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March - 2005 - issue > Entrepreneurship
Indian BPOs Are The VCs Still Looking At It?
Subhasis Chatterjee
Tuesday, March 1, 2005
BPO is not that something every vc talks about these days. Venture Capitalists are no longer interested in funding pure-play BPO companies who provide voice based call support to their overseas clients. When Carlyle Group invested $9.4 million in Chennai-based Newgen Imaging Systems, an integrated service provider; the e-publishing industry trend had become increasingly visible. Newgen’s clientele include twelve of the world’s leading publishers across Europe and the USA.

With a combination of traditional typesetting skills and high-end e-Publishing technologies, the company offers an attractive outsourcing proposition for the Western world from India.

It is well known that the BPO industry has shown some significant growth in the past and the VC community is still eager to significantly invest in the BPO space. Given India’s strong English-speaking youthful workforce, improved telecom infrastructure, lowering of international call rates and government support to IT enabled service sector, the BPO industry is prepared for imminent success.

Within the BPO space, insurance, technical support and financial services are quite attractive investment opportunities for the VC community. BPOs that have experienced management teams and marketing capabilities to procure overseas customers are some crucial criteria VCs consider before taking any investment decisions. ”We will consider the particular market in which the company is operating and in case of a start up company when it is going to attain the critical break-even level,” says S.N.Rajesh, Vice president of UTI Venture Capital Funds.

Bala Deshpande, Investment Director of ICICI Venture Funds, which has raised $240 million under the India Advantage Fund, is not highly optimistic about the funding opportunity in the pure voice-based call center BPOs. ”I personally find that market is already too crowded. We are more interested in funding highly specialized BPO companies which are providing specialized back end support to their overseas clients,” says Deshpande. Elaborating on return quality the company expects from its investments, Deshpande mentions a 30 percent yearly Internal Rate Return (IRR).

According to industry estimates, twenty-two BPO companies in 2003 received $160 million as VC funding compared to $148 million received by nine BPOs in 2004.
The trend is apparent. Overall investment in the BPO sector has declined, but the investment amount in selected BPO outfits has increased significantly. In 2004, companies like Newgen Imaging, and Office Tiger raised noteworthy amounts from VCs as well as private equity funds.

In the BPO arena, companies like Daksh have matured and created an impressive outsourcing ecosystem, involving infrastructure, recruitment and training, while simultaneously building the industry’s best practices encompassing these functions. As a result, they are a very lucrative investment opportunity for a company like IBM, who is rescued from the time and effort necessary to reach a comparable level.
But for companies who are not obtaining sufficient numbers of customers or who want to cover a larger market, merging with a larger partner will be the only option, according to Girish Kulkarni of TDA capitals. He predicts non-voice segments within the BPO sector will witness much activity.

There are various specialized opportunities for the industry to seek. For example, HR
outsourcing is an immense growth area in BPO, but Nilesh Hundekari, analyst with KPMG, claims no significant players are offering any services in this field more than that of basic payroll. Similarly, opportunities are possible in fields like instructional design, CAD/CAM, and knowledge management.

In an already overheated market place, the VC community is trading with caution. Before making any investment decision they must ascertain growth potential, moving past track the management team’s current records and, of course, consider the revenue model. “Apart from these we will give due credence to the the exit option available before us,” says Harikrishnan, fund manager with the UTI Venture Funds. This venture capital stronghold of Unit Trust of India, along with TDA Capital Partners, invested $2.3 million for a minor stake in RevIT Systems Private, Limited and its subsidiary, Sherpa Business Solutions, a Chennai-based healthcare and publishing outsourcing company.

With the focus of the VC community shifting towards those BPOs focusing on specialty outsourcing work for their overseas clients the whole dynamics in the BPO landscape is changing. BPO companies that provide professional services to their overseas clients are the ones likely to gain in this ever-changing environment.

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