Exploring New Frontiers

Even five years ago, it would have been unimaginable that a small technology start-up in Patna, Bihar, would pique the interest of Timothy C. Draper. But Husk Power Systems has caught the imagination of the scion of Silicon Valley's first family of venture capital. Draper says it could be the electric company of the future. The fledgling firm's rice husk-powered generators that bring clean and cheap electricity to 60 remote villages in Bihar is the kind of innovation that Silicon Valley and Draper's firm, the $6-billion Draper Fisher Jurvetson (DFJ), revel in.

Husk's four young founders, Manoj Sinha, Charles Ransler, Ratnesh Yadav and Gyanesh Pandey, entered Draper's league of "extraordinary entrepreneurs" this June quite by chance. They beat 16 start-ups from as many countries to win a global business plan contest hosted by DFJ and Cisco Systems. The reward was $250,000 in funding. Husk has all the ingredients of a high-quality cleantech start-up. The market opportunity is huge. An estimated 125,000 Indian villages live off the power grid. The technology is cheap. The installation cost per watt is Rs 50. The potential for long-term profits from carbon credits is huge.

"The entrepreneurial world has changed pretty fundamentally. Venture capital's job is to be ahead of the curve of each entrepreneurial cycle. Right now the cycle is global," says Draper. In the past decade, DFJ has invested extensively to stay on top of that cycle. Today, it commands a formidable network of 16 affiliate partner funds across Asia, Europe, Israel, South America and Russia. India is an exception where it invests directly from its own fund, currently the $600-million DFJ IX. This makes it the most global of Silicon Valley venture firms. "I don't see any other way that people can operate," says Draper (see interview on page 38). 

The US West Coast's fabled venture capital industry is currently grappling with a steep decline in 10-year returns. The ‘lost decade', as some have begun to call it, has also seen the industry receive record capital from pension trusts, university endowments and other institutions that invest in venture capital funds as limited partners. A shakeout appears to be in order and even some of the larger firms may have to re-engineer the way they have worked so far (see ‘No Easy Exits Ahead' on page 40). 

Moving into the global arena is one of the ways in which the Valley's investor community can re-engineer. The returns are not small. DFJ takes home a portion of the profits made by each affiliate fund and also has access to their deals. Skype and Baidu, DFJ's two most successful exits in the past decade, came from investments through affiliate funds. However, this model may not be the prescription for all. Resources are a big factor. So far, only the top Valley firms have been able to build a parallel universe in emerging markets such as China and India. Even these firms, including DFJ, have only now started to find their feet in these markets. "Our investment thesis for India has been forming over the past three years," says Mohanjit Jolly, executive director, DFJ India, which is stage and sector agnostic and has done 18 deals so far. 

Evolving Market
Five-odd years after firms such as Norwest Venture Partners, Sequoia Capital, Matrix Partners and Kleiner Perkins Caufield & Byers set up teams here, the Indian venture capital model is still a work in progress. Year 2009, particularly, has tested their patience. Capital flows have been constrained. Portfolio firms have seen their markets halve or disappear. There has been much handholding and some heartbreak. Battery Ventures shut down the India team when fundraising, reportedly, got tough back home. Returns have been under pressure. Travel portal Travelguru's acquisition by Travelocity, the most high-profile among just five exits this year, reportedly did not make any money for its investors.

Yet, something quite exciting has also been underway. According to Venture Intelligence, investment levels in 2009 dipped to $332 million and 68 deals till November, against $839 million and 155 deals in 2008. But the nature of deals has been quite remarkable. Husk Power Systems is only one of several stand-out deals in the past 12-18 months. Bangalore-based NEA-IndoUS Ventures, which manages a $190-million India fund, teamed up with DFJ to back Noida-based e-waste recycling start-up Attero Recycling. "When we met them they were two guys and an Excel sheet," recalls managing director Kumar Shiralagi. The company can now process 36,000 tonnes of e-waste annually. Mumbai-based Matrix has invested in two offline education companies — FIITJEE (training services) and Tree House (pre-school). Sequoia is a past master at unconventional deals having funded everything from microfinance (SKS Microfinance) to healthcare diagnostics (Dr Lal Pathlabs). DFJ has also backed Delhi-based solar lighting systems maker D.Light Design and Bangalore-based Reva Electric Car Company.
   
