Start-ups, VC funds in uneasy marriage

By fuelling start-ups, venture capital has played a crucial role in India's rise as a nation of entrepreneurs. However, as in any marriage, the relationship is being updated with the usual dose of cynicism, disillusionment and discoveries.

A perception is gaining ground that the venture capitalist is a meddling busybody who lunges for the exit button at the first sign of trouble.

"VCs do not make a company," scoffs Sekar Vembu, founder of Chennai-based Vembu Technologies, a vendor of online storage back-up software.

"Many VCs in India are still not strategic partners, but more like moneylenders who make start-ups perform with a gun to the head. The proprietary attitude they bring to the incubatee's premises is not encouraging."

Experience taught Vembu to put the shoe on the other foot and "evaluate" VCs and private equity partners. Vembu Technologies is now seeing its turnover cross the $1 million mark and plans to file for product patents within two years.

Those without the moolah have relied on gut and gumption. Chennai-based Escrowtech India, a software source code repository, has not made a VC funding pitch yet for equity divestment or working capital, but is optimistic of new opportunities opening up with new markets.

Sudhir Ravindran, an intellectual property consultant and founder of Escrowtech, has promoted the concept of software escrows to safeguard the source codes of customised software, the safety of which is vital to the fortunes of many businesses.

Escrowtech, which specialised in "safekeeping" of crucial source code for its customers, started as an Indo-US venture, and without VC funding, built up a robust Fortune 500 clientele base, which includes Cipla, Ernst & Young, Fidelity International, ABB, Intel, Toshiba, Deloitte & Touche, Walmart and Canon.

An increasing number of start-ups has begun to point out that companies that came out with life-changing concepts "� Disney, Microsoft or Sony "� were not VC creations. Some, though, remain beholden to VCs.

"People realise that innovation and more funds flowing into product development is what really matters. Today, with greater clarity on which businesses are eligible for funding, the best ideas will win," says Anand Adkoli, the CEO of Bangalore-based product firm Liqwid Krystal.

Liqwid Krystal secured $2.5 million in seed funding during the boom days of 1999 from Global Technology Ventures.

Bangalore-based Proteans Software is another firm that owes a lot to timely venture funding, and foresees revenues touching $6 million in 2007-08. Neelam Dwivedi, its vice-president, notes that incentives from the government will in the long term help create a sound investment ecosystem.

"Typically, many an entrepreneur dies fighting infrastructure woes. But those who succeed in securing VC funding have strong faith in their ideas and execution abilities to see them through the rough and tumble of the market," she says.

VCs have their share of complaints. "A key innovation conundrum is that of creating too many me-too products," says a leading executive with a VC firm. "A product should be an ingenious answer to a problem facing the market."

According to some others, Indian products still come across as incomplete. They often lack user manuals and do not ship with proper documentation. Coding errors are not uncommon, and they are often discovered after implementation on customer sites, says a VC.

TOUGH DEALS

$620 mn invested through 42 deals in the IT sector this financial year

Mumbai and Bangalore drew over 50%, followed by Delhi, Chennai and Hyderabad

IT services and BPO were the biggest gainers

Source: Venture Intelligence