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December 24, 2005

Global telecom equipment makers looking at manufacturing in India

Businessworld has a cover story on how and why global telecom equipment firms are beginning to manufacture in India.
One of the driving factors behind this growing interest is, without a doubt, India's emergence as the fastest growing telecom market in the world (in absolute numbers, China still takes the cake). India got that distinction in early 2004 when its telecom market growth touched 67.73 per cent compared to 26.75 per cent for China, which it relegated to second place.

Equally significant has been the role played by Dayanidhi Maran, the Union minister for communications and information technology. Over the past 12 months, he has been hotfooting around the globe, and positioning India as a telecom manufacturing destination amongst investors.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

Bennett Coleman portfolio crosses 40

The tally of companies in which Bennett, Coleman & Co. (BCCL), the publishers of Times of India and Economic Times, has acquired stakes has crossed 40, according to a Businessworld article.



In fact, it has become one of the biggest portfolio investors with Rs 700 crore already deployed in a clutch of companies that will earn it a neat packet when they go for their IPOs. And it's still buying.


The article goes on to explain how BCCL's "private treaties" work:

In the portfolio investments, BCCL seems to be picking high-growth SMEs headed for IPOs. They need media space to build their brand and corporate image. BCCL, says Rajshekhar, is "helping emerging companies realise the power of advertising". He heads a division called 'private treaties'. The typical deal is a cash payment for a small equity stake, say, 5-10 per cent. The deal size varies from Rs 9 crore-100 crore. So far, BCCL is dipping into its considerable cash reserves of Rs 2,379 crore to strike these deals. This money is then spent by the investee company on buying media space in BCCL brands. In effect, the money comes back to BCCL. Plus, BCCL stands to make a stash when it exits. Nice accounting move. But why not get companies to advertise straightaway? Rajshekhar reckons these companies are in their growth phase and have other working capital priorities. To convince them about the power of advertising, private treaties works best.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

New Seed Funds: Right time, Right Place, Right Model

On Monday (Dec 19), I attended the soft launch of Mentor Partners, a unique technology-focused seed fund, in Bangalore. The firm plans to initially invest $1 million each in 10 product-focused companies in the IT and telecom space: around $500,000 as seed investment or "bridge loan" and the remaining as part of the first round investment along with other Venture Capital firms.

With two partners on the ground in Bangalore (Ravi Narayan who earlier co-founded Nextone Communications in the US and V.Prabhakar, a co-founder of Bangalore-based software testing services firm RelQ), Mentor Partners will help its investee companies get access to top companies in India, the US and other markets via its about 35 other members in its network. The network includes those who are either operating managers (like Vish Narayanan, Head of Telecom Operations at General Motors in Chicago) or "been there, done that" entrepreneurs (like Rosen Sharma who has founded several start-ups like Solidcore, VxTreme, Ensim, Stratum8 and Green Border).

While the number of entrepreneurs with good products ideas is growing rapidly in Bangalore and other cities, the bane of genuine early-stage investments in recent years has been lack of ability and willingness on the part of VCs to provide seed capital (a typical VC firm cannot invest less than $3 million) and more importantly, play a hands-on role in growing start-ups.

Mentor Partners plans to raise its corpus from high-net worth individuals and Silicon Valley venture firms. (Several Sand Hill Road firms have recently made similar investments into local VC firms in China. There are several reasons why it makes sense for Silicon Valley firms to make such indirect investments-despite the issues it create with respect to “double carry fees” for their own investors. For instance, they don’t have to prematurely invest in setting up a full-time team and office in these developing markets. Plus, they get proprietary deal flow for making follow-on investments.)

A key source of strength for Mentor Partners is that there are enough follow-on investors (including some two dozen Silicon Valley VC firms and strategic investors either already on the ground or very keen to invest in India) who can invest $3 million or more into their portfolio companies - when they are ready for it. Plus, as B.D.Goel, a member of the Mentor Partners network, points out, "success" for such a seed fund would be in validating the business models of their investee companies and helping them access name-brand investors as part of the first round. Mentor Partners will then rely on the follow on investors to take its investee companies to the next level, rather than having to hand-hold companies all the way to an exit. For entrepreneurs too, this is much better than having a larger fund invest $1-3 million when their products are still being built and then, just when they seem to be getting their marketing act together, start pushing towards a premature exit.

Mentor Partners' model-including its relatively small fund size and its unique partner network-is a welcome addition to the Startup-VC ecosystem in India. What's even better is that there are more similar seed funds that are either up and running or being raised. While Bangalore has seen the launch of the $3 million Erasmic Incubation Fund, Mumbai-based angel investor Mahesh Murthy has teamed up with Pravin Gandhi (a co-founder of Infinity Venture) to raise a $10 million fund to be called, well, “Seed Fund”.

Here's hoping that these seed funds-which are filling an increasingly obvious and large gap in the eco-system-will close their funds quickly and invest in creating some very exciting technology companies out of India in 2006.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

December 10, 2005

What ails buyouts in India?

Why is it that despite several months of trying, large buyout funds have not been able to close any significant deals in India? The answer seems to be the lack of a strong “theme’ favoring deals in this segment, plus the inability to include leverage (debt) as part of buyout deals.

Industry experts believe that privatization-of both Central and regional government companies-in China will be a predominant theme that is set to accelerate buyout activity in that country. In India however, beyond the now-on-now-off privatization attempts as well some shedding of non-core businesses by old business houses, there is no dominant theme that favors buyout activity. "Partnering Indian companies wanting to acquire overseas is the only theme we see in India. Everything else is just opportunistic," said Anurag Mathur, Principal of CCMP Capital Asia (formerly JP Morgan Partners Asia), at a panel discussion on buyouts at the recent Asian Venture Capital Journal (AVCJ) forum in Mumbai. CCMP is looking at "control buyout deals with an equity ticket size of at least $100 million".

As part of the same panel, Puneet Bhatia, Managing Director of Newbridge Capital, pointed out how Australia has a booming market in buyouts, primarily due to the fact that the regulations in that country allow leverage. India also poses a problem it that it has a very limited universe of target companies that global buyout firms seek – typically, companies with over $200 million in revenues.

Manish Kejriwal, Managing Director of Temasek’s Indian operations, said he was focsing on building strong relationships with family owned businesses in India through its PE investment activities. He believes such relationships will help create buyout opportunities for Temasek from these groups in the long term.

Overall, the panelists agreed that given the strong growth in the Indian economy, we are set to witness several “growth buyouts” here. They expect to witness deals next year in the pharmaceuticals, automobile and auto components, banking and textiles industries. The action is also likely spill over into the cement and telecom industries.


Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

December 03, 2005

Are India's listed cos. prepared for Clause 49?

Knowledge@Wharton has an article on how India's public companies must meet a January 1, 2006, deadline to comply with sweeping new corporate governance standards.

Extracts:

The reforms, ordained by the Securities and Exchange Board of India (SEBI), are laid out in amendments to Clause 49 of the companies' listing agreement with Indian stock exchanges, a section that pertains to corporate governance.

...Infosys pays its directors one of the highest annual retainers in India -- nearly $45,000 a year. In return, it demands a lot of its directors, including requiring them to participate in a peer review and an annual self-assessment of their contributions to the company.

...Harbir Singh says that one key area in which Indian companies generally lag the best international standards is in "the amount of disclosure of strategies and priorities" to shareholders. He attributes that to a corporate culture in which Indian chief executives have greater longevity and therefore wield more influence than their Western counterparts. A shorter tenure, or at least the fear of it, encourages more accountability. Singh also cites the relative lack of influence exerted by institutional shareholders. There just aren't that many yet.

