Where Angels Fear To Tread

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Delhi-based One97 Communications has been flooded with business plans ever since it launched a $100-million venture capital (VC) fund for mobile value-added services (VAS) two weeks ago. The decade-old mobile VAS company is the first among a small group of relatively established players to take a formal step towards nurturing younger firms. This could be just the solution the nascent industry needs to plug the gap in the availability of early stage funds.

One97’s motivations for setting up the fund, One97 Mobility Fund, are both altruistic and opportunistic. “There is certainly a corporate bias. We could develop new technologies and products internally, but younger firms are more on the edge, their passion is higher and one can get to market faster,” says founder and managing director Vijay Shekhar Sharma. And younger startups funded by One97 stand to gain in terms of faster access to telecom operators who buy mobile VAS services and applications for their customers.

For One97, the decision to become a VC investor is a progression of its growth strategy in the past couple of years. It has already incubated or funded four startups. Among them are Oorja Mobile Services (mobile customer analytics) and Singapore’s TenCube, which develops smartphone security technology. “We realised from those experiences that we could access most firms faster if we had a venture capital fund,” says Sharma. Last month, One97 teamed up with SAIF Partners to launch the fund. The bulk of the $100-million corpus will come from One97’s balance sheet and SAIF will make up the shortfall when required. One97, which plans to raise Rs 120 crore from the public markets this year, reported Rs 86.70 crore in revenues and Rs 12.40 crore in profits for the nine months ended December 2009.

One97 is not the only player lining up funds for new startups. Bangalore-based OnMobile, India’s first publicly listed mobile VAS firm, is finalising a $50-75 million fund to incubate or fund at least 20 startups. “We’ve been planning this for three years. We started with a pilot (Ver Se Innovation) and should launch by this year-end,” says Arvind Rao, co-founder, chairman and CEO of OnMobile, which currently has revenues of over Rs 400 crore. The fund will target startups that are complementary to OnMobile’s offerings. “I firmly believe that if the investments are not complementary, they will not work to anybody’s benefit,” says Rao. The experience with mobile classifieds startup Ver Se has been the learning ground. After acquiring a 51 per cent stake in the company in 2007, OnMobile worked on its business plan and subsequently took it overseas with a distribution tie-up with Vodafone. Last October, Ver Se raised Rs 20 crore from Matrix Partners India. “It has to be win-win for all, the entrepreneur, the investor and the customer. We don’t just bring money to the table,” he says.

Both OnMobile and One97 will mostly end up backing startups that are effectively below the radar of conventional VCs. Such startups typically need less than $1 million to prove their ideas, apart from significant hand-holding when it comes to testing their products with telecom operators. Most VC firms in India start with deal ticket sizes at $2-5 million.

The potential for growth in the mobile VAS sector remains exponential with the mobile subscribers crossing 600 million in June, according to the Telecom Regulatory Authority of India. Further, with 3G networks waiting to roll out, the demand for new applications and services on mobile will only grow.

However, most startups have found the going tough in the past two years. For one, getting a new application or service to market depends almost entirely on the whims of telecom operators, who demand 60-80 per cent of revenue share. “Given the amount of money that startups have to spend on developing new services and applications, the revenue share makes profitability untenable. The gestation period for a startup before it can break even therefore becomes longer,” says the founder of a Bangalore mobile startup, who recently wound up his company after battling with a funds crunch for two years. Part of that funds crunch can be managed if startups have access to VC funds during the gestation period. However, while mobile VAS has received about $200 million in VC funds money since 2006, much of this has gone to mature companies.

Apart from early movers such as OnMobile, One97, Spice Digital and Altruist, not many startups have been able to build sustainable businesses. Much of the startup activity has focused on content-based services, which are difficult to monetise, compared to platform-based approach, which also builds the infrastructure around content adopted by the market leaders like OnMobile. “We like mobile VAS but we are waiting to see more sustainable business models emerge,” says Alok Mittal, managing director of VC firm Canaan Partners.

It is rare in India to see startups giving a leg-up to younger startups. The mobile VAS space seems to be the exception. But, apart from One97 and OnMobile, other players have only taken jabs at doing the same. Delhi-based Spice Digital, promoted by the BK Modi Group, had earlier incubated mobile social networking startup MobiSoc. Chandigarh’s Altruist Technology doesn’t yet actively invest in other startups. “We encourage entrepreneurs to join us as SBU (strategic business unit) heads and create value for themselves as well as the company,” says Dheeraj Aggarwal, founder and CEO of Altruist. However, he concedes that a fund “helps create an ecosystem more conducive to innovation”. Perhaps another mobile VAS fund is on its way.

It certainly would not hurt.
 
snigdha dot sengupta at abp dot in