Technology Venture Investing in India: Healthy, Growing and Here to Stay!
Date: Tuesday , May 03, 2011
India is increasingly gathering attention in the world of global venture capital investing. In Deloitte’s 2010 Global Trends in Venture Capital Survey, 68 percent of Indian VC respondents expected the quality of deal flow to improve over next five years, and 76 percent expected LPs to be more inclined towards investing in India. And why not – with a PPP adjusted GDP of $4 trillion that grew at about 8.4 percent recession-proof average between 2006-10, and a 350 million middle class and 750 million working age population powering the economy, there seems to be no stopping the Indian economic juggernaut. It’s also heartening to note that VCs have put money where their mouth is, by pumping in close to $3 billion in India during 2004-09. Expectedly, the Indian VC environment is dominated by technology, with the space constituting about 70 percent of all VC investments during this period.
With the Indian VC industry witnessing about 140 venture-backed exits between 2004 and 2010, along with MakeMyTrip’s recent IPO providing excellent returns to investors, doubts about exit potential have been quelled to a large extent. The Technology VC space, in particular, witnessed 95 exits during 2004-10 out of which, about 70 percent comprised of M&As. With sectors such as Mobile VAS, Software and Internet providing return multiples in the range of 7x to VCs, the space has not disappointed from an exit perspective. IDG Ventures India focuses on investing in technology and technology-enabled companies based out of India. Increasingly, we are seeing the rise of serial entrepreneurs and disruptive technologies in India, across sectors such as medical devices, business intelligence and Internet. Belief in scalable commercialization of these technologies is cemented by the financing trends of companies such as Perfint, a medical devices player that received Series A investment from IDG Ventures India and Accel, and that has now gone on to receive follow-on financing from quality investors such as Norwest Venture Partners (NVP). We are also seeing deep intellectual property being increasingly created by Indian startups.
Bangalore continues to be the nerve center of Indian technology VC space, comprising about 40 percent of deal volume during 2004-09, followed by Mumbai, Delhi NCR, Chennai and Hyderabad, along with Pune to a lesser extent. It’s getting extremely difficult for VCs that don’t have a strong presence in Bangalore, to do high quality technology deals. In all these aspects, Indian VC space is gradually shaping up to be similar to Bay Area investing wherein VCs have access to game-changing and IP rich startups in select concentrated locations, and wherein large PE players are willing to step in as follow-on investors . IDG Ventures India has 11 portfolio companies across diverse technology segments, and continues to remain extremely positive on Indian technology investing. At this point, it might be useful to take a step back and analyze key drivers and emerging opportunities in this space.
A clear trend being witnessed by the Indian technology space is convergence of multiple high-speed data technologies. Telecom players have realized that in the mature and extremely competitive Indian ‘voice’ market, the only way to increase ARPU’s is to hook consumers onto data services. As many as eight operators are providing high speed broadband services to phones and laptops, utilizing diverse platforms such as 3G, 4G, LTE or EVDO. India appears to be skipping a few steps in the usual evolution cycle of communication technologies – while 3G service rollout is at least 4-5 years behind other global markets, 4G services would only be a year behind major global rollouts. The strength of this trend was clearly reflected in Apalya, India’s flagship Mobile TV player with 100 percent market share, attracting investments from both financial investors (IDG Ventures India) and strategic investors (Qualcomm). The devices segment too, is ready to help consumers in utilizing these services. The introduction of affordable smart-phones, tablets and touchscreen devices is leading to consumers skipping the PC-laptop-tablet chain, and it would not be surprising if in the coming decade, millions of rural and semi-urban Indians get first time introduction to communication technologies through these devices. Apple officially launched its iPad in India in early 2011, while Samsung has dropped the price of its Galaxy Tab tablet from $ 845 to $ 645. With players such as Qualcomm working towards making 3G chipsets for sub-$110 phones, and also towards chipsets that can seamlessly allow users to move from 2G to 3G or LTE, users can expect more technology and more features at a lower price.