..And what about that alleged shortage of candidates for independent directorships? Under the new Clause 49, one-third of the board must be composed of independent members if the chairman of the board is not also an executive of the company, and half of the board membership must be independent if the chairman is an executive. According to rough estimates, just the top 500 listed companies, with an average of nine members on their boards, will need to find 2,500 new board members. They would qualify as independent only if they have no material financial relationship with the company and were not employed by the company in the previous three years.

Godrej says he is not concerned about the lack of qualified people to fill the post of independent directors. A website has been set up to recruit independent directors. The effort has been sponsored jointly by the Bombay Stock Exchange, the National Stock Exchange and the Confederation of Indian Industry. It already has identified about 3,000 candidates, Godrej says, and "more are being listed each week."

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

November 24, 2005

VentureWoods becomes a group blog

VentureWoods a blog started by entrepreneur-turned-VC Alok Mittal has since turned into a platform with multiple contributors (including yours truly) from the Indian VC-Start-up eco-system.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

November 19, 2005

TCS steps on the gas

Businessworld has a cover story on TCS' growth strategies post its IPO. Here is an extract relating to the acquisition strategy of India' top IT services firm:
Apart from HCL Technologies, TCS has been the most systematic player in the M&A game. In December 2001, the company put in place a specialist M&A team that would function as a think-tank on strategic acquisitions both in India and overseas. The team was led by Mahesh Bhandari and Debasis Pottdar, both former M&A specialists with Arthur D. Little and Arthur Anderson respectively.

Over the last four years, the M&A think-tank has guided TCS's spree of acquisitions, including the critical consolidation of its BPO holdings. It sold its stake in Intelenet, a joint venture with HDFC, and merged the Tata group's holdings in Airline Financial Services, WTI and Phoenix Global Solutions to create TCS BPO last year. In addition, it has also helped rationalise TCS's various joint ventures across the globe. And it has pushed through some critical deals like Computer Maintenance Corporation (CMC) in 2001 and Tata Infotech in April this year. Over the next few years, the M&A team will get busier with TCS actively going after overseas acquistions and, at the same time, consolidating the Tata group's IT holdings. Sources in the company say the Tata Infotech acquisition is the first step to integrating the Tata group's IT companies within TCS. When the process is complete, TCS's topline will get a fillip of an additional $1 billion, taking TCS past the $4-billion mark in revenues.

Acquisitions will also be used to strengthen domain presence, a process currently underway. The CMC acquisition gave TCS a foothold in the government sector. The company has earmarked 11 verticals and is reorganising its delivery centres and sales teams in India and globally. "This process will be complete by the year end," says Chandrasekaran. Infosys and Wipro have also aligned themselves along verticals in India, but they are yet to roll out globally.



Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

"Sequoia-Indiatimes deal off"

Sequoia Capital has decided against partnering WestBridge Capital in their proposed investment into Times Internet which operates the Indiatimes.com portal and e-commerce service, reports Businessworld.
It was planned that a consortium of WestBridge Capital Partners and Sequoia Capital will take up 15 per cent of Indiatimes' equity. But the deal did not go through. Now only WestBridge has taken a 2.9 per cent stake.

...Earlier, Indiatimes was keen on the 15 per cent stake sale as it wanted to list directly on the Nasdaq in the US. It reckoned that the experience and network of Goldman Sachs-backed WestBridge and Silicon Valley-based venture fund Sequoia Capital would have been valuable for the company in getting a strong valuation.

However, a recent guideline by the finance ministry has undone its plans. The ministry tightened the guidelines for foreign currency convertible bond (FCCB) and global depository receipt (GDR) issues to align them with the Securities and Exchange Board of India guidelines on domestic capital issues. This means that unlisted companies going abroad will first have to list in the domestic market.


Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

Will Glenmark's new drug propel it to the big league?

Businessworld profiles Glenmark's early success with its new experimental drug oglemilast meant to treat asthma and chronic obstructive pulmonary disease.

The deal with Forest Labs is worth $190 million (Rs 836 crore) in all, the largest by any Indian drug maker - including the biggies in the swanky campuses. (The largest before this was the $65-million partnership between Ranbaxy and Bayer for the former's extended release version of Bayer's antibiotic Cipro.) Even the deal with Teijin, worth $53 million (Rs 233 crore), is substantial for a company the size of Glenmark. And a third deal is being negotiated with a European partner.

...While the size of the deal is impressive by itself, the circumstances in which it was struck are more striking. Forest came in even before the drug was tested on humans. For Glenmark, it was the first molecule to be licensed. Yet, the deal dwarfs those struck by bigwigs more than twice Glenmark's size. "Forest must have seen something in that drug," says an analyst.

It's too early to write the oglemilast story - the drug still has some way to go. Forest and Teijin will first take the molecule through human trials on their own. If it clears them, the two firms will have exclusive marketing rights in the US and Japan. Glenmark will earn a royalty on sales and periodic milestone payments during the trials.

There is great risk on this path. One out of every five drugs that enter trials actually reach the market. Even Big Pharma, with billions invested in R&D, has been unable to change that skew. Pharma history is strewn with examples of drugs that failed in trials, or cleared them but were refused marketing rights by the US and Europe regulators. Some drugs from Dr Reddy's and Ranbaxy, too, have suffered that fate.

The article also has a box item on the history of new drug discovery and development efforts at Ranbaxy and Dr. Reddy's.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

Opportunities and perils for Indian cos. hunting for global auto part makers

"Plenty of global auto part makers are up for sale. And the money is not hard to find. But there are big risks, and Indian companies need to choose their targets well," says a recent Businessworld cover story.



Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

November 18, 2005

Forbes on the new boom in India's textile industry

Forbes has an article on the new boom in India's textile industry.

Some extracts:
The industry accounts for 30% of India's exports. China does a much larger dollar volume in textiles, but still the sector accounts for only 18% of China's exports.

India, like China, chafed for decades under quotas that limited how much it could send to the U.S. and Europe. In January those quotas were lifted and exports from both countries shot up. In the first five months of this year China's exports of cloth and apparel to the U.S. jumped 54% to $9.9 billion. India's volume was up 29% to $2.3 billion, according to the International Labour Organization, a UN adjunct.

...Last year the Indian government finally cut duties on imported textile machinery. In a further effort to boost the industry's competitiveness, the government this summer announced plans to spend $150 million creating (with private partners) 25 textile parks by 2008--enough for 500,000 new jobs. Each park will cluster small producers in one industrial unit, with some shared buildings like testing labs, raw materials depots and warehouses.

Investment has been pouring in. Companies have contributed more than $17 billion in recent years to the Indian cloth and clothing industry, according to Texprocil, the export-promotion body of the Indian cotton textile industry...

India and China compete fiercely for orders from the U.S. and Europe, but Indian companies are finding they often get the nod for handwoven, embroidered or otherwise embellished fabrics, clothing and housewares, while China is chosen for larger orders of mass-produced items. As China wins the bulk orders, its market share is likely to increase faster than India's.


Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

November 10, 2005

Refreshing "Web Two Point Oh!"

In case you track the Web 2.0 scene/debate (aka by some as "Bubble 2.0"), check this site out.

Just refreshing the page will get you new "VC friendly" Web 2.0 company name and business model.

Here are a couple of examples it generated for me:

Your company name: Seconoorb
Your company product: tag-based blogs on the desktop

Your company name: Seckoroll
Your company product: geotag-based blogs via flash

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

Paul Graham weighs in in favor of founder sales

In August 2005, I made a post saying why I thought it might be a good idea for VCs to actually insist on "limited founder sales" when they invest in a company - i.e., a *part* of the investment amount goes towards buying the shares owned by founders, rather than into the company.

