Seeking Silicon Valley

BANGALORE: Modern venture capitalism in India began as recently as 1986 and most of the Indian VC community, in its development, has been driven largely by the fluctuations of the IT industry. While the IT boom gave them an ‘abnormal growth’, with the bust came a slump, that some argue affected venture capitalism more than it did technology firms. As MD & CEO of UTI Venture Funds Management Company Rajakumar puts it, "The boom involved a total change in VC fundamental principles. With the bust, it was back to basics."

One of the biggest effects of the bust on Indian VCs was the near disappearance of firms investing in startups. A situation, which has not changed much even in recent times. "It is true that seed stage funding among VCs is almost non-existent and one can see only late stage investors. This is because of the unfavorable risk reward ratio in startup investments," said MD of WestBridge Capital Partners in India KP Balaraj, which counts itself as an early stage investor.

While agreeing wholly with Balaraj, the community believes that though things might seem to look upbeat, there have to be certain fundamental changes to provide real fillip to VC funding, the first of which demands more product companies from India.

"The IT boom fuelled software services from India and a lot of investment was poured into it. The bust gave rise to the ITeS/BPO segments. The software product opportunity has remained untouched and there is a yawning gap between demand and supply of investment in that sector. If we can prove successes in that area, we will see a lot more VC activity in India," said K Ganapathy Subramanian, MD of JumpStartUp, a VC fund started in 2001, which concentrates on high technology startups.

While the creation of more success stories in the product space in itself will need more VC funding resulting in a classic ‘chicken and egg situation’, the need for it leads to another important criteria for increased investments - proven exit routes.

Said MD of e4e Labs Dr. Sridhar Mitta, "The Indian IPO is not proven yet, even on the services front. Big successes have still not come in to make the way easier for VC newcomer entry."



While some believe that there has to be more domestic VC firms, the truth remains that most of these firms lack the ability to open up overseas markets. An answer that is fast finding traction is that of cross border funding.

Indian VCs — on the Silicon Valley route?

According to estimates the combined funding of all VCs till 1996 amounted to little more than $20 billion which increased to a whopping $100 billion in ‘99-’00, the boom days.   NASSCOM states that disbursements of VC funding halved to $540 million during 2003, a fall from $1.1 billion in 2002. They also state that, the percentage of VC investments going into start-ups declined from 36% in 2001 to less than 10% in 2003.   NASSCOM reports that 80% of total investments made were in existing, profitable companies, which translates to 20% only in startups   Indian Venture Capital Association (IVCA) estimates that $774 million was invested in India in 2003 from $590 million in 2002 and expects to top $1 billion this year.   TSJ Media, whose Venture Intelligence India service tracks hi-tech industry trends, says that VCs made just two significant first round investments in 2003, both of them in BPOs.

JumpStartUp was one of the first firms to base almost all investments in cross border funding. Subramanian said, "Customers for Indian firms remain overseas and till the domestic market evolves it is better to cross pollinate a company. Smart capital from a local US VC is easier to obtain when a company has marketing activities there and operations in India. And with such investment it is easier to build the necessary customer base."

Many predict that cross border funding will become the standard model for fund raising and the way future companies will evolve. Though each criterion is important, none of them will make a difference unless developed together to form an environment that encourages investments.

"An entire ecosystem has to be built to encourage investment and capital is just one of the factors. It will have to include entrepreneurs, customers and acquisition based exit routes. All of this will take time but will be needed for healthy investment," said Subramanian.

He also opined that initial seed capital pools can be created by angel investors or the government, as in the cases of Taiwan or Israel, and prove initial successes to encourage private investment.

VCs often use the Silicon Valley analogy. They evince the ‘Silicon valley model’ of developing organizations as the way forward and envision the day when India will rise to the valley’s maturity, which attracts more than 30 percent of total IT investment in the US. Estimates vary from two years to ten years, but in spite of the seemingly tremendous odds that face them, nobody doubts that they will get there eventually.

Mitta’s hope that, "things will change and it will happen," reflects the optimism of the VC community as they look forward to a future of steady growth, inevitable change and increasing investment.

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