INDIA'S VENTURE CAPITAL MARKET

Clipped from the Red Herring:

Seeding India's venture community
The growth of fundamental innovation in India is paving the way for venture capital.

RED HERRING
March 1, 2004

In the late 1990s, venture capitalists got intoxicated by the idea of investing in India. Dazzled by the country’s vast engineering reserves and the flair of Indian entrepreneurs in the U.S, firms like Draper International, Walden International, and Chase H&Q Asia Pacific set up shop in the subcontinent. Five years later, they have little to show for their troubles.

Now funds seem to be flowing into Indian startups again. The third quarter of 2003 saw a sharp uptick, when $300 million went into small companies, as opposed to the $100 million for the first half of 2003, according to CDC Group, a venture capital firm that tracks Indian investments.

A number of high-profile Silicon Valley stalwarts are also turning heads by focusing on the region. All-star VC Vinod Khosla of Kleiner Perkins Caufield & Beyers will reportedly turn his attention more towards Indian entrepreneurs. Meanwhile, the “father of the Pentium chip,” Vinod Dham, who oversaw development of the processor at Intel, has been quietly funding Indian companies through NewPath Ventures, a $56 million India fund that includes the WorldBank as an investor.

So what’s different this time?

On Thursday night, the recently formed U.S.-India Venture Capital Association held a reception at the Crown Plaza Cabana in Palo Alto. (The manager of the hotel, who threw in some tea, is of Indian origin, as if to underscore the tightness of the “Indian mafia,” what the network is colloquially referred to.)

Three prominent venture capitalists, NEA’s Dick Kremlich, Mayfield’s Yogen Dalal, and Sigma’s Peter Solvik, reflected on their recent visit to India and the countries potential as serious venture capital market.

Yogen Dalal, a managing director at Mayfield, says that the emergence of vibrant VC markets is a long-term process, but the phenomenon could begin within the next 24 months. Still, he wonders if more capital is being targeted at India’s early stages than there are actual opportunities.

“A lot of the VCs in India are a little bit frustrated right now,” says Mr. Dalal. “Many of them are sitting on the sidelines, twiddling their thumbs.” However, he sees the reverse migration of experienced 30-somethings who have served on Silicon Valley’s front lines as a great boon for India’s economic sector.

Dick Kramlich, general partner and co-founder of New Enterprise Associates, is much more bullish. Asked when a blockbuster product company, rather than high-profile service plays, would come out of India, he responds, “a CheckPoint Software is probably already out there, we just don’t know what its name is.”

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Another critical ingredient – and one that has only become available in the last 18 months – is the presence of seasoned senior managers. U.S. technology companies are increasingly encouraging their top managers of Indian origin to head up their companies’ efforts in India. “You have the raw material, or technical talent, interacting with senior management,” says Mr. Anandaram. Rather than be a passive observer to the process, Jumpstartup uses its deep network to persuade the right managers to jump ship.

Migrating slightly from its deep software focus, Mr. Anandaram believes the opportunity in India lies in the development of embedded systems for semiconductors and VLSI design. Jumpstartup invested in Hellosoft, a Hyderabad company that makes embedded systems for a variety of wireless markets, and is currently looking to add 75 more engineers to its team of 125. Aarohi Communications, which is rolling out a family of chips for the storage market, closed a $13.5 million round in December. Jumpstartup persuaded an industry veteran to quit his cushy post at Intel and forge out in a new direction as head of Aarohi’s hardware engineering.

Bangalore, not the Bay, is now the region with the world’s most programmers, notes Sumir Chadha, a senior managing director at WestBridge Capital Partners. That bodes well for VC firms like WestBridge, which are practicing a unique style of cross-border investing by funding companies that have both a U.S. and India presence.

WestBridge Capital, meanwhile, is pursuing a more button-down strategy. The less risky yet quite lucrative services deals are the firm’s sweet spot. WestBridge funded call centers when that market was emerging. Now it is looking for “next generation” services deals by betting on which U.S. industries will be outsourced next. Mr. Chadha points to WestBridge portfolio company ICICI OneSource, which provides financial services transaction processing to a number of Fortune 500 companies as an example. A joint venture with the largest financial group in India, the company has over 70 million in revenues, he says. Meanwhile, Indecomm Global Services focuses on health care claims administration.

Mr. Anandaram points out another compelling fact: 883 U.S. patents were filed out of India in 2001, a leap from the 183 filed in 1997. Further data is not available, but if that growth were to continue, there would be 1,700 filings in 2003. Meanwhile in India, 15,000 patents were filed in 2003, as compared to 4,000 in 1995. The seven companies in Jumpstartup’s portfolio have 35 patents between them alone.

Mr. Chadha says that services deals generally return about 3 to 5 times the money put in. That is not the 10 times multiple that VCs supposedly look for, but he feels that the safer bet is well worth it. In the meantime, Mr. Chadha says that the limited partners funds, are seeking to invest in more cross-border funds as India’s economic ascent continues and investors wonder how they can take advantage of it.

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Pioneers like Jumpstartup and WestBridge may find themselves somewhat victims of their own success, as other firm’s popup and compete for the best deals. Ultimately though, increased VC attention will be a great help to launch India’s entrepreneurial sector and not just because of the extra capital available. The startup building expertise of venture capitalists, combined with the recruiting and wrangling of funds like Jumpstartup, will help patch up the missing piece.