I had said:
I think this will help reduce the all-too-famailiar clashes between founders and their VC backers post the initial honeymoon period. Letting the founders take "a little bit off the table" reduces their risk in doing what VCs what companies all their investee companies to do: grow faster.

Now, in a new essay titled "The Venture Capital squeeze", Paul Graham - a co-founder of ViaWeb (acquired by Yahoo for $50 million) - warns VCs that "if (they) are frightened at the idea of letting founders partially cash out, let me tell them something still more frightening: you are now competing directly with Google." Click Here to read Graham's very interesting article that is attracting a lot of attention.

Back in the Indian context, M&As have remained the main source of exits for VCs here for a long time. While Google and Yahoo! may not be acquiring too many companies in India, we are witnessing global tech majors - from Flextronics and to IBM - becoming more active acquirers here. So, would we start witnessing more founder sales in Indian VC deals as well? While I'm convinced it would be a good trend, the question is whether the demand for early-stage investments too high (compared to supply), for local VCs to "allow" this?

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

November 07, 2005

US recruitment firm specializes in "angel employees"

With Internet-based services companies back in favor among US VC investors (a phenomenon aka "Web 2.0" or "Bubble 2.0"), can service providers and wannabee start-up executives be far behind?

Scripps Howard News Service has an article on PeopleConnect, an exectuive search firm that actually has a branded program called "Employees Without Paychecks" that focuses on placing executives and tech professionals who are willing to work at start-ups without pay until the clients' VC funding comes through.

PeopleConnect is the first search firm to market a program of recruiting employees who will work for equity. "A friend of mine calls them 'angel employees,'" (PeopleConnect CEO) Max Shapiro, said, comparing them to angel investors, who fund early-stage companies.

... Shapiro markets the Employees Without Paychecks program to early-stage companies that, like Commendo Software, are just a few months away from seeking venture funding. He selects client companies carefully to avoid placing candidates at ventures that have no chance of success.

Candidates are initially treated as independent contractors and paid with stock options, with an understanding that they will become salaried employees when the company gets VC funding.

PeopleConnect charges a contingency fee of 25 percent of the candidate's first-year earnings. It takes a small portion of that fee in a combination of cash and stock options right after the candidate starts. But most of the fee is due when the candidate goes on salary. If the client company never obtains the resources to hire the person, PeopleConnect doesn't get paid.

"In a way, we're investing in the companies as well and hoping they get funding," Shapiro said.


UPDATE: Jeff Cornwall cautions entrepreneurs on the potential dangers of recruiting "angel employees"

While this is a great way to save cash and lower the breakeven point, it does have the potential to make things complicated. All of these managers are now shareholders and have legal rights. The more partners in the deal, the more complex things can become. I would only recommend this strategy for businesses with a clear and relatively quick exit plan. I would not recommend this for entrepreneurs who plan to build and hold their business. It is a recipe for too many headaches with so many added equity holders.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

November 06, 2005

Debate on the investment "sweet spot"

Anand Sridharan of Bessemer Venture Partners-India and Roshan D'Silva, Managing Partner of Middle East technology incubator One Nine Three (and co-founder of IIT-Bombay incubatee MyZus Infotech), have an interesting debate going on Anand's blog on whether late-stage, non-tech investments will score over early stage tech focused investments.

Some Extracts:

Roshan:
India needs early stage capital today. The market is large and is ideal for an investor who can cherry pick the companies who he can back. I see no reason to sacrifice returns and join the crowd....I just feel there is more money to be made in the long run by building a very traditional Silicon Valley-ish Venture Capital firm investing in india.


Anand:
Where is the actual investment opportunity, specific to the Indian market? Non-tech, growth capital opportunities outnumber tech, venture capital opportunities by an order of magnitude. Possibly even higher, if you apply a quality filter. Indian IP/tech startup scene is fast improving, but is still a few years away from critical mass.

So, what am I saying. There is a 'sweet spot' in not-so-large companies requiring expansion capital to scale up a proven business model in non-tech sectors. As of now, this spot is sweeter than early-stage tech.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

BlueRun Ventures' Vineet Buch launches blog

Vineet Buch, a Principal at BlueRun Ventures, has launched a blog titled Venture Explorer

Update: Buch recalls how he was hired away in March 2005 by BlueRun Ventures when the firm invested in Ojos (now Riya.com), the online photo search technology company that he co-founded.
John Malloy at BlueRun asked me to join his firm and work with Ojos as an investor...

...Munjal Shah (Ojas Co-founder and CEO) and I sketched out a strategy for Ojos over a year ago, in terms of product, markets, hiring, burn rate, etc., etc.

...Ojos set up India operations two months after the US, everybody hired in India showed up for work and is still there, and the India team was productive on their second day on the job. (Those who know the Bangalore hiring climate today will be shocked to hear this).



Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Entrepreneur-turned-VC launches blog

Alok Mittal, the co-founder of JobsAhead.com (acquired by Monster.com in 2004) and now a venture capitalist with Barings India Private Equity, has launched a blog titled VentureWoods.

In one of his early posts, Mittal talks about "Band of Angels India", a group of successful entrepreneurs and executives (of which he is a member) with a passion to invest in and mentor early stage businesses.

The application process to BoA involves sending in an executive summary to any of the members (yes, investors themselves take decisions here, there are no “investment managers”) and convince them that what you have is a potentially successful business. The member than “sponsors” the proposal to the whole group. Members in the group make individual decisions on whether to invest in any particular opportunity — for example, 4 members may decide to fund a given venture. The members continue to be involved in the mentoring process.

Typical deal size at BoA is less than Rs 2 crores. We expect higher investments to be supported by other venture capital players. BoA is diversified in its industry coverage — we will invest in any industry where we have members (and hence an understanding of that space). We look at deals from across the country. Some coverage on us. You may mail in your proposals to any of the members directly.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

October 31, 2005

Warburg Pincus-Bharti saga ends; Nets $1.324 Billion for PE firm

The Investment (1999-2001)

Between September 1999 and July 2001, Warburg Pincus invests $292 million in Bharti Tele-Ventures in return for a 19% stake, the first tranche being invested in September 1999. Dalip Phatak and Pulak Prasad of Warburg joined Bharti's board.

Company Valuation: $1.537-B

The IPO (January 2002)

Bharti goes public (which, I assume, diluted Warburg's stake to 15%.)

The Exit (2004-2005)

August 2004: Warburg sells a 3.35% stake for about $208 million.

Company Valuation: $6.210-B

March 2005: Warburg sells another 6% stake for $560 million, marking the largest ever equity deal in a single scrip on an Indian stock exchange.

Company Valuation: $9.333-B

October 2005: Warburg sells its final 5.65% stake to UK-based Vodafone for $847.5 million.

Company Valuation: $15-B or 10 times that when Warburg invested in the company five years ago.

Warburg's total realization: $1.616 Billion - i.e., over 5.5 times its investment amount.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

October 28, 2005

Digital distribution of feature films picks up momentum

Businessworld has an article on the various players that have introduced the digital distribution of movies to cinema theaters across India.



It emphasises more firmly than ever India's position as the digital cinema laboratory of the world. There are now more than half a dozen players trying to roll out digital systems. At over 135 theatres, India is by far one of the largest digital cinema countries in the world along with China and the US. UFO Movies, the brand name under which Valuable hawks its service, has a target of 2,000 theatres by March 2008. If it meets that, it will become the largest film retail chain in India.


Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

EMS firms beeline to India

Never mind infrastructure issues. Leading global contract Electronics Manufacturing Services (EMS) firms are opening plants in India at a rapid pace. The latest addition to the list is Sanmina-SCI, the third largest, reports Businessworld.





Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

October 23, 2005

"Real Estate Investment Opprtunities in India"

Why are PE and VC firms scurrying to set up real estate focused funds in India?

The streaming video of the presentation on "Real Estate Investment Opprtunities in India" by top executives from Kotak Realty Fund - S Sriniwasan, Executive Director and V. Hari Krishna, Chief Investment Officer - at the TiE Silicon Valley office in July 2005 provides the answers.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

October 21, 2005

Why Warburg Pincus prefers PIPEs

Knowledge@Wharton has an interesting article explaning why Warburg Pincus is bullish on India. After the usual tale and numbers about the firm's investment and hugely profitable partial exit from Bharti Televentures, the article goes on to talk about how and why Warburg prefers to stick to investing in alredy listed companies - aka PIPE (Private Investment in Public Enterprises) deals.

Warburg's other notable holdings in India include Rediff Communication, the country's largest consumer web portal; Gujarat Ambuja Cement; Sintex Industries, an industrial plastic-goods manufacturer with a 60% share of the market for water-storage tanks; Kotak Mahindra, a financial services conglomerate; Nicholas Piramal India, a major pharmaceutical company, and WNS Global Services, a business process outsourcing company.

As the list shows, Warburg's bets in India are hardly reckless. The firm generally sticks to the tried, true, big and stock-market listed. That is rarely a winning strategy for a private equity investor in the United States, but can be in India, where the pent-up demands of a billion people leave plenty of room to grow for even the largest conglomerates. So in India, the investment firm is not spending much time seeking out early-stage companies or funky technology. In fact a couple of its forays into tech were jettisoned. They involved minor investments, under $2 million each, Dalip Pathak (the managing director at Warburg who spearheads the firm's strategy in India) says.

"Larger companies are less risky; listed companies are less risky," he says, citing the transparency afforded by India's capital markets. One other reason to pick big over small, in Pathak's view: Bigger Indian companies are increasingly seeking capital and acquisitions abroad, and if they play foul with Warburg, "they know they will never get investment abroad."


The article points out how competition for such late-stage deals is increasing - from Citibank VC, Carlyle, General Atlantic, etc. One of the new things Warburg is doing in response is "looking to participate in India's raging real estate market".

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

October 20, 2005

Lessons a VC learned from a good exit

Bill Burnham of Celsius Capital has a great post on the lessons he learned from investing in Datapower, a company that was recently acquired by IBM.

The entrepreneur "sometimes" knows his market better
Just after Datapower had launched its first product, a performance oriented appliance, Eugene lobbied for the company to accelerate the launch a second security oriented product that had been planned for a quarter or two in the future. At the time, I remember cautioning Eugene on the potential distractions and costs of having two immature products in the market at the same time. Eugene lobbied hard to take the risk and thankfully he won the day. I say thankfully because not only did the company land a $300K order that quarter for the security product, but it was able to establish significant mindshare in the security space well ahead of its competitors. To this day the security space continues to have the most robust market demand and competitors that failed to quickly launch a security product suffered in the market. The lesson for me in this was that VCs have to be careful not to micro-manage product development in a rapidly emerging market because demand can move very quickly and in unexpected ways.

# Shotgun Weddings Don’t Work.
...The lesson for me as an investor is that you should never insist on making a company hire a specific person a condition of investing as that dramatically raises the potential for conflict. You are much better off investing in advance and helping the company recruit someone great that everyone is 100% confident in.

# VCs can indeed be very unethical.
Prior to raising his first significant round of venture financing, Eugene had raised a seed round from a few individuals and a couple of investment funds, one of whom was a reasonably well known VC fund...Everything was ok until Eugene decided to raise his Series A financing. At that point the VC fund submitted what was clearly a low-ball term sheet and pushed very hard to close it. When Eugene objected to the terms and announced that he would try to generate some alternative offers to see if this was in fact “market” he found that he couldn’t get any traction with other Boston based VCs most of whom would either not meet with Eugene at all or who told him that they would not do the deal without also including the original VC (at the terms they had proposed). Now I don’t know if the original VC had an active campaign to try and discourage other investors from doing the deal, but they obviously knew that new investors would not want to do the deal without them (if the original investors don’t invest that is typically a big warning flag that something is wrong) and used that leverage to try and get a better deal... However after Eugene rejected their term sheet and instead ultimately accepted mine, the VC in question went ahead and not only invested in a competitor, but installed the same executive that they had installed at Datapower at their new investment. Within months, this competitor began spouting very similar marketing messages and appeared to be executing against a carbon copy of Datapower’s product and market roadmap.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

October 13, 2005

"The Infosys of auto components"

Business Today has a detailed profile of Baba Kalyani-led Bharat Forge, including nominating the firm as "the Infosys of the auto components sector".



I couldn't get past a couple of paragraphs myself, but I link it here since auto components is a favored sector among Private Equity/VC firms these days.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

October 09, 2005

Low cost airlines in China and other markets

Of course, everyone knows about the low-cost revolution in the US skies thanks to pioneers like Southwest Airlines and more recent entrants like JetBlue. But how about other countries? Did you know for example, that the Mexican government is set to license five new budget airlines - which would essentially look at competing with long-distance buses? And that in Brazil, low-cost carrier Gol Linhas Aéreas Inteligentes has captured a quarter of that country's air travel in just four years?

A recent Knowledge@Wharton provides a great international perspective - including from the US, Europe and China - on the dynamics of low-cost airline industry.

Some extracts from the article's section on the action in China:
Over the last six months, China's airline industry, which for a decade hadn't registered any new members, showed sudden signs of growth. Three private airlines -- Okay Airlines, Spring Airlines and United Eagle Airlines -- made their debut. Even more notably, Shanghai's Spring Airlines became the first carrier in China to offer low-cost airfares. On July 18, the opening day of the carrier, a flight from Shanghai to Yantai cost 199 yuan (about $24). The move by Spring Airlines -- which is owned by Shanghai Spring Travel Agency, the largest privately-owned travel agency in China -- stirred discussions in the media about low-cost airfares. In April, Thailand's Asia Airline opened its China flights and charged 99 yuan ($12) for a ticket from Xiamen to Bangkok. The move marked the first step by foreign air carriers to launch low-cost services.

...In addition, according to press reports during the World Economic Forum in Beijing in September 2004, CEOs from some of the world's well-known low-cost carriers -- including Asia Airline, Britain's Easy Group and Australia's Qantas -- all said they believed that it's time for them to enter the Chinese market, noting that in developed countries, an air ticket on average represents 0.5% of a passenger's annual income, while in China the ratio is as high as 10% to 15%. This suggests a huge demand from Chinese consumers for low-cost air services.

...The year 2004 saw a record for China's aviation industry in terms of transportation volume, which jumped 35.3% over 2003. A total of 121 million people -- or one in every 10 Chinese -- traveled by air, up 38.1% from a year earlier. Like the rest of China's economy, the air transportation industry has become one of the fastest-growing industries and has attracted attention from carriers throughout the world.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

What motivates a corporate VC?

Until 2004, Intel Capital was probably the sole active corporate VC investing in the Indian technology sector. 2005 has seen the VC arms of Nokia, Cisco, IBM, TI and other hi-tech companies - begin to actively scan the Indian market for potential investments. Add to this, the star of 2004 – contract manufacturer Flextronics – and the active investments by business groups like Godrej and Reliance Capital, it certainly seems as if corporate VCs are going to play an increasingly important role in the Indian technology landscape.

In this context, it is important for Indian entrepreneurs to understand the factors that drive corporate VCs vis-a-vis pure financial investors. A recent Knowledge@Wharton article, quoting the work of Gary Dushnitsky from Wharton and Michael J. Lenox of Duke University, provides some useful pointers.

