US-India Venture Capital Association (US-IVCA) and Venture Intelligence had a small event today to launch the India Venture Capital Report for 2006. While there were no major surprises in the report, it provided some data to backup anecdotal trends that have been talked about over the last few months.
For instance, it showed that venture investing indeed grew rapidly in 2006. It almost doubled with $500+m committed in 92 deals. 60% of these are in the $2-10m range. Bangalore saw most of the action. IT/ITES was the dominant sector with online services taking a key share and BPO/KPO following behind. Angel investing is still low though picking up.
One thing did strike me about the data. Apparently there were only 9 cross-border deals that were done last year (compared to 7 in 2005 and 9 in 2004). I knew that the proportion of these cross-border deals (also called hybrids or micro-multinationals) was falling but this is a bigger fall than I had realized. Part of this reflects maturity but I wonder if this has anything also to do with the trough of disillusionment that the R&D offshoring space is going through.
Although cross-border deals are not growing, India-out deals are. Today what qualifies as an India-out deal is often a concept-arbitrage venture in the area of online services (hat tip to Sramana Mitra for the term). I have nothing against concept-arbitrage deals (if you’re wondering what they are, they are the eBay, Expedia, Amazon type replicas for India). I think they are good both from an investor and market perspective. But they are not as hard to do as the true India-out deals.
In case of concept-arbitrage deals, the business model is often clear and it’s a matter of timing and execution (i.e. team). India-out ventures that don’t involve concept-arbitrage – like Reva cars, Tally Solutions, Tejas Networks, etc. - require stronger teams from a strategy, technology and market immersion perspective. Getting these stronger teams in place is hampered by the weak angel investing ecosystem.
Angel investing will take years to fix. This puts the burden on VCs. They have to be able to turn intrapreneurs from big companies into entrepreneurs. In other words, they have to develop a deal creation mindset. A great example of deal creation is MindTree (which went IPO last week). Sudhir Sethi (now with IDG Ventures) was instrumental in getting the initial (killer) team in place. Replicating this approach is not going to be easy for many of the new Partners who have come back from US. Most don’t have a strong point-of-view on true India-out ventures (concept-arbitrage is their comfort-zone). They also don’t have the tentacles into the local MNC captives and big firms.
Besides becoming good at deal creation, VCs also need to create a strong brand for themselves. This is needed as it’s an increasingly crowded VC market - lots of capital, few good deals. Given that most of the ventures involve first-time entrepreneurs, the brand has to be about high-touch support of their portfolio companies. This, in turn, needs support networks that VCs create around themselves. I am happy to say that some new firms – Helion and Canaan come to mind – are already going down this path. But more needs to be done.
[I hope some of my VC readers will chime in with an opinion, especially, if it’s a dissenting oneJ]
Sharad
It would be worth studying the nature of the cross border deals - they may not all be India R&D centric deals. Normally Venture Intel categorises those as US deals with Indian founders (many of who have an India dev centre)
On the matter of the rise of India out deals, I think its a matter of an evolution process for the VCs. At a level its understandable for them to experiment with the concept arbitrage first while they get comfortable with investing in India and while they build their networks. Further while it would seem intuitive that VCs should brand build to attract the entrepreneurs/intrapreneurs, most VCs strongly believe in generating brand from the deal success stories as opposed to any other way. So they would rather burrow around quietly for a while, unearth a gem and then make it happen
There appears to be quite a bit happening on the network building. I hear of VCs digging up contacts and building their network all the time. Close to half a dozen of the big name VCs now have an India footprint. That means people on the ground with networks. Thats a sea change from 2 years ago. I think many of the players have seriously committed to the Indian market so they will make it happen - tho it might take longer than expected. Also, angel investing is defintely rearing its head again. Just 18 months or so ago, I would have been hard pressed to name one credible angel type investor, today there are a few.
We still need to showcase a few more success stories to get the juices really flowing
KB
I thought, the presentation packaged the data that most of us in the VC community need in a very crisp and usable fashion. Kudos to Sequoia, IDG Ventures and UTI Venture in taking the lead to make this happen with the Venture Intelligence team.
The presentation/report did not come up with any surprises, however. Early stage funding and mentoring is still in its infancy. There is more than $2B sloshing around in committed capital for venture funding but no commensurate deal flow. This makes for major constipation! At the same time, deals in the later stages maybe getting highly overpriced.
Mentor Partners is one among several companies that are taking headon the challenge of the weak angel investing ecosystem. We provide early stage entrepreneurs that are looking to build IP-based companies out of India for the global markets. It is a huge task to create successes in this ecosystem, but that is what the partners at Mentor Partners, who are serial entrepreneurs themselves, enjoy doing. The grey hair and scar tissue that we have developed from previous startups are lent to new entrepreneurs. And early money is made available so they can accelerate their progress to “fundability”. We have had some early successes and our companies have raised subsequent rounds from the likes of Intel Capital, Blue Run Ventures, Sierra Ventures and Sequoia Capital.
The good news is that more players are appearing to fill this gap in major metros in India. Other reputed seed stage funds in India are Erasmic and Seed Fund.