Trends for investment - Promod Haque

Date:   Thursday , May 07, 2009

Globally, I believe that we are seeing some very interesting growth equity opportunities (particularly in India) across a wide variety of sectors including telecom, technology, financial services, infrastructure and manufacturing. The correction in valuations has created a more viable option for VCs to invest in later stage companies. Also, given the public markets are on hold for IPOs, companies are turning to growth equity. IT-ITES outsourcing has also been a sector that has prospered in India over the last several years, and we are now beginning to see the maturity of the second-generation services market. We continue to look closely at this sector in India as we are seeing a lot of interesting businesses in this area.
Domestically, we are seeing some very interesting companies in the systems, services, software and Internet sectors. There are also some great ‘bulk up’ opportunities for existing portfolio companies in the midst of a tough economic climate. Many of our portfolio companies had successfully acquired other companies, ‘bulked up’ and grown their businesses significantly during the last downturn, and we are seeing this happen again.
Venture is a highly cyclical industry, and we believe that this is frankly the best time to invest in companies; there is a lot talent out there, quality opportunities and motivated entrepreneurs.

Hottest technologies
Infrastructure management services (IMS) is a very hot sector right now. The growing pressure on corporations to better handle the complex IT requirements demanded by internal and external regulators is accelerating the need for simplification and efficient management of IT at a low cost. We believe that 70 to 75 percent of infrastructure management opportunities can be off shored. We also believe there are tremendous opportunities when it comes to SaaS and cloud integration. Today’s companies have a dire need for integration of enterprise applications deployed in the Cloud, as SaaS, on premise or in any combination. Cloud and enterprise applications will continue to coexist in a hybrid model for a long time to come, and the need for integration technology is growing, and becoming the bridge between the two worlds.

We are also excited about some interesting technologies/companies in the network infrastructure space, the next-generation storage sector, as well as a host of emerging technologies that enable virtualized transactions for both real and virtual goods.

Advice to entrepreneurs
The current market conditions will continue to put companies through difficult times this year. That’s why we’re working closely with our own portfolio companies to manage their cash during the downturn (as we’ve done during previous downturns). We’re advising entrepreneurs to be extremely cautious. Based on past experience, we know they will continue to experience a squeeze in spending, as we have already started to see this year. It takes longer in this economic climate to reach a meaningful exit (M&A or IPO, and the IPO window hasn’t opened yet). Therefore, conserving cash and finding a way to reach cash flow breakeven is critical for these companies.

The good news is that we believe that companies with strong fundamentals will be rewarded over time. But they need to make it through this tough economic environment, save cash, keep the burn rate down and reach cashflow breakeven sooner. Ultimately, the team’s patience, passion, ability to focus on cost efficiency and perseverance are key drivers to success.

Promod Haque is Partner, Norwest Venture Partners