The authors feel "venture capital is an essential tool available to a corporation to increase its innovativeness".
Corporate venture capital is one leg of a three-legged stool whose other two legs are a strong internal R&D capability and strong alliances with academic or government researchers.

Corporations that have stayed the course with venture investing -- DuPont, Johnson & Johnson, IBM and others -- tend to make equity investments in innovative startup companies with strategic rather than simply financial motives, and in time reap both strategic and financial benefits.


While having an VC arm might be good for large companies, start-ups can often discover that having such strategic investors on board may not always be a great idea.
Over the years, many examples have arisen of disputes between entrepreneurs and their corporate suitors over alleged misappropriation of trade secrets during the process of negotiating a corporate investment or acquisition, according to Dushnitsky. He cites a litany of such disputes: Simple.com versus McAfee.com; CardioVention, now defunct, versus Medtronic; a Stanford University professor versus Rockwell International. "The logic is that in these environments, because you cannot protect your idea, more of the technology is likely to be kept secret," Dushnitsky says.

So, when does it make sense for a start-up to go with a corporate VC?
"When corporate venture capital is least likely to attempt imitation," Dushnitsky writes. Based on a matched sample of 258 entrepreneurial ventures and 74 corporate venture capitalists, he concludes that the probability of a relationship between the two parties "decreases if the products are potential substitutes and increases when the products of the two are complementary."

If the products are potential substitutes, "there are incentives for a corporate venture capitalist to behave opportunistically and copy the venture's novel technology," he writes.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

October 08, 2005

Korea fines five US Private Equity firms

Korea Times reports that the Korean National Tax Service (NTS) has fined five foreign funds - The Carlyle Group, Lone Star, Goldman Sachs, AIG and Westbrook - a total of 214.8 billion won ($209 million) for evading capital gains taxes on profitable exits in the country. The agency also plans to refer several high-ranking officials at these funds for prosecution.

The NTS imposed a 147.3 billion won in taxes on foreign funds with regard to their capital gains from sales of local assets by operating through tax havens abroad and evading taxes by abusing the double taxation avoidance treaty.

Currently, Korea has signed with 62 foreign countries to avoid double taxation. The majority of foreign private equity funds have invested in local equities and real estate properties through their subsidiaries in tax havens, including Malaysia’s Labuan, even though the country is signatory to the international treaty, to avoid paying capital gains and other taxes.

It also imposed 67.5 billion won in penalties, as the funds did not properly pay stock transaction fees and illegally transferred capital gains realized here to their overseas affiliates.

The investigation was prompted largely by public criticism that foreign funds did not pay taxes after they took billions of dollars in capital gains from the acquisition of distressed financial institutions and corporations following the 1997 currency crisis.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

October 03, 2005

Why Bessemer cooled to tech investments in India

Anand Sridharan, Associate at Bessemer Venture Partners’ Mumbai office, has laid claim to the title of “India’s first VC Blogger”, by kicking-off "Seriously Clueless", a new blog at http://radventure.blogspot.com.


Anand Sridharan
(Photo Source : Business Today)


Anand has made a great start by providing readers an insider’s account of how he and his colleagues have localized their firm’s approach to investing in India.

The easy answer would have been to continue doing what we do in the US – invest in early-stage, IP-led, technology companies. As we spent time on the ground, we realized that the ecosystem for such companies – seed funding, mentors, a thriving domestic tech market, critical mass of people with product-lifecycle experience – doesn’t yet exist. At the same time, domestic demand growth is fueling several successful companies in a range of non-tech sectors. These aren’t necessarily IP-led companies, but are certainly built on strong execution and process capabilities.

So, if not tech, what else would interest Bessemer? In a detailed follow up post, Anand provides insights into how is likely to go about finding "the next Bharti".

An extract:
(1) Stick to basic needs
It will take us a while to get to self-actualization needs. Health spas, blogging and other self-indulgent pastimes will remain pastimes, not businesses. Billion $ businesses are most likely in food, clothes, basic infrastructure (roads, houses, health, education), communication, transport, household goods.

(2) Think utility, not fun
Middle-class Indian households are used to an all-encompassing entertainment budget of $1/month/head for unlimited cricket, news, songs and movies. And this even includes the EMI on the TV (in addition to the cable bill and a newspaper subscription). No one is in a hurry to pay $5 a pop for a mobile phone game.

Here’s hoping Anand will continue his initial enthusiasm and great start.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

October 01, 2005

Jaz Banga's Feeva to benefit from San Francisco's free Wi-Fi network

As you might know, the City of San Francisco has invited proposals to set up a community wireless broadband network. Bidders include investor and Internet God Google and ISP firm Earthlink.

One of the bidders is an interesting company called Feeva, Inc. (formerly UnwireNow Inc.) which "is hoping to be able to partner with whichever company wins the city contract", according to a SiliconBeat report. Feeva's software platform allows WiFi providers to serve targeted advertising to users - based on their location. "It's one way that a company such as Google could recoup its costs," the report adds.

According to the SiliconBeat report, Feeva already has a partnership with Google on the two free WiFi hotspots - at the San Francisco Public Library and at Union Square - that it already runs in San Francisco.


Feeva’s Founder & President Jaz Banga with San Francisco Mayor Gavin Newsom at the launch San Francisco’s second official WiFi network at the San Francisco Public Library.

Other members of Feevo's management team include Chairman & CEO Dr. Nitin J. Shah and VP Engineering Brij Patel.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Silicon Valley Bank completes one year in India

The Santa Clara, CA-based Silicon Valley Bank celebrated the first anniversary of its Indian operations by throwing a great dinner and networking event at its Bangalore office. From Silicon Valley VCs to wannabee tech entrepreneurs, all were present in strength.

SVB India Advisors Pvt. Ltd., the Bank's second international subsidiary, has acheived a lot in these 12 short months. With some dozen VCs setting up shop at SVB's Bangalore office, the firm has managed to ensure that the series of US VC delegations that it led (along with TiE) in 2004, translated into some real action. While some of the VCs - like Battery Ventures and Bessemer Venture Partners - have already made their first direct investments in India, more deal-making is set to follow.

SVB, with its special cross-border strengths and its Silicon Valley style alacrity, has made its mark as a valuable new player in the Indian VC-entrepreneur ecosystem.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

The opportunity in the pathology labs business

Businessworld has a roundup of the consolidation and rising investor interest in the pathology labs business.
The Rs 2,000-crore industry in India is going through major change. When Businessworld looked at the pathology industry a year back ('Still In The Lab', 12 July 2004 edition), there were six clear leaders. Now there are four in that league. The top two - SRL Ranbaxy and Metropolis - have increased their lead over the rest, and Pathnet has been bought over by Metropolis. Of the rest, Dr Lal's Path Labs and Wellquest have expanded their reach. The sixth, Thyrocare, has moved off the top table. In the last one year, the number of its collection centres has fallen from 545 to 312.

...The top two groups are also trying their hand at clinical trials. While SRL Ranbaxy has instituted the 80-bed Oscar Clinical Research Centre at the Sunflag Hospital in Faridabad, Metropolis has set up a site management organisation to handle clinical trials at Sri Ramachandra Medical College in Chennai and MS Ramaiah Hospital in Bangalore.

Even with this, the top two are looking at garnering some international business. The next two - Wellquest and Dr Lal's - are emerging as strong domestic players. Wellquest, a chain promoted by Nicholas Piramal, now has a new lab in Delhi, seven other labs, and 60 collection centres. Dr Lal's, in which private equity firm WestBridge Capital has picked up a 26 per cent stake this year, has a central lab, 12 satellite labs and 110 collection centres in and around Delhi.


Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Global IT services firms and Indian firms face off

The bagging of the $2.2 Billion outsourcing order from ABN Amro Bank by Indian IT services firms TCS, Infosys and Patni, has prompted Businessworld to put the "the Indian IT services firms versus global majors" on its cover.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Business Today's list of Cool Companies

Business Today has published its second annual listing of "Cool Companies" that "are not just successful, but hip and happening".

The list includes wine maker Sula Wines, online advertising services firm Pinstorm, leather goods maker Hidesign and temp workforce provider TeamLease.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

September 28, 2005

Businessworld interview with Blackstone's Akhil Gupta

Businessworld has published an interview with the Akhil Gupta, head of the Blackstone Group's Indian operations:

Which sectors do you find most attractive in India now?
We are looking at companies across all sectors. As big-ticket players, we will not look at any deal below $25 million. The BPO space for private equity participation is saturated. Thus, going ahead, one might see a lot of private equity participation in pharmaceuticals, real estate, export and infrastructure.

What is Blackstone's USP vis-a-vis other private equity players in India?
A clear differentiator is that we will only do the big-ticket deals. Second, we have the largest portfolio companies as compared to our colleagues in the private equity space. So we position ourselves as catalysts for cross-border activities and as partners for growth over a long term. Even for a sector like telecom, which is essentially local in nature, we bring in our global expertise about process knowhow, etc., to enhance performance. We will be performance-driven at any stage of our partnership.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

September 18, 2005

InfoTalk's Podcast with Sequoia's Mark Kvamme

InfoTalk has a great podcast with Sequoia Capital's Mark Kvamme. Some sound bytes (some of which might be paraphrased):

It's a myth that we invest only in companies who are referred by someone known to us. We've recently invested in a company that cold-called us.

If we can build a world-class business, the liquidity (exits) will take care of themselves. In fact, in today's crazy world of Sarbanex-Oxley, it makes sense to stay private for as long as possible.

We want people to know that we can make $100,000 investments, that we invest in 18-19 year-olds and we invest in ideas that are not yet fully-developed.

My phone number is 650-854-3927 and email address is kvamme@sequoiacap.com. We love to hear new ideas and new entrepreneurs. !!!

How about that for an accessible VC?

Arun Natarajan is the Editor of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

September 17, 2005

MIT's Deshpande Center wins praise

Brad Feld has high praise for the Deshpande Center for Technological Innovation at MIT. He feels "it’s an awesome example of a university program that funds novel, early-stage research, connects innovators with the business creation infrastructure – including VCs and entrepreneurs – and actively helps new startups to be created out of fundamental early stage research".
As the Deshpande Center enters their fourth grant cycle, they just released the data on what happened with research teams that they have funded to date.

* 44 teams have been funded since 2002
* $4.9m of grant money has been awarded
* 9 companies have been formed
* $23m of angel and first round VC funding has occurred
* 7 other teams are forming new companies and actively raising money

This is an incredible hit rate – 20% of the teams have already started companies and 36% of the teams that received grants have either started or are starting companies. Congrats to all these teams, Charles Cooney (MIT Professor) and Krisztina Holly (Deshpande Center Executive Director), and Desh and Jaishree Deshpande who underwrote the program.

Arun Natarajan is the Editor of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

India's Web 2.0 companies?

Business Today has featured a list of "dotcom" survivors - from Automartindia.com to YourManinIndia.com - as part of its recent Cover Story.

Arun Natarajan is the Editor of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

How much will CIFC and ChrysCapital make from the Suzlon Energy IPO?

Business Standard calculates how much the two late-stage PE investors stand to gain from the wind energy turbine maker’s forthcoming IPO:

Citicorp, which had invested in Suzlon in April last year, effectively paid Rs 21.6 per share, and will now get at least Rs 425 per share, since the price band for the IPO has been set at Rs 425-510.

That is a huge 1872 per cent return on investment in a period of less than 18 months. If the issue gets priced at Rs 510, Citicorp's return will jump to 2266 per cent.

Of course, Citicorp will not realise this return entirely, since it is selling only a small portion of its investment in the company through the IPO.

Suzlon's initial public issue of 29.34 million shares includes an offer for sale of 2.58 million shares by Citicorp. That will still leave Citicorp with 20.6 million shares.

In fact, Citicorp is not the only player that has benefited in a big way. ChrysCapital, another private equity investor, bought shares in August last year at an effective price of Rs 27.1 per share.

Unlike Citicorp, which is offloading shares through the IPO, ChrysCapital has already sold about 60 per cent of what it held in Suzlon to other foreign investors at an average price of Rs 385.6 per share.

ChrysCapital continues to hold 7.5 million shares in the company, which makes its total return on Suzlon investment from 1380 to 1509 per cent, based on the price band of Rs 425-510.

Both Citicorp and ChrysCapital have invested Rs 50 crore (Rs 500 million) in Suzlon for a 9.6 and 7.1 per cent stake, respectively.

Arun Natarajan is the Editor of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

September 11, 2005

While IT services cos. are acquiring overseas, product firms are getting acquired by foreign firms

This week, I contributed to an article on M&A in India's IT services sector in the The 451 techDEALMAKER. I'm posting below some of my responses to a well compiled list of questions from The 451 Group's Fred Linden.

What trends do you see in M&A involving India-based technology and communications companies?
While product/IP-driven companies based in India are finding willing buyers and investors among foreign companies (examples include the recent Oracle-I-flex deal and Flextronics’ string of acquisitions in 2004), services-focused firms are capitalizing on the booming capital market to acquire overseas companies.

Based on the successful exits, technology-focused VC firms are now more bullish on backing product/IP-driven firms rather than IT services firms (except for niche/specialized players).

Within services, it has been quite fascinating to witness how much more rapidly the Indian BPO services sector grew and matured – including in terms of attracting M&A interest from overseas firms - compared to the IT Services sector.

Are there factors besides the ample supply of competitively priced and well-educated knowledge workers driving the tech sector growth in India?
The sheer numbers in terms of trained manpower is a factor that no other country - except probably China - can match. The strong Indian diaspora in the US - common to Israel and China as well – is another source of strength. With salary levels on the rise year-on-year, the availability of sufficient “been there, done that” management experience and the comfort with English of even the entry-level programmer are what will keep India ahead of China in the IT services space.

What's driving India-based IT companies to look abroad for investment opportunities?
An extremely conducive capital market – both domestic and global for Indian companies - is making the financing of acquisitions much easier. Whether it is a local IPO, overseas equity issues (like GDR and ADRs), convertible debt (like Foreign Currency Convertible Bonds) or Private Equity funding, Indian companies are spoilt for choice in terms of options to finance their overseas acquisitions. The Indian government too has liberalized the rules for companies making overseas acquisitions and recently also relaxed limits placed on Indian banks to finance these acquisitions.

What's driving foreign-based companies to buy India-based IT operations (besides the obvious - the low cost of highly qualified labor)? How do other forms of direct foreign investment in the Indian IT sector (JVs, local branch offices, etc.) compare?

Recent deals seem to indicate a preference among foreign firms to acquire Indian firms with specialist/niche capabilities rather than generic service providers.

Would it be correct to say that the focus of India-based IT is shifting from IT business services/systems integration (2003 & 2002) to IT outsourcing and software development?

My understanding, as someone who tracks the IT Services industry mainly from a deal perspective, is that while the larger firms continue to play across the spectrum, mid-sized firms are choosing – if not forced - to specialize. Offshore software testing services has been a new area of growth for the mid-sized players and based on their success, the larger players – who earlier did not pay to much attention to this opportunity – are growing their practices in this area.