What do these trends mean for the Indian technology VC eco-system? It means a large domestic market providing impetus to e-commerce in India. Larger number of people will use Internet and mobile platforms to buy more products online, watch TV and videos, teach their children, and book everything from air and rail tickets to movie tickets. It also means corporates will hold more web and video conference meetings than in-person, and spend more marketing and advertising dollars in trying to reach consumers across technology platforms. All these translate into an excellent opportunity for Indian technology entrepreneurs to reach hitherto untapped markets, and build businesses that are scalable at rates unheard of in the Indian economy. Case in point is Myntra, an Indian e-commerce player wherein IDG Ventures India invested when its revenues were insignificant. It has since gone on to attract follow-on investments from reputed global names such as Tiger Capital, and is now poised to become one of India’s largest e-commerce players. In the software space, we are seeing rise of the ‘Products story’. With software services increasingly getting commoditized and becoming the playground of large players, young Indian software companies are expected to increasingly focus on packaging their offerings as products. This helps their business from scalability perspective, in addition to providing more opportunities to create intellectual property, branding and differentiation. Riding on this trend, Manthan, which provides Business Intelligence solutions to global retailers, has received investments from reputed names such as IDG Ventures India, DFJ-ePlanet and Fidelity.
Indian entrepreneurship space is also seeing a strong trend of young Indian companies going after global markets. Perfint started by serving more than 50 hospitals in India, and is now receiving strong traction from South East Asia and Africa. Manthan too, has ramped up its international sales force to penetrate the global retailing space. Aujas Networks, which operates in the information risk management space, has already served more than 100 customers across 10 countries. With strong macro drivers in action, the Indian technology VC space is also witnessing the rise of innovative tech paradigms that could potentially shape the space in coming years. Foremost among them is innovative advertising solutions that can help companies reach consumers across technology platforms. This could include watching an ad or getting exposed to a banner while playing an online game, or opening an app on your phone or tablet, or catching your favorite soap on mobile TV. Ozone Media, which is in the online ad network space, is seeing strong domestic demand, and has also started serving international markets. Another paradigm that is gaining significant attention is Software-as-a-Service (SaaS). With both large domestic SME market and vibrant international demand, the SaaS model promises high potential upside for investors, with its inherent flexibility and scalability across firms, geographies and service categories. Manthan’s newly launched SaaS offering is getting excellent responses from customers while Iviz, an IDG Ventures India portfolio company that provides Cloud based On-Demand Penetration Testing, is seeing excellent traction in international markets.
Finally, there is tremendous scope for innovation in auxiliary or support services domain for fundamental Indian sunrise sectors such as energy, telecom, construction and utilities. This is further indicated by ConnectM, which provides Remote Monitoring and Analytics based energy management solutions to these sectors, receiving investments from IDG Ventures India and IBM.
All above mentioned trends cement the fact that the Indian technology space is replete with opportunities for entrepreneurs. However, Indian technology entrepreneurs need to be conscious of a few aspects to achieve success. It’s important that entrepreneurs build strong teams by aligning incentives attractively through equity or ESOPs. They should also try and create un-replicable value propositions that provide a sustainable competitive advantage to the venture. Another important aspect is securing adequate angel funding at the optimal time, and utilizing it to evolve product/ service offerings and validate the business model. While raising VC funding as a follow-up to the angel round, it’s best to avoid undercapitalizing the business, keeping in mind economic cyclicality and potential downturns in the offing. Also, it’s important to do thorough diligence on the people being brought in as Board Members by the venture, to ensure high value-add from them. Finally, it’s crucial to think about building highly scalable businesses, and making sure this thought process reflects in the business plan.
In a nutshell, all macroeconomic, policy, demographic and investment trends point towards a vibrant Indian technology space. Driven by the rise of disruptive technologies and high quality entrepreneurs, IDG Ventures India expects the Indian VC space to absorb between $7.5-10 billion of technology VC investments during 2010-15. What is also heartening to note is that the Indian entrepreneurial financing chain seems to be coming of age. While organizations such as Accel India, the Seedfund, Bloom Ventures and Indian Angel Network are providing entrepreneurs with seed and angel financing, VCs such as IDG Ventures India, Canaan Partners, Lightspeed Ventures India and Sequoia Capital are ensuring that ventures have access to adequate capital as they hit the runway. In conclusion, Indian Technology VC investing is healthy, growing and here to stay.
The author is Senior Analyst, IDG Ventures India
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