Money_Matters

VC funds, seed funds, angel and private equity (PE) funding have long taken over what was once done by financial institutions such as IDBI, ICICI and state financial corporations. Explains Sanjay Anandaram, co-founder of JumpStartUp Venture Fund: “The funding situation has dramatically changed for the better in the past five years. It can only get better and it is.”
Laura A. Parkin, executive director of National Entrepreneurship Network (NEN) & Wadhwani Foundation, adds, “In the past few years we have also seen an emergence of homegrown firms such as Helion, which have added to the existing ecosystem.”
VC financing really started in India in 1988 with the formation of Technology Development and Information Company of India (TDICI) — promoted by ICICI and UTI. The first private VC fund, Credit Capital Venture Fund, was sponsored by Credit Capital Finance Corporation (CFC) and promoted by Bank of India, Asian Development Bank and the Commonwealth Development Corporation.

The second phase between 1995 and 1999 attracted many foreign institutional investors to set up VC funds, such as Baring Private Equity Partners in 1998, but this interest waned during 2000-03 when the Nasdaq index crashed. In 2004, when the Indian economy got on to the 7-8 per cent growth trajectory, the number of funds mushroomed once again with 86 funds set up in that year itself. The momentum was kept up after that with homegrown firms such as Helion Venture Partners beginning operations.

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A Close Contest

Angel and seed investors arrived on the scene around 2000. Seed investments however, declined during 2000-03 and picked up only after 2006. PE funds that came into existence in the late 1990s also picked up in 2004. This has taken the number of total funding firms, including global firms, to 150 today.
Millions of dollars from these firms have been pouring into businesses across sectors. If Sequoia Capital invested $7 million in Times Internet, the company along with LightSpeed Ventures and SVB capital invested $10.5 in TutorVista, an education services company. Social media site Sulekha.com was started after Norwest Venture Partners shelled out $10 million.
“The fact is, in the past four years capital has become readily available to anyone who has the requisite experience and a new idea,” says Sandeep Murthy, partner at Sherpalo Ventures.
The past couple of years have seen experienced professionals leaving their secure jobs to chase their dreams. As Bharati Jacob, partner at Seed Fund puts it, “Indian education was earlier not suited to creating employers. It was traditionally suited to producing only employees. But now that is slowly changing.”
But Sherpalo’s Murthy says, “In Silicon Valley, entrepreneurs emerged from large firms and from the labs of many prestigious universities. That kind of output is still lacking in India.”
Investors find both positives and negatives while scouting for prospective business honchos in India. According to Sanjeev Aggarwal, co-founder and managing director of Helion, “Indian entrepreneurs have the power of resilience. They will not quit even if it takes time for his business to bear fruit.” But they need to learn to have a narrow focus, he feels.
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Adds Alok Mittal, managing director of Canaan Partners, “Given that the Indian market is limited due to the lower connectivity and PC penetration here, entrepreneurs tend to think global from day one.” But Murthy of Sherpalo is not so upbeat. He says Indian entrepreneurs lack the sense of urgency that one finds in their western counterparts.
Obsession With Technology
Information Technology and IT-Enabled Services (IT/ITeS) firms in India have garnered the lion’s share of investments in the past few years. According to a study by Venture Intelligence, a research service focused on PE and VC funds with 107 investments, they have retained their status as the favourites among PE investors during 2008. Though the energy sector topped in terms of quantum of investment at $1.7 billion, IT and ITeS closely followed with $1.6 billion. “Technology-powered services have caught on like wildfire. And that is where some of the interesting ideas have come from, so those were the areas investors were keen to place their bets on,” explains Aggarwal of Helion.

As recently as 2002, GE Capital invested $108 million in Patni Computer Systems. Citigroup Investments pumped in $20 million into Progeon and FinVentures invested $9.1 million in iFlex Solutions. But despite an overdose of technology-led innovations, there are still many verticals that are underexposed. “There are numerous opportunities related to education like e-learning tools, Web assessment, distance learning solutions, and even ERP software for schools. Another area where we hope to see some activity is in relation to personal finance, social networking with some local flavour and travel,” explains Mittal of Canaan Partners.
Anandaram of JumpStartUp says, logistics, supply chain, waste management and rural-suburban information services could also afford to see some innovation.
Applying Brakes
Even as new ideas flow in and there are new entrepreneurs on the block, recession seems to have spoiled the show as far as finances are concerned. A Venture Intelligence report says PE firms and VCs (excluding PE investments in real estate) invested $10.8 billion in 399 deals in India in 2008. This amount was significantly lower than that in 2007 when $14 billion was invested across 439 deals.
“2008 was the first year since 2002 that PE investments in India have witnessed a year-on-year decline,” noted Arun Natarajan, founder and CEO of Venture Intelligence. The largest investment reported during 2008 was the $640 million raised by Aditya Birla Telecom, a subsidiary of listed mobile telephone services provider Idea Cellular, from Providence Equity Partners in return for a 20 per cent stake.
Sandeep Murthy also strikes a note of concern, “There is a freeze on the financial ecosystem at present. There is going to be a lot of waiting and watching over the next one-and-a-half years.” While these companies wait and watch, there may not be many new financial commitments made soon.
dhanya dot krishnakumar at abp dot in
(Businessworld Issue Dated 24-30 March 2009)

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