Our data suggests that India-based IT companies over the past four years have been increasing the size of their foreign acquistions rather than making more of them (although just in the past couple of months there have been an upswing in activity). Can you confirm this trend toward larger transactions, and what would explain it?

While I’m not sure there is a conscious move towards doing larger deals, given the challenges of integrating cross-border acquisitions – motivating and retaining the existing team, cultural issues, etc. – it makes sense for Indian IT vendors to go in for fewer deals - and consequently ones that are significant sized - so that management bandwidth is not spread too thin. Also, given the strong performance of the Indian stock markets, it makes sense to use the opportunity to do larger deals now.

Our data suggests that the size of IT acquisitions in India by foreign companies has not been growing over the past four years. Meanwhile, the activity level (number of deals) has been growing. Can you confirm this trend toward quantity over size, and what would explain it?

Each foreign firm entering India makes a “build versus buy” decision. Over the last few years, most Global IT Services firms have entered the country and opted to create their own delivery presence rather than acquire generic local IT services firms. The process for setting up an India Development Center (IDC) is relatively smooth (so there is no significant entrenched advantage that a local firm enjoys here). Plus the foreign firms have been able to hire local management talent – usually by hiking salaries significantly.

The acquisitions have been reserved for adding niche capabilities – like BPO (IBM-Daksh), vertical specialization (Flextronics-HSS), etc.

What recent international deal involving a tech company based in India do you find most interesting?

Apart from the recent Oracle-I-flex deal, which has received wide publicly, I found the way in which Singapore-based contract electronics manufacturer Flextronics has rapidly emerged an active acquirer of Indian technology companies to be quite fascinating. The company moved swiftly to invest in most of the leading communications software companies in India in 2004: it acquired FutureSoft and Deccanet Designs and invested $226 million to acquire the 55% stake held by News Corp. in publicly-listed Hughes Software Systems. As part of the company’s plans to make India its global center for technology products design, Flextronics has also led a $10 million investment in chip design firm inSilica and acquired multimedia technology firm Emuzed.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

September 03, 2005

Making merry until the IPO party lasts

In an article for the Financial Express, I highlight how late-stage companies are tapping Private Equity investments just a few months before filing for an IPO.
October 2004: HT Media raises private equity capital from Citicorp International Finance Corporation, following an earlier investment from Henderson.

August 2005: HT Media's IPO is oversubscribed.

May 2005: ABG Shipyard raises funds from Merlion India Fund and IL&FS VC.

August 2005: ABG Shipyard files for IPO.

May 2005: Telecom R&D firm Sasken raises a reported $9 million from US-based VC firm, NEA, and files for an IPO almost simultaneously.

See a pattern here? Welcome to the world of pre-IPO Private Equity deals. As long as the IPO window in India is wide open we can expect the pre-IPO PE financing to gather momentum. (After all, right now, the only difference between one IPO and another is how many times each one is oversubscribed). Investing in mature companies just before their IPO – which sets a nice healthy valuation benchmark for the company - and exiting at a nice profit either at the IPO or over a couple of years, is a nice formula indeed. As long as the party lasts.

Investing in mature companies just before their IPO – which sets a nice healthy valuation benchmark for the company - and exiting at a nice profit either at the IPO or over a couple of years, is a nice formula indeed. As long as the party lasts.

I personally do not have too much of a problem with this phenomenon. Over the last 18 months, one of the most significant trends in the Private Equity world has been the emergence of a clear stratification within the industry - i.e., a clear demarcation of who specializes in what, in terms of stage and size of financing. This is good since it lends depth to the market and can be expected to have a “trickle-down” effect on start-up financing as well. Angel investors and early-stage Venture Capital firms (which are a sub-set of Private Equity firms) can now invest in the confidence that their investee companies have multiple players to go to for follow-on financing at various stages of their growth.

...To their credit, PE firms have kick-started investments across a range of industries. (Until mid-2003, companies outside the IT and BPO industry rarely got as much as a dekko from VCs.) And it is not just export-led industries like textiles, pharmaceuticals and auto-components that are attracting PE investments. Companies focused on the domestic economy - like Retail and Media firms - are getting a decent share of the money as well. This again augurs well for the long-term.

So, what’s next? As the IPO fever heats up and more and more PE firms rush in to make their first investments – keen to report an “early success” back to headquarters - we can expect a supply-demand mismatch. As more money chases fewer quality companies, the result is inevitable: Prices - that the promoters will demand from PE firms - will go up. As long as the markets head northwards, the deals will continue to get done at higher and higher valuations. But the IPO window will - inevitably - close at some point. And, when the music stops, some PE firms - who have just paid fancy premiums in their latest pre-IPO deal - will be left stranded.

...They will have to bide their time until the next IPO season. Or sell at a discount. After all, as the Americans say: No pain, no gain.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Why all this buzz around media?

The latest issue of Businessworld magazine has a cover story on the heightened deal-making in the media and entertainment sector in 2005.

Here's my take on the Private Equity action in the Media & Entertainment sector (some parts of which were featured in the Businessworld article):

For almost three years since the 2000 downturn, PE and VC firms focused whatever little investments they were making into the Information Technology and BPO services sectors. The media & entertainment sector, which was reeling under the impact of the sharp decline in advertising spends, never got a dekko.

September 2003 witnessed two major investment announcements in the media & entertainment sector: Henderson Global Investors' $27.8 million investment in HT Media for a 20% stake and ICICI Ventures' $22.2 million buyout of the Tatas 50% stake in Tata Infomedia. HT Media went on to raise a further $15.3 million from CIFC (a part of Citigroup) and Henderson in October 2004 - the only significant media investment by PE firms in that year.

A key factor in driving investments by PE firms is how successful they would be in finding profitable exit routes – either via an IPO or the acquisition of the investee company. 2004 was a great year in this respect with private equity firms exiting their investments in as many as 30 Indian companies across all sectors, six of them via IPOs. The biggest media sector exit during the year was New Delhi Television’s $24.5 million April IPO which provided an exit route for its PE investors including Goldman Sachs, Saffron Fund, JF India Fund, JP Morgan and SBI Capital Markets. Infinity Ventures and IL&FS VC exited their investment in gaming software firm Indiagames when China-based TOM Online acquired an 80% stake in the company for $17 million in December 2004.

Talking of exits, the August 2005 IPO of HT Media is likely to be a major milestone for PE investments in the sector. Henderson has already realized its original investment via the 5% stake it sold via the IPO. Any sales of its remainder shares (it is estimated to own about 10% stake post IPO) above the IPO price will be pure profit. Canadian PE firm CDPQ too obtained an successful exit for its investment in UTV Software Communications via the company's $20 million March 2005 IPO.

Catalyzed by these successful exits, 2005 is turning out to be a blockbuster year for media sector investments: UK-based PE firm 3i's $45 million investment in Nimbus Communications in August 2005 follows BSMA and Arisaig Partners’ $12 million investment in Adlabs Films (April), New Vernon Bharat's $7 million investment in Jagran TV (May), Kerala Venture Capital Fund's investment (amount not disclosed) in Film and TV production firm Symphony Entertainment (June) and Americorp Ventures' acquisition of a 9.33% stake in TV broadcasting firm Asianet Communications for a undisclosed amount (March). Add to this Reliance Capital's $83.7 million strategic investment into Adlabs Films in July, and it is clear that a major party is on. So much so that some US VC investors are now actively looking for investments in Internet media companies – something considered a downright bad word just two years ago!

