Coming, Silicon Valley VCs

The big Silicon Valley venture capitalists are homing in on India and China

The big Silicon Valley money boys are homing in on India and China "� and their pockets are bulging with $40 billion. Last December, a delegation of 23 Silicon Valley venture capitalists trooped into India on a scouting mission.

In October this year, the delegation visited China. Among them were New Enterprise Associates, Mayfield Fund, Bessemer Ventures, Battery Ventures and Sequoia Capital.

So far, only one of the 23 "� Bessemer Venture Partners "� has set up shop in India, though Battery Ventures is believed to be close to investing in the Bangalore-based Tejas Networks. Another Silicon Valley venture capital company, Nokia Venture Partners, moved into India in the middle of this year independent of the delegation.

To be sure, they won't invest all their cash in India "� China too is on their radar. And both nations will get just a part of the total cash they have. Nevertheless, many of these venture capitalists are convinced that India will be the next significant technology development centre. The US has seen the biggest innovation.

"But," says Sujit Banerjee, country head of Nokia Ventures, "a lot of innovation is now also moving to India and China and venture capitalists need to be in these markets."

The coming of the new boys could also have major significance for technology companies that are scouting for funds. The Indian venture capital industry has undergone fundamental changes since the 2000-2001 technology bubble burst.

Since then, venture capitalists with large funds have preferred to invest not in start-ups but in companies that are well on their way to market success.

Indeed, most of the investments at the early stage of a company's development have been made by state-sponsored or owned funds like the Small Industries Development Bank of India or Canbank Ventures, the exceptions being a few private funds like the Bangalore-based Jumpstartup.

According to the Indian Venture Capital Association, domestic and foreign venture capitalists invested $774 million in 2003 in India, up from $590 million in 2002.

In 2004, up to November, venture capital and private equity funds invested over $820 million in India-based companies, according to data from TSJ Media, the Chennai-based firm that tracks venture capital investments and mergers. But less than 10 per cent of this money found its way to start-ups.

The pendulum is starting to swing the other way again because new investors are coming forward to invest in the several start-ups that have sprung up in the last two years or so. Explains Arun Natrajan, editor at TSJ Media : "The founders and early employees of IT services companies who have made it big are beginning to make serious investments in local companies."

He cites the example of Infosys co-founder N.S. Raghavan's Nadathur Holdings which invested $7 million in the apparel design subsidiary of the Bangalore-based Reach Technologies in March 2004, adding that successful non-resident Indians like Vinod Dham and Tushar Dave of NewPath Ventures, their venture capital company, have incubated companies like Nevis Networks and InSilica and in 2004 helped them raise significant second round investments from global investors like Nokia Ventures and Flextronics.

Silicon Valley's venture capitalists will add a new dimension to this picture. They want to not just plonk down cash in all sorts of Indian companies but also to encourage Indian product design people here to form companies with manufacturing teams in China.

"Whether of not venture firms or their portfolio companies are taking immediate action in both countries, they all agree that both countries should be considered part of their business activities. Firms are doing their due diligence to determine if India and China fit into their plans," explains the California-based Ash Lilani, head of global sales and marketing at Silicon Valley Bank, the investment bank that led the first delegation of venture capitalists to India last year, followed by the one to China.

As Silicon Valley Bank sees it, India and China have unique strengths. China's forte is manufacturing. India's strengths lie in software, information technology services and business process outsourcing.

"For a venture capital fund and its portfolio companies, both are important factors that can't be ignored," Lilani said while on a visit to Mumbai a fortnight ago.

"Most of the investments in China are being made in companies that are duplicating what is done in the US. From components to semiconductors to the making of the entire product "� all get done in China at a much lower cost," adds Sujit Banerjee, managing director, Nokia Venture Partners.

But Lilani thinks that India will get less venture capital cash than China because IT services and BPO require less capital than manufacturing. "It's more like 60:40, China to India," he says.

Bessemer Venture has already taken the plunge in India. The firm set up office here in September and has roped in former Walden International general partner Dinesh Vaswani to evaluate investment opportunities in companies based here but incorporated in the US.

"We will be bringing companies in which we have invested here to set up R&D and sales and marketing operations," says Vaswani. The firm is also evaluating an investment in China at present, he adds.

Nokia Venture Partners, meanwhile, wants to tap Indian companies that offer innovative, leading-edge technologies. So it's invested in Pune-based start-up Nevis Networks, which is developing next generation enterprise security solutions.

Secondly, Silicon Valley's venture capitalists would like to bring together Indian and Chinese companies. According to M J Aravind, partner at Palo Alto-based firm Artiman Ventures, venture capital firms will be looking at whether Indian product design teams can have closer relationships with manufacturing teams in China to form companies.

Such relationships exist between Indian and America companies. "Venture capitalists today marry two sets of people in the US and India to form a team. The US team brings in the product management and customer interfacing skills and the Indian team brings the product design and execution skills," says Aravind.

Artiman Ventures plans on partnering with research institutes in India, relationships that companies it has invested in can draw on for research and development.

"Today India and China as a combined market opportunity weigh much more than they would separately," notes Siddharth Shah, head , private equity practice, at Nishith Desai & Associates, the Mumbai-based law firm.

Lilani backs the point: " About 25 per cent of our nearly 10,000 clients are already leveraging the region in some way. They see this as a necessary element of their business for many reasons," he adds.

If new venture capitalists are foraying into India, it's also because rules have been relaxed. In April this year, the Securities & Exchange Board of India made it easier for a venture capital firm to exit a company in which it had invested by removing the one-year lock-in requirement after the company got listed.

It also allowed venture capital funds to invest up to a third of their corpus in listed companies, up from 25 per cent earlier.

Last but not least, for US venture capitalists, large local markets like India and China provide a hedge against investments in the US.

Whatever the reasons, the new venture capitalists could provide a fillip to Indian entrepreneurship. For one, they'll spur competition in the venture capital market.

Home grown funds have an edge in that they have much wider networks, relationships and understand the culture, as Ganapathy Subramaniam, managing director of Jumpstartup argues.

"The entry of more foreign venture capital will help expand the opportunities and implies that a lot more capital will be made available and a lot more partnerships will come into force," he concludes.