizeable amount
of investment has flowed towards tech-driven startups over the last nine
months." India still has the basic components to bring in VCs in droves.
First, there is an abundance of talent available in the country. Though a bit
cliched now, the low-cost high-quality Indian workforce has brought in a comfort
factor for the clients in the developed countries. This was further strengthened
by the Y2K project work by Indian companies, which helped develop tremendous
branding for Indian SW professionals. So, VCs are also more comfortable dealing
with this brand. Second, there are a number of Indians in the Silicon Valley and
with many in the successful entrepreneurial mode, VC money is again more
comfortable in changing hands in India. Though the investments are still
insignificant as compared to global VC and angel investments, the trend is
rapidly picking up. According to Nasscom, the VC and angel investment in
high-tech firms in India is going to from $20 million in 1996 to an estimated
$1.2 billion by 2001 and could touch $10 billion by 2008.
Preference for tech firms
Key issues for VCs
Market: Market size, segment and growth of that market segment are important. Investing in niche verticals is always dangerous considering the fact that if the market size itself is very small, then the chances of the company achieving critical mass is much more difficult.
Positioning: As a majority of players are looking at improving efficiencies rather than cutting-edge technologies, it’s imperative for the VC to have a good idea of how the company is positioned to take on competition.
Sustainable advantages: Another key factor for VCs investments is the sustainable advantages the team and the company may have. This also includes the ability of the management to build and maintain new sustainable advantages.
Projections: Gone are the days of eyeballs and page views. VC are interested in projected financials and its attractiveness in terms of profitability (margins) and growth.
Despite the multitude of infrastructure and regulatory issues, VCs are not
averse to investing in the country. Comments Kiran Nadkarni, MD, Draper
International, "Unlike the large market in the US, VCs in India are yet to
segmentize their investments in terms of specific niche areas, but today about
70% of the VC money is flowing in the technology area." It’s a similar
situation in the US with the technology sector claiming the giant slice of the
VC investment pie. For example in 1999, VCs invested about $30 billion in the US
of which technology firms got over 80%. Also, private investors provided a
larger pool of investments in terms of angel or start-up funds to the tune of
about $80 billion, again a major chunk to the technology sector.
But cutting-edge technology companies, on the lines of Silicon Valley or
Israel, are yet to become common in India. So where are the VCs putting in their
money since the dot-coms, especially in the B2C space, having become a strict
no-no affair? Well, most of the VCs this correspondent spoke to were keenly
looking at markets that would lead to increasing efficiencies. The emphasis on
" increasing efficiencies" is important, as a huge market is available
in the US to leverage on India’s low-cost English-speaking workforce. For
example, e-CRM companies like Talisma can employ manpower at their Indian center
at a salary of $3,000—4,000 a year for a total cost of about $15,000—20,000
per annum instead of $50,000—140,000 in the Bay Area or in North Dakota. That
represents a lot of advantage and a huge market. Agrees Vijay Angadi, MD, ICF
Ventures, "We would like to leverage the enormous low-cost talent in the
country and are more comfortable in investing in companies which increase the
efficiencies in existing processes." This means that IT-enabled services
are definitely in. Services like e-CRM and call centers will certainly attract
VC attention, especially if you have good global clients. Companies like
Daksh.com, Customerasset.com and others have received good response from
investors. Customerasset.com, which has a Rs 60-crore investment plan, feels
that raising funds is not going to be an issue for it. Another space receiving
positive VC response is software development. Says Sridhar Mitta, MD, e4e labs,
"Today, most of the investments are directed towards software development
and IT-enabled services. To some extent, technology development is also getting
the attention of certain VCs." Companies working on wireless, 3G,
convergence and telecommunications are some other hot areas for VC funding.
Some VCs have also started to segment their investments by niche products or
technologies. For instance, e4e Labs, which is committing about $300 million in
the country, is keen to invest in companies which deliver technology as a
service through the Internet rather than as a product. e4e’s operations follow
the incubator model, and it is essentially looking at 10—15 companies in the
area of infrastructure service like remote management and provisioning of
networks and computers. The Carlyle Group, which has about $250 million in its
kitty, is for companies developing infrastructure in areas of telecom and
networking or those who are in segments like payments, security and encryption.
Some others like Walden are looking at export-oriented technology companies,
overseas technology companies with a development center in India, and
technology-based Indian service companies addressing the Indian market. In all
these cases, the major thrust seems to be on companies that can raise their
efficiency levels to compare with companies in the US. Nasscom’s projections
of a $87-billion opportunity for India by 2008 also say that a major chunk of
the revenues will come through IT services and IT-enabled services.
An interesting feature of VC funding is their preference for the southern and
western regions. Since VCs need to track their investments on a regular basis
and constantly meet the company’s officials, most of them are looking at
investing in companies close to their base stations. Since a majority of VCs
operate from Mumbai and Bangalore, they are keener to invest in companies
located in the southern and the western belt. Another reason is that a large
number of IT related developments are taking place in these two regions. As a
result, at least for the time being, north and east seems to be low on the VCs’
agenda.
There also has been a shift in the funding parameters. Today, more than the
idea itself, VCs are looking at the execution of the idea. So it is imperative
to first have a team in place and then other issues will fall in line. According
to Suresh Rajpal, CEO, Trigyn Technologies, "VCs today are extremely
apprehensive of investing in a company that doesn’t have a proper team and CEO
in place. For instance, when we decided to spin off eVector as a separate
company, the VCs were ready to invest. But it took about 5—6 months for the
actual funding to come in because we hadn’t formalized the team and CEO for
the new company." So where does this leave the wannabe young entrepreneurs–the
20—30 age group bubbling with ideas? An alternative is to go to companies,
which incubate ideas and let them bring in the team.
Forward march
In the capital intensive IT industry, VCs have an important role to play–they
have been part of the success folklore of global companies like Intel and
Microsoft. India, however, has seen only a fraction of such investment. Much of
this has to do with a lack of sync between the educational and research
institutions, and the industry. Today, despite India having among the best
R&D centers in the world, the works and findings there rarely find a way to
the industry. On the other hand, institutes like MIT in the US have full-fledged
offices for patents registration and industry interaction. Though a small step
has been taken with the IISC taking the lead, it’s still time for ideas in
labs to get funded by VCs. Until that happens and India moves into the high-end
product and technology development space, VCs are likely to show their
preference for IT-enabled services and software development.
YOGRAJ VERMA in New Delhi