VC Tree is still Green

The art of pitch Don't ask for more money than you really need; Do have solid milestones that track achievable goals; Do focus tightly on the differentiated phpects of your business; Do talk about your current customers or those you're close to signing up. Don't "look like" an Internet portal or other e-business;

N JAYALAKSHMI

he worst is over. And in an almost-cathartic sweep of fresh perspectives, they are ready to take on new challenges with renewed hope. This seems to be the common verdict on the Indian venture capitalists (VCs), post slowdown and dotcom-busts. According to the report by an Indo-US business journal, more than 25 firms started by Indian techies recently have attracted at least $500 million from various venture capitalists. This spells fresh optimism considering that reports on VC funding in India have been more or less negative. For example, a report last year said that Indian venture capitalist investments declined by almost half during January-March 2001 to $50 million from $ 92 million during the same period in 2000.

And now, according to new reports, the VC funds are still bullish about Indian startups. In fact, according to one report, India was the second largest market for VC funding during FY'02 ($ 1.2 billion) after Japan, which saw investments to the tune of $ 1.9 billion. This report says that even China, which was projected as the main rival to the Indian software sector, drew only $39 million of funding during this period. This sentiment is echoed by analysts and industry players. A Mckinsey estimate quoted in a report further fans the optimism fire. It says that India will attract $10 billion in VC money annually by 2008.

Says Sameer Kumar, VP, Acer Technology Ventures, a VC based in Bangalore, "Yes, I agree that the Indian VC industry is looking up. One reason is that more and more American companies are outsourcing their technology requirements to Indian companies and the Indian IT industry is growing. Secondly, many of the VCs who took a big blow in 2000-01 have recovered and are coming back." According to others, the environment is becoming more conducive for funding.

For example, according to one VC quoted in a report, a friendly framework has been put in place and the industry has passed the early stages of the learning curve. He feels projects are being benchmarked with global markets and technology. Many also feel that with the increase in cross-border investments, overseas VC investors are showing greater interest in Indian companies.

But with renewed enthusiasm comes renewed caution and newer benchmarks. Quite obviously VCs have learnt some lessons from last year's experiences and are treading the grounds carefully. Says Sameer Kumar, "Yes, after the slowdown and the dotcom busts, VCs are more cautious and diligent. They take their time to get familiar with the companies and study them before investing in them. Basically, we are looking for good track-record. We would also look at customer or technology validation. That is a must." In fact, some amount of soul searching had begun as early as towards the end of 2000 when signs of an imminent slowdown were beginning to appear.

For instance, according to a report published in December 2002, many VC firms were already beginning to change strategies in India and focusing on core technology-based start-ups. According to analysts, VCs had become much more cautious even then in the wake of a high rate of failure in the dotcom business both in India and abroad. The common complaint was that many VCs in India were looking at valuation alone without taking a close look at revenue models. This is fast changing and analysts expect greater reality checks.

Some fundamentals remain unchanged of course, factors that VCs will always look at before funding. These, according to most in the industry and analysts, include "the promoter and his team, scalability of the project, domain expertise of people involved and macro-view of the market opportunity", as quoted in a report. End of the day, good old-fashioned virtues like track record, integrity, and commitment of the team involved seem to determine the ability to draw VC funds.

But these factors apart, some segments do promise greater potential for VCs. For example, technology companies and those in the IT-Enabled Services Sector (ITES) seem a favourite among VCs. Talking about the hot segments says Sameer Kumar, "We basically look at technology companies and those in the ITES segment." And adds, "I don't think the ITES segment will go along the way of the IT/software services sector because it is more robust. In the former, the demand-supply ratio was skewed with over-supply. I don't think that exists in the ITES segment." This is especially significant given the fact that the ITES segment, particularly in the area of BPO, is being touted as the next big thing in the Indian IT industry.

For example, according to a Gartner report, BPO services worldwide will grow to $243.5 billion in 2005 at a 14.4 per cent compounded annual growth rate. It further adds that this segment has the potential to drive India's economic growth through the next decade. Other areas expected to see more VC investments are Internet communications infrastructure and the media sector. Food processing and pharmaceutical and biotechnology sectors are also poised for growth and therefore for greater funding, according to reports. The last, in particular, is an interesting projection given the skepticism it met with due to its longer gestation periods. In fact, the very same reason is now being used by some analysts to make optimistic projections for this segment.

Recently, a news item talked about the collaboration of a Karnataka group, the Vision Group for Biotechnology, and the Confederation of Indian Industry (CII) for a national survey on the lack of funding in the biotechnology industry. According to the group's chairperson, Kiran Mazumdar-Shaw, quoted in the report, in the last decade an investment of over Rs.5 billion had been made in biotechnology companies and the total annual revenue in this industry crosses Rs.7 billion of which Rs.2.5 billion comes from exports alone. She also lamented that VCs did not understand the industry and that a lot of start-ups suffered for want of seed capital. Let's just hope that the VCs were listening and that funding promises spread across segments.

(N Jayalaksmi is a freelance writer, who writes for dailies like Times of India)

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