VCs back on the BPO track

NEW DELHI: After the disastrous meltdown of the dotcom boom followed by the economic slowdown, India’s sunrise BPO industry was starved of funds. Although it was the VCs who triggered the growth of the sector in the first place, there was a lull in funding pattern as VCs became more cautious with their investments. The mad rush in the BPO sector did not help as VCs played the wait and watch game for emergence of winners. Finally a few invested and even exited like ChrysCapital in Spectramind and TransWork.

As money trickled in, some BPO companies had to wind operations waiting for the funds that never happened. Things started looking up in July 2003 which saw a number of investments with Westbridge Capital leading a $ five million financing in Indecomm Global Services. Bangalore based 24x7 managed to rake in $22 million fund from Sequoia Capital, while Satyam Computers BPO initiative Nipuna raised $20 million from Intel. A little earlier, Talisma had managed to raise $ five million from Oak Investments, while Worldzen raked in $ four million from the Carlyle Group in February this year.

So what is it that changed suddenly? Why are VC finding the sector attractive now? Cyber News Service asked a few investors about the sudden activity in the sector.

Infinity Technology Investments’ Saurabh Srivastava reiterated that BPO is a hot destination for VCs today. "Any sector that experiences growth in 70 percent-80 percent range is a sector worth investing and BPO falls in that category," he added. Infinity Technology Funds had invested a couple of millions in Mumbai-based call center Epicenter Technologies two years ago. Srivastava said that Infinity does not believe in a hands-on approach but more of a mentoring style in the investing companies.

Gopal Jain of View Group echoed the same sentiment. "We are focused on the services sector and BPO is a key sector for us. There has been a renewal of investment appetite in the private equity industry," he said. View Group has invested in TracMail, IMG, India Life Hewitt, and Ingenero.

ChrysCapital, which has made considerable investments in technology, BPO pharma and finance companies, said that the BPO sector is upbeat now. It was one of the few VCs to have invested early in the sector and perhaps the only VC to have made decent money when it exited from Spectramind. It has now invested in three other BPO companies namely GlobalVantage, FNA and TechTeam. Typically, ChrysCapital has a holding period of four-seven years although in the case of Spectramind the exit was much earlier. Exit could be through a strategic sale or public offering.

According to Gulpreet Kohli of ChrysCapital, although BPO sector may be divided into pure-play, those foraying from IT services and niche players, there is no way of saying which category of players would do well in BPO. Companies must have their fundamentals correct like ability to scale, customer traction, profitability, etc in order to succeed.

Head of Acer Technology Venture Fund, Samir Kumar, said that from a VC’s point of view, BPO is a good sector to invest. But he cautioned that there has been a lot of commoditization in the voice-based call centers and VCs are not likely to invest unless the company operates in a niche area. However, there is a lot of traction in back-office operations and these companies are likely to see more inflow of funds.

Acer Technology recently funded Indecom Global Services along with WestBridge Capital and has also invested in RelQ, which is a software validation and verification company. Other than this, the company has invested in a number of technology and software companies and is in the process of evaluating another two-three companies including a BPO company, which would be finalized within this year.

Speaking of exit options, VCs said that they would be looking for an exit option in the next three— five year’s time frame either through an IPO or through a merger with a bigger company. Since most of these are fresh investment none of the VCs could speak of a definitive exit route although there were strong indications that merger with bigger companies is a more likely route to emerge in future.

On being asked about the fundamentals, they look for when investing in companies, they pointed out that a strong management team who has already delivered, profitability of the company, demonstration of an ability to scale, operating in some niche area or conversely large target market, its list of existing customers, etc. are important areas that they look into.

(CNS)