On the face of it, the phenomenon seems almost sudden. Software developers
and companies in India are today clearly confronting emerging and worrying
problems on crucial areas of their business directly impacting bottom lines.
Issues like measuring software projects, laying grounds for continuous
improvement in software processes and preventing defects are being scrutinized.
Why this sudden spurt in attention and concern in the area of software and
engineering processes?

Once you start looking, the answers are not really hard to
find, though on the face of it the exterior business picture is deceptive. The
rosy side, of course, is that today there are over 1,300 software exporters in
India generating an estimated business volume of Rs 15,000-odd crore. Business
grew by 49% in the last fiscal. The Indian software industry’s strength lies
in its deep understanding of technology and delivering quality services through
the projects it undertakes. But analysts and industry observers are of the view
that there is still considerable scope for improvement. Especially when it comes
to laying the ground for future markets and capabilities. There is also the
question of managing a workforce of over three lakh. This raises questions of
skills, which will be necessary in the coming years. Also on the positive side,
the Indian software industry has a global delivery model, a high-quality spread
of clients and a good mixture of onsite and offshore projects. Sixteen of the
thirty-two software companies with SEI CMM level 5 quality certification are

So what does the future hold in this scenario for Indian
software companies? Among the key activities that Indian companies have to
involve themselves with are addressing hardcore customer-oriented issues, which
boils down to the management of the software and engineering processes. These
are also inextricably linked with issues of time, quality and money and profits
management. Companies like QAI have been set up specifically to manage software
and engineering process issues. Navyug Mohnot, executive director, QAI India,
says, “Today, particularly for software development companies, the three
critical parameters for success in the market are speed, innovation and the
seizing of opportunities.” Simply put, this translates into effective
knowledge management, management of people and the handling of business
processes through tools like the Six Sigma process.

In the absence of a track record, this is the key area that a VC investor looks
at. The background should provide the educational and professional history of
the promoters. It should highlight the contribution and strength of the
promoters and their commitment to the venture.

The plan section should indicate projections of income for the next three to
five years, ratio analysis and the proposed investment plan. It should also
provide an industry analysis, the different participants, a study of the 
competitors and the proposed promotion and marketing strategy.

The final aspect that VCs look at is how they can exit from the investment. The
exit section should highlight the possible exit options for the VC, whether it
can be through a strategic sale, or through an IPO.

Choosing the right VC

Once the
homework is done, the next stage is
to identify a suitable VC investor to
fund the project. While deciding on the source of capital, remember that VCs
bring more than just funds to the table. This concept of bringing along a bundle
of capabilities along with funding is called ‘smart’ money. The VC can
contribute in any of the following areas:

VCs can bring in management expertise, which the technocrat entrepreneur may
lack. Angel investors and other VCs can play a prominent role in taking the
start-up from conception through operation till expansion in the market. VCs can
nominate senior people on the board to provide direction or they can themselves
be involved in day to day operations–an approach called hand-holding. They can
also help investee companies to identify proper people for key positions in the
organization. Therefore, depending on the expertise required, the entrepreneur
can look for angel investors, seed capital investors or institutional investors.

VCs, by their extensive networks in the industry, can help start-ups get their
initial business. Providing such initial breakthroughs can be critical for the
start-up in its struggle to gain credibility and a foothold in the market.


The reputation of the VC that has funded the project can be important at the
time of strategic sale or during the IPO. Association with a reputed VC would
help in obtaining better valuation during the IPO or for getting a superior
offer during a strategic sale.

Before deciding on the VC
investor, the entrepreneur should also decide on the nature of funding required
for the venture, whether it is seed capital, start-up capital or later-stage
funding. Seed capital is the initial funding required to validate the idea and
finance the initial feasibility studies. Start-up funding is required for
product development and initial marketing. Later-stage funding is required for
working capital finance and business expansion. As different business stages
would demand different business capabilities, the nature of the VC investment
would depend on the type of funding sought. While seed capital and start-up
funding can be obtained from angel investors, incubators and start up venture
capital funds, later stage funding can be obtained from institutional venture
funds and mutual funds.

The future is now

Several new
initiatives have been started like the India Venture 2000 and the e-mahamillionaire
project of NIIT to nurture and guide prospective entrepreneurs to obtain VC
funding. Notwithstanding the recent developments, the VC industry is in a
nascent stage in India today. With the prospect
of more growth in the IT
sector, a lot more activity can be expected in the VC industry with the
availability of more investible funds. Some of the recently launched technology
mutual funds have earmarked a portion of their funds in unlisted companies,
which make them more like VC funds. All this is happy news for the entrepreneur.
Venture funds have been an engine for economic growth for over a decade in
countries like USA, Israel and Taiwan. The situation is now ripe to be
replicated in India.

Dr Thillai Rajan

Leave a Reply

Your email address will not be published. Required fields are marked *