It was a typical Delhi rainy day. Braving the chill at Pragati Maidan, over 300 dot.com wannabes listened to half a dozen successful net entrepreneurs relive their success saga.
Thanks to IT Asia 2000, an infotech conference, the aspirants quizzed the speakers on everything, from the basics of setting up a website to digging out partnership strategies for the wired world. Like the 20-something participant from Delhi's suburb Gurgaon, who stayed back to network with Suresh Rajpal, the ex-head of Hewlett Packard (India) and now head of eCapital, an Internet-based technology company.
With aspirations like these sweeping the nation, the queues outside the hallowed portals of venture capitalists are only getting longer. Following the Rs 500-crore buyout of Indiaworld by Satyam Infoway, dot.coms are considered to be the ideal `get rich quick' vehicle. "After all, we have the ability to tap the global market, and the returns are
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fast," says one. But how do these venture capitalists sift through the myriad proposals that pour in? And for how long will this
gold rush last?
For most, it looks like a chase. The venture capital funds are in search of a better company to invest, while the companies are looking for better value for their stakes.
According to estimates by the National Association of Software and Services Companies (Nasscom), India is likely to attract over $10 billion in venture capital funds by 2008. More than $1 billion will flow this fiscal.
Even as every neighbourhood businessman is a venture capitalist reincarnate, independent estimates show that the current funds that have poured in are controlled by just a handful. About 15 venture capital funds are operating with an average kitty of $50-100 million each This is in addition to the private funds from global infotech giants like Intel, Novel and Microsoft, and the state-owned venture capital funds, all notching up to roughly Rs 400 crore.
Even as dot.com companies and Internet-related technology companies are the hot picks for venture capitalists, other knowledge based ventures like biotechnology and pharma are also vying to attract funds. According to Sudhir Sethi, Walden International Investment Group (WIIG), India is currently experiencing a larger than expected boom of venture capital funds. And this is only expected to grow further.
Sethi believes the growth will be driven by two fronts. One is the wealth creation by senior executives of successful infotech companies in the form of stock options and the second is the all-pervasive Internet thrust.
WIIG manages a corpus of $63 million, of which $30 million has already been invested. It has focused on infotech, Internet and new media, telecom software, healthcare and semiconductors.
WIIG executives point that all kinds of people are flocking at their doorstep. "About 26 per cent of the people we met are below 30 years of age and have some kind of business plan and ideas. They have the ideas but lack the resources and funds," says Sethi. The rest, he claims, are people holding senior positions in various domestic and multinational infotech companies.
In addition, many want to replicate some of the success models in India. In fact, analysts say that ever since Rajesh Jain's Indiaworld was acquired by Satyam for an eyepopping Rs 500 crore, every entrepreneur is aiming for anything upwards of Rs 30 crore.
This looks rather amazing. On an average, eight out of ten investments of a venture capital fund fails. And then, the two that hit the bull's eye are less than half the size of a yahoo.com or hotmail.com. "Be very careful in selecting your partner, he has to add value to your business process, not just money," says G B Kumar, national manger, business programs, Intel.
For instance, Intel invests in companies that are important to its business strategy. Hence most of its investments are in technology companies. "While we make an investment in a technology company, which we basically do, we look at how important is it for out core competency," says Kumar.
Or take P V Kannan, who launched an India-specific venture capital fund along with two Indian Silicon Valley entrepreneurs. He left Kana Communications, a US-based communications software company, which has a market capitalisation of over $8-billion, to start his own fund. Kannan now plans to line up a $100-million investment fund in India. "I'd say, look for a valuable partner," he asserts.
That goes for both the venture capitalist as well as the start-up. As yet, since this is a sunrise industry, the hiccups haven't been felt. But as Saurabh Srivasthava of Infinity Technology Investments cautions, "There is too much money casing very few good ideas. I do not know how many of the ideas are actually worth investing. But the ones that are good get really good value."
Infinity currently manages a $30 million fund in India. While it has shortlisted some companies, it is still to make the investments. Besides, in a year's time, it is expected to set up a second, larger fund.
Also stressing the need for a good partner is Raj Saraf, chairman and managing director of the Mumbai-based Zenith Infotech. He says, "Dot.com is the most happening area, but be careful, if you do not have the right partner, you might burn your finger." And adds, "It is not like making a movie, where you take a producer's money and play with it. It is a much more important business strategy and plan."
For the start-ups, the hand-holding from the venture capitalist goes a long way. "It adds credibility to your business plan. The venture capital fund will also guide you through various stages of the business' evolution," says Rohit Bhasin, executive director, financial advisory services, PricewaterhouseCoopers. "Also, the credibility rubs off on the intellectual property that the company or its product can offer," he adds.
According to Rajat Gupta, head of consulting firm, McKinsey & Company, "A good venture capital fund looks at a lot of parameters while shortlisting investment opportunities. Hence, its approval further endorses the start-up's credentials."
McKinsey has already rolled out an incubation process called McKinsey India Venture 2000, to hand-hold the start ups. McKinsey has also set up a Venture Capital committee with some leading venture capital funds as members. Besides, as per its plans, the consulting major has lined up coaches to mentor the start-ups.
Even as business is booming, the venture capitalists are working out their exit strategy. "While the venture capital funds make an investment, he is probably looking at the exit strategy too. If he can see a more attractive exit option, the company is determined to get a better valuation by the venture capital fund," says Bhasin.
But how long will this gold rush last? "The flow of venture funds into India is going to last as there is a great business potential in India," feels Bhasin
According to Ashish Dhawan, director Chrysalis Capital, which is in India with a $ 65 million fund, the market is currently in top gear and will remain so unless something unexpected happens. "This could be another unstable phase of Indian economy or not so clear policies," he says. Chrysalis has invested in egurucool.com and bazee.com.
Even so, for many, the Indian venture capital scenario has its own pitfalls.
They believe that a lot depends on the government. "If the government wants the growth and buoyancy to continue, it should deregulate the venture capital fund industry," feels Dewang Mehta, President, Nasscom.
Points Srivastava, "the regulatory mechanism has to be spruced up with enough flexbility for a venture capitalist to have easy exit routes. I think the government is working towards this."
Or as Sudhakar V Shenoy, president of USA-based Information Management Consultants (IMC) Inc, says, "It's all about making life easy and not difficult (for venture capitalists, incubators and angel investors). If I have to run from pillar to post to get permissions to bankroll or fund a bright idea in India, after a certain time, I'll give up no matter how committed I am to India."
Then there is the K B Chandrashekhar committee report on venture capital fund set up by the Securities and Exchange Board of India (Sebi). According to the report, the regulatory tax and legal environment should play an enabling role for venture funds to flourish. Internationally, the venture funds have evolved in an atmosphere of structural flexibility, fiscal neutrality and operational adaptability.
Besides, the committee also suggested that the infrastructure in the form of incubators and research and development needs to be promoted with the help of government support and private management. This is the model followed by countries like the US, Israel and Taiwan.
It further points out that this is necessary for faster conversion of research and development and technological innovation into commercial products.
But while the report was submitted sometime back, the government is yet to take action. "When can we expect a much transparent venture capital procedures, the industry needs it," says Kanwal Rekhi, president The IndUS Entrepreneurs (TiE), an association of the US based Indian entrepreneurs. Even as it take its own time, there is nothing to deter venture capitalists or the start-ups.