Clearly, venture capital in India has finally broken out of Silicon Valley's shackles and gone pan-India to back water purifications systems (Waterlife India), sanitation projects (Saraplast), cotton trading solutions for farmers (Zameen Organic), education and even beauty salons (R&R Salons) and service apartments. Local firms such as Nexus Venture Partners, Mumbai Angels and Helion Venture Partners have followed suit. This has drawn some censure from the entrepreneur community, chiefly in the technology space. The Silicon Valley tag understandably raises expectations. "The Valley is about concept risk, disruption of mature markets. So the returns are somewhat binary in nature. India is still a growth market," says Alok Mittal, general partner, Canaan Partners, which specialises in technology and healthcare.

THE RISKMASTERS The big players of the venture capital industry in India

Most portfolios, therefore, are peppered with sector agnostic early stage and growth deals. Growth deals accounted for $175 million while early stage was at $157 million in 2009, according to Venture Intelligence. Matrix and Sequoia are among the most visible in employing this blended strategy. Matrix, which invests from a $300-million India fund, recently put $10 million in service apartment firm Siesta Hospitality. It also has early stage deals such as Quikr (online classifieds) and AskLaila (local search). "Venture returns come from non-linear opportunities. In India, such opportunities are few and far in between," says managing director Rishi Navani. Internet start-ups, for instance, are non-linear opportunities because of the potential for massive scale-ups (eyeballs) at minimum investment. Most technology product businesses also qualify. 

Some have stuck to their knitting as far as possible. IDG Ventures India has chosen to bet only on technology products. "You need to have the DNA, patience and understanding of product pricing and marketing to back such companies," says managing director Sudhir Sethi. The firm invests from a $150-million India fund and prefers start-ups with disruptive technologies that can go global. One instance is Bangalore-based 3D Solid Compression, which started as a Stanford University project, in the 3D design space. NEA-IndoUS, Canaan and Sherpalo Ventures have also largely remained within the broad IT-ITES space.  
    
Investors are betting that the blended strategy will enable them to show some quick returns to limited partners and buy them time to develop the early-stage market. India is still a long way from delivering Silicon Valley-type returns, but it is a matter of time and patience. "You cannot come in when the inflection point has already arrived," says Sandeep Murthy, partner, Sherpalo, which is Kleiner Perkin's exclusive partner here. 

THE GAMBLER ‘It Would Be A Mistake To Put Ourselves Into A Box'

For Timothy C. Draper, founder and managing director of Draper Fisher Jurvetson (DFJ), taking his 24-year-old venture capital firm global has been more about necessity rather than choice. The DFJ Network, which includes 16 affiliate funds, has backed 600 companies globally. India has always been special to Draper since his first big success as a venture capitalist came in 1997 with the sale of Hotmail — co-founded by Indian-American entrepreneur Sabeer Bhatia — to Microsoft. He speaks to BW 's Snigdha Sengupta about how DFJ is changing the way it works. Excerpts: (Read Full Interview)

One key lever to generating high absolute returns, explains Lightspeed Venture Partners' Bejul Somaia, is to get the ownership right. "You could own 50 per cent of a $200-million business or 10 per cent of a $1-billion business," he says. Lightspeed has invested $30 million since 2007 in three firms. Ownership tussles are often deal-breakers here. "In the Valley, 30-40 per cent ownership is considered good enough to make a small fortune for the entrepreneur," says Sateesh Andra, venture partner at DFJ. 
  
The blended approach actually ensures that very young companies are not completely ignored. Sequoia, for instance, has invested close to $400 million in early stage companies, while also being active at the growth stage. "There is no drought of capital at the Series A or B stages. If you are a good company, with Rs 10-15 crore revenues, you will get multiple term sheets," says managing director Sumir Chadha.
 
Indeed, much of the capital that has been raised by India-focused venture capitalists in the past couple of years is still in reserve. Entrepreneurs may disagree, but this phase of venture capital investing is turning out to be much more wholesome and exciting than the post-internet bust era. Between 2001 and 2004, venture capital, singed by dotcom losses, played it safe by staying largely with the software services sector. This time promises to be different. 

snigdha(dot)sengupta(at)abp(dot)in

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