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BW Businessworld

Backing Ideas Early

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Till the late 1990s, venture capital (VC) — in terms of formal VC capital companies — did not exist in India. The entrepreneurs who started out in the 1980s — for example, Shiv Nadar and the co-founders of the HCL group, or for that matter, N.R. Narayana Murthy and the other co-founders of Infosys Technologies — did not have access to VC funding.

The VC industry in India happened during the IT and dotcom boom in the 1998-2000 period. Many of the famous names from Silicon Valley decided to set up operations and back lots of startups.

The dotcom bust, in turn, saw lots of them pack their bags and leave. Even the ones who stayed back battened down their hatches and became considerably risk averse. Meanwhile, some homegrown VC outfits were also cropping up — founded mostly by entrepreneurs who had sold their companies during the boom and were eager to encourage the next generation of startups. But even they largely stuck to the tried and tested path — mostly investing in firms with relatively safe business models.

This was the case for much of the past seven years. Though new funds were raised, risks taken — at least by traditional VC standards — were rather low.

Over the past two years, some of the VC funds have managed to exit their early investments at huge profits. This has given a big fillip to the sector. There is renewed confidence in raising funds — and there is a greater yen for taking big risks. However, the latter holds true for only some of the players.

The Indian VC industry today stands split almost equally into two groups. At one end are those who prefer to wait and watch a bit until an entrepreneur has taken his company to a certain size. These are VCs who prefer "middle stage" or "late stage" funding. The second group backs entrepreneurs who have just about started out with a strong idea — these are the "early stage" investors of the VC industry.

Early-stage investors are extremely important because they boost  the entrepreneurial culture in the country. In our cover story this issue, associate editor Snigdha Sengupta looks at seven VC funds that are early stage investors — and how their investment philosophies are going to affect entrepreneurship in the country.

(This story was published in Businessworld Issue Dated 12-09-2011)