Thursday, November 13, 2008
What are Indian venture capital firms up to these days? Some Indian “new economy” funds got severely burned on foolish dot-com investments. But a lot of capital continues to flow into India. Five established and emerging Indian VCs -- Srini Raju, founder and CEO of i-Labs Pvt. Ltd, and one of the directors on the board of Satyam Computer Services Ltd.; Subrahmanyam Ramnathan, managing director of Vanenburg Group; Somshankar Das, managing director of e4e; Ashutosh Yadav, CEO of I2DC, and Vivek Sekhar founder of 2i Capital -- share their thoughts in a virtual roundtable discussion on VC activity in India.
What’s the investment your firms have earmarked for 2001?
Srini Raju: We have an initial fund of $111 million for incubation. We will double this amount in 2001 as part of the company's expansion plans.
Somshankar Das: We will invest about $250 million to $300 million over the next years to build 10 to12 Internet based infrastructure service companies in our markets of focus.
So there's obviously VC money in India, but how much of that is actually 'smart money'?
Vivek Sekhar: We have read reports, which say that there is over $2.0 billion available as VC funds to Indian companies and entrepreneurs. We think that the 'smart money' component of this corpus may not be more than $200 million. On our part, we are clearly attempting to add value to portfolio companies by providing intellectual capital over and above investment capital.
Is there a glut of venture capital in India?
Sekhar: We do not see a glut because firstly, the Indian technology industry is not saturated as yet, and secondly entrepreneurs are looking for value addition rather than just capital. In our view, this is probably the end of the first phase of growth in the information technology industry in India where proof of the concept has been established. Hereafter, Indian companies have to build a stronger, globally competitive business models that do not merely rely on cost-arbitrage but genuinely add value. Therefore, it is the higher level of IT consulting or product development -- the second generation IT-boom -- that we and other VCs are looking to fuel. This will be a much larger boom compared to the last time with larger and stronger companies participating in it.
What has been the effect of the recent stock market slump on the VC industry in India?
Subrahmanyam Ramnathan: The lessons we learned are many. The biggest lesson we learned was not to invest in firms that do not have in-depth knowledge of the market and business strategies.
Sekhar: The general belief, which is a fact, is that a downturn in the US market will generate additional outsourcing opportunities due to cost pressures being faced by US companies. However it will initially create a sense of gloom for everyone concerned. In our view smarter companies and entrepreneurs have already started developing technology-based productivity and cost reduction services and products targeted at existing and new clients. The slowdown of the late 1980s and early 1990s led to innovation and technology-based productivity and cost reduction measures. We expect a repetition of history albeit in a different form. US corporate restructuring has always had a strong technology component -- this is beauty of American corporate dynamism.
Indian technology companies have to look at this opportunity objectively and build stronger relations with their current customers. They will need to focus on domain knowledge, quality, delivery, and costs of projects being handled, so that they can confidently bid for higher value businesses and slowly wean away customers from more expensive, branded service providers.
Raju: Most of the companies value their firms unrealistically. We select companies as per their technical expertise and business model.
But why did so many VCs fund so many Indian dot-coms when the market clearly did not exist?
Das: Most VCs in India do not have a technology industry background. This has manifested itself in the pattern of VC investing in India for a few years in areas such as IT services, IT enabled services and dot-coms. Even today, only a few true technology companies get funded in India.
Yadav: Divining the future is the futurologist's business and risk taking is VC's business. The early rise of Amazon.com with a sprint-and-spend strategy that made “first-mover-advantage” a truism of the Internet era brought in self-fulfilling prophecies seducing VCs and the associated community. Frenetic fear of losing a potential monster winner outweighed concern over “what if the company doesn't do what the business plan says?”
Call it the VC paradox. In the US, by any traditional measure, VCs have done better than ever in the past few years, giving phenomenal returns for their investors. In India, as the market expectations went from eyeballs to profits faster than expected many have burnt fingers. But, the biggest positive of this gold rush outweighs the negatives. The word “entrepreneur” has acquired respectability.
Drowning in money, the VC industry has grown too fast. Now comes the inevitable shakeout. And, it is the year when the reputations of VC's - once considered the “poster boys of the new economy” - will come under fire from entrepreneurs and the general public.
Sekhar: The Indian dot-com situation has not met everyone's expectations certainly, but it has provided some lessons -- that only sensible planning, and serious business plans that are derived from a deep understanding of consumer psyche and technology changes, work well in the long term. The bursting of the so-called bubble has helped VCs focus on serious entrepreneurs alone and helped them achieve the right valuation by eliminating unrealistic expectations. We believe that the market may eventually provide the right opportunities in e-commerce, after a significant degree of consolidation is over, which could help existing invested VCs to recover a part of their investment. People had underestimated the degree of corporate death and obsolescence that goes hand-in-hand with phases of rapid technological and economic change.
So which are the most exciting and attractive sectors or companies in India?
Das: We are not just focused on India. Our approach is to build companies that address global markets. The sectors of interest to us are Internet software engineering, value chain integration, security, network management services, online diagnostics, wireless data services and CRM.
Ramnathan: We focus on e-commerce and beyond -- sectors like infomediaries, Web collaboration, or virtual office. On the ERP front, we concentrate on product data management, demand chain management, engineering enterprise and portals & application integration.
Yadav: Apart from the now very popular and stable India-US corridor “rupee costs-dollar revenue” model of services companies, the technology entrepreneurship will take off, finally, and pave way for the future “Made in India” brands.
We feel excited about services companies with a vertical focus in the telecom, wireless, communications, networking, gaming and bioinformatics sectors. As these companies increasingly move towards research based offerings and IP licensing models they become even more attractive. Young service companies who have matured into embedded software, components and emerging technologies will be more lucrative.
The ITES sector seems to be the most exciting sector, with tremendous employment potential for a country like India. But the lack of successful executives who have created organizations at that speed makes it a tough game.
Sekhar: The main opportunities in India are Software Services and increasingly IPR-based technology development companies. 2i Capital is concentrating on the latter. Opportunities in hardware are few given that domestic value addition is limited. In technology product areas the main limitation for companies is on the marketing front where their front-end in the US or Europe is weak or non-existent. In the Internet space we are looking at infrastructure and security companies rather than e-Commerce and portal-based businesses
What have been the biggest challenges you have faced as a VC in India?
Yadav: The entrepreneurship movement has just begun. The VC community should be given full credit for the same. The venture industry has seen tough times. Things are not going to be easy in the future as well. Apart from regulatory, infrastructure and administrative issues faced by VCs, lack of quality entrepreneurs is also a concern. VCs will increasingly have to hunt out top-notch professionals from the corporate world and 'create' deals if they are to deploy their funds well.
