We expect the BPO sector to be an attractive investment opportunity. However, it is not the right sector for early stage technology oriented VC investors (what we find in Silicon Valley). Successful investment in the BPO space requires large capital commitments and a longterm outlook (true for all investments in the services sector). Large private equity and buy out firms generally invest in this area. Investors will also require experience in building cross-border companies, since it is necessary to have access to low cost geographies, in order to build profitable, scalable BPO companies.

From an investment point of view, we would look for a team with considerable experience in running a BPO business. Success in these businesses requires execution, not exploration. The team should have worked together before and must have considerable process experience (as opposed to technical expertise). An ideal team would have significant expertise in one function — HR, finance and accounting, billing etc, along with experience in a vertical industry. The team should also be able to access technical skills that can design and build robust, scalable technology platforms to grow the business.

Barriers to entry can be created with strong process methodologies, customer on-boarding techniques and strong implementable policies on quality, audits and security. Success in BPO requires a partnership relationship with the customer based on mutual trust.

In an ideal scenario, the proposed project would already hold a letter of intent from a prospective client, making it easier to start the project. Strong feedback from a customer is essential to make a BPO project successful. Typical market segments addressed by a BPO company should be the mid-to-large sized enterprises. The SME market is a challenging one to address — BPO companies looking at this market segment will require significant investment in channel development, marketing and in brand building.

Given the high cost of customer acquisition, especially in the mid to large enterprise segments, well-designed BPO projects also factor in the possibility of cross-selling and up-selling other business services.

BPO projects can also be categorized as transformational BPOs and traditional BPOs. The former involves changes or improvements in business processes as the processes are outsourced. The latter involves shifting out the processes from an in-house environment to an outsourced environment, without any changes. Investment amounts vary greatly between different kinds of BPO projects.

Large BPO investments could be in the neighborhood of $50 million, small ones in the neighborhood of $7 to 10 million. The former implies a start with a brown field acquisition, and may also involve some debt. The latter is usually a green field site with may be one contract in hand. This may not involve debt to begin with. Debt is possible when the company has positive cash flow.

Returns for venture investors are hard to predict these days. Valuations of BPO companies range between two and four times revenues — usually calculated as profits after tax multiplied by P/E ratio. P/E ratio is usually equal to long term growth rates.

Valuation is also a function of revenue and profit size — the bigger the latter, the higher the valuation.

To achieve the liquidity necessary for returns, exits can be IPOs or trade sales, with the latter being more common.

Som Das is currently CEO of e4e, which, through four operating companies, is developing next-generation remote technology services to the global enterprise and service provider markets. Som was a general partner with Walden International where he specialized in semiconductor, software, IT service, and Internet infrastructure markets. While at Walden, he created a portfolio of service companies including Mind Tree Consulting, Techspan, Sierra Atlantic, WebEx. He also established the Walden India Nikko Fund in 1998, the first technology focused VC fund in India.