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October, 2001 TECH TRENDS |
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CHANNELS Politics
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VC FUNDING The Nimble Will Survive Despite getting burned last year, most VCs haven't fled. But they are getting more picky. And funding is there for the right projects. By Indrajit Basu No one can ignore the role of venture capitalists in fuelling the entrepreneurial mania that swept India (and the world) for almost two years until mid-2000. Their forebears may have been stifled due to lack of financial resources and the 'right' contacts; but India's new-generation entrepreneurs grabbed the opportunities offered by the new economy with both hands. And their hopes and dreams were nurtured by an army of VCs who, according to software forum NASSCOM and global market research firm McKinsey, pumped in over $1billion (Rs 4,712 crore) of risk capital in tech start-ups in those two years alone. But it is a different story now. Ask any entrepreneur and pat comes the reply: "It's an insult to be referred to as an entrepreneur-especially if you are trying to raise venture capital." Indeed, stung by the dotcom demise and global tech slowdown, VCs have changed gears in India. Unlike last year when they were going dotty over dotcoms and anything that had "technology" associated with it, VCs now seem to be in no hurry to part with their money. For instance, according to preliminary estimates, venture capital funding in the country for the first quarter of fiscal 2000-2001 barely crossed $40 million (Rs 188.4 crore) compared to $106 million (Rs 499 crore) during the corresponding period the previous year.
Reverse flow Apart from getting a lukewarm response from VCs, Indian tech-entrepreneurs seeking venture funding have an added problem to worry about: Competition from their overseas brethren. With venture funding in the United States almost drying up, several US-based ventures have started chasing venture capitalists in India. Sources in the Indian venture capital industry say that this trend started a few months back. Most such start-ups-with strong Indian links-are services companies that do not enjoy the confidence of US-based VCs. There is another reason forcing US-based start-ups, especially the smaller ones, to look towards India-VCs in the US do not touch deals that are small. "Anyone requiring funds in the $3-10 million (Rs 14 crore to Rs 47 crore) range seems to be coming to India, because US-based VCs prefer to fund bigger deals," said an employee of Citibank Private Equity. Venture capitalists in the country say nearly half of the proposals they receive these days come from the US. These proposals fall into two categories: Either the venture has been promoted by an Indian entrepreneur or the company has some back-end operation in India. But it is not just start-ups from the US that are seeking money in India. "Although still sporadic, we have begun to see proposals from companies in Australia, Canada and Singapore as well (for venture finance), some of which have, or want to set up operations in India," says a manager at VC firm WestBridge Capital. And what is a loss for Indian start-ups is a gain for venture capitalists in India. According to them, the opportunity to fund start-ups originating in other geographical regions makes the risk-reward equation tilt in their favour. The silver lining All is not lost yet, say market analysts. There is still a sack-full of venture capital floating around with VCs looking for opportunities to invest in Indian companies. According to a recent Wall Street Journal report, India has emerged as the fifth-largest venture capital target in Asia (behind Hong Kong, Japan, Singapore and Taiwan), as VCs from around the world pumped in $770 million (Rs 3,628 crore) in 2000, about seven times more than the previous year's level. Moreover, even as India's tech sector goes through a rough patch, a few US-based VCs remain upbeat about the country still being a software powerhouse and a global back-office destination. Some venture funds, like GE Capital Services India, feel that the Indian IT sector still offers great growth opportunities. A top private equity investor worldwide, GE Capital has recently stepped up its investment targets to $40-60 million (Rs 188 crore to Rs 282 crore) a year. Moreover, ICF Ventures, a Bangalore-based VC fund, estimates that overall there are about 70 funds with a total of $3 billion (Rs 14,136 crore) ready to invest in fledgling Indian IT firms. Investment bankers and VCs are particularly optimistic about product/services firms with back-end operations in India. "VCs are particularly comfortable investing in a company, say, which has 20 employees in the US and 400 in India where its back-end operations are located," says Raj Dugar, managing director, WestBridge Capital. The hot news No wonder then that CRM (customer relationship management) companies of late have attracted VC interest and investment. Industry observers say most of the big Indian eCRM players are now closing decent second round funding deals. For example, call centres Spectramind and First Ring have each attracted $6 million (Rs 18 crore) second round VC funding in April and June, respectively. For investment banker Rashesh Shah of Edelweiss Capital, the CRM space is 'very hot' right now. The outsourced CRM services market in India is currently worth $88 million (Rs 418 crore) and will grow at a CAGR of 52 per cent to reach $306 million (Rs 1,455 crore) by the year 2003, says an Edelweiss Capital's report on CRM. "That's precisely why almost all top VC firms have added a CRM company to their portfolio," he says. "VCs are interested in IT-enabled firms because of the strong revenue model," says Vineet Mittal of Infowavz, a call centre facility which recently raised around Rs 8 crore from ICICI Ventures. According to Vishal Pratapwant of Antfactory (which is said to have invested in CRM firm CustomerAsset.com), "There has been a bloodbath in every sector. It's the IT-enabled services sector which provides for relatively stable investments." However, VCs are not looking at start-ups in this segment. The consensus is that money in this sector lies in scale. A business becomes meaningful only when it reaches critical mass. According to Pratapwant, a company should be able to accommodate 1,000-2,000 seats in the next couple of years. Thus, while VCs are bullish on the CRM space, they are wary of investing in start-ups for the fear of fuelling another round of mad rush. Waiting for the turnaround Few expect a major upswing in the year 2001. According to data collected by Venture Katalyst, a Web site for the venture capital industry and tech-entrepreneurs, $5.6 billion (Rs 26,387 crore) of VC funds were announced in the year 2000 of which only $1.02 billion (Rs 4,806 crore) was invested over a total of 256 deals. This number is unlikely to be topped in 2001. VC-turned-entrepreneur Gautam Patel says: "It will take around 12 months before the next big cheque is written." Optimistic observers, however, expect that things could look up during the second-half of 2001 itself. Gaurav Motwane, CEO of Expopoint, a firm funded by Infinity Ventures, says later this year the markets may see an upswing as non-performing companies get weeded out and survivors of the first round start looking for the next round. After last year's "quack" economy, the first half of the current year witnessed a weak market, referred to as a "correction" by market watchers. This could lead to an accumulation of demand and as entrepreneurs get focussed, VCs could again start taking interest by the end of the year or early next year, say market analysts. Nimesh Grover, vice-president, India Direct Equity Advisors, says, "What happened last year was an aberration, not a boom." According to him, only 15 per cent of the announced $5.6 billion (Rs 26,387 crore) will actually be invested this year. And the gainers would be pure technology companies or entities with backend operations in India. The rest might discover that raising money in today's market conditions is an uphill task. |
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