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Citigroup launches "venture lending" service in India

This week, Citigroup announced the first customer - Chennai-based Secova eServices - for its new "venture lending" service to Venture Capital-backed companies in India. Apart from providing a term loan, as part the Venture Lending transaction, Citigroup will also acquire a small pledge of stock warrants which would entitle it to invest and acquire equity shares in the customer company at a predetermined price.

The service is aimed at early- and growth-stage companies which have already raised a round of VC funding. Secova, for instance, raised its first round financing from the Tamil Nadu IT Fund (managed by IL&FS VC). By using debt financing from the Venture Lending service to finance fixed-asset purchases or working capital, entrepreneurs can employ their VC funding in areas such as accelerating product development or in making key hires. This way, entrepreneurs can achieve a better valuation for their companies before going in for the next round of equity dilution.

More from Citigroup's note about the service:

What is Venture Lending
Startup companies typically receive several rounds of equity investment prior to going public or being acquired. Each round is expected to provide sufficient capital to achieve predefined milestones. By reaching milestones, the company is able to (and typically needs to) raise a subsequent round of financing. These step-up rounds of financing serve two purposes: First, they enable entrepreneurs to minimize the amount of equity that is given up in the firm by linking further dilution with higher valuations. Second, they enable the venture capital investor to minimize investment risk by spreading the capital requirement over multiple rounds and usually a number of different investors.

There is a clear need for some amount of debt financing between VC rounds to help companies and investors ‘extend the cash runway’ of their investments. By using debt, the entrepreneur is able to have access to more capital without giving up as much equity. Put differently, venture debt enables the entrepreneur to run the company for a longer amount of time, increasing the enterprise value of the company, before raising more money. Venture Debt is an existing concept in the US accounting for over 25 years.

Benefits of Venture Lending
• Extends the “cash flow runway” for the company and makes it easier to achieve the next valuation milestone.
• Venture lending represents a less dilutive type of financing than venture capital financing since venture lenders generally require less of an ownership position.

Venture debt is typically useful for early stage and emerging venture-backed companies that are looking to build out their business through infrastructure expansion or growth capital. Venture debt is traditionally used for the purchase of hardware and infrastructure equipment, enabling emerging companies to reserve the venture capital investments for business critical activities such as research and development, marketing practices, and hiring. Additionally, venture debt can be used to finance accounts receivables, inventory, demonstration equipment and can be purely offered as growth capital.

For further details, contact Ajay Hattangdi, Vice President-Citigroup, Mumbai at ajay.hattangdi@citigroup.com or +91 22 5001 5039.

September 02, 2005

“Regulators need to watch out for Private Equity firms”

In the context of the launch of large buyout-focused PE funds like Blackstone and The Carlyle Group in India, Raghuvir Mukherji, a consultant with the Financial Securities Group of Infosys Technologies, stresses, in a Business Line column, the need for urgent regulation in three areas:
The level of gearing expected (including, if necessary, mandatory credit ratings for these firms) to prevent them from creating an asset bubble;

Publishing of data on activities of these firms and those they take-over, to prevent them from using the latter to do things that fall within the grey areas of the law;

Minimum lock-in period for these equity firms to prevent them from asset-stripping the companies they promise to turn around.

September 01, 2005

Does it pay to be an iconoclastic VC?

Extract from a recent The Deal.com report:
(Tim Draper, Managing Director of Draper Fisher Jurvetson) is best known for self-promotional stunts such as singing at conferences, dressing up as Batman on the floor of the New York Stock Exchange and generally, just making really silly public statements that attract attention. While VC investing may require brains and native shrewdness, Draper's rebound may show that success can also come through a willingness to take risks on new geographies and sectors. And if self-promotion and buffoonery are an inseparable part of that risk-taking proposition, so be it…

For all this ridiculousness, Draper still sits on a significant stake in one of the world's more promising startups that happens to be located in Eastern Europe. Tallinn, Estonia-based Skype was founded by Niklas Zennström and Janus Friis, the engineering duo behind file sharing technology KaZaA. Skype offers PC-to-PC Internet telephony calling that is free for registered users and inexpensive for unregistered users.

But why Draper Fisher Jurvetson? First, it's one of the few venture firms willing to take a chance in a distant locale such as Estonia. Although the country is just two hours by hydrofoil from Finland, most VCs wouldn't even travel to London, let alone Tallinn.

August 30, 2005

VentureVoice audio interview with Brad Feld

In this podcast interview to VentureVoice, Brad Feld of Mobius VC talks Issue of products vs. consulting, VC-CEO relationship, relevance of business plans, working with other VCs, dealing with lawyers on deals, etc.

August 29, 2005

Audio interview with Bessemer Ventures' Rob Chandra

In this downloadable mp3 audio interview ("podcast") to PodTech.NET, Bessemer Ventures General Partner Rob Chandra talks about the industry segments that his firm is actively investing in these days, about BVP's investment in Skype and why BVP is so focussed on India and China.

August 25, 2005

Indiabulls on the rampage

Business Today has a fascinating profile of PE-backed stock broking and financial services firm Indiabulls

(A) striking feature of Indiabulls is its ability to raise money. In 2000, it had managed to raise venture capital from Infinity Ventures, Harish Fabiani of Transatlantic, and LN Mittal Internet Ventures, all of whom put in a total of Rs 43 crore. The next rounds happened in 2004 and 2005, when Farallon and Amaranth brought in a total of Rs 310 crore. Now Indiabulls is clearly among the top 100 capitalised companies, with Rs 700 crore in equity capital.

August 21, 2005

An U-turn at i2?

Sanjiv Sidhu founded supply chain software i2 Technologies seems to have emerged back from the brink, says this BusinessWeek article, providing a lot of credit Michael McGrath, who took over from Sidhu as CEO.

Sidhu moved up to chairman of the maker of supply-chain-management software, and McGrath went into Bob Vila mode. For starters, he stopped picking up the tab for cell phones for the entire staff. Then he cut all corporate travel unless it was billable to clients. And he laid off 13% of employees -- most of whom were in upper management. "In the past, layoffs were all done at the worker level. We had way too many VPs and higher-paid executives," says McGrath.

In a little more than a quarter, McGrath has managed to get i2's stock relisted on the Nasdaq, raise nearly $40 million to shore up its balance sheet, and dramatically cut costs -- by $20 million in the second quarter alone.

...Some of i2's recent tech improvements have been helping companies predict how different products will sell, in real time and even at the store level.

...But McGrath isn't just counting on big supply-chain-management packages to boost the top line. He has completely changed how i2 sells software. Under McGrath, salespeople are no longer swinging for the fences. Simply put, he has admitted something analysts have said of struggling business-software companies for years: They can no longer live on big multimillion deals. Because software purchases were so large, companies were dragging their feet.

...To get that price point down in the hundreds of thousands per deal, McGrath is selling software in chunks that address specific parts of the manufacturing or fulfillment process. The idea is the lower price point will lead to a shorter sales cycle, and it'll build more trust, bringing the customer back for more chunks of software.

It's a very gutsy move, and one similarly beleaguered software companies have been loath to make. You have to close more deals to make the same amount of money, and the software has to perform as advertised, or customers won't come back. Much of i2's salesforce, which relied on hefty commissions from these deals quit. Many more were fired.

McGrath didn't sweat it -- he'd rather sell through third-party consultants anyway. That lowers the cost of sales even further, he argues. "He's swapping the potential for huge, hockey-stick growth for less volatility," O'Marah says. "But it's probably the most important thing he has done."

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

August 20, 2005

Profile of ChrysCapital's Ashish Dhawan

Business Today has published a detailed profile of ChrysCapital co-founder and Sr. Managing Director Ashish Dhawan, who has managed to successfully transform his firm from an early-stage, Internet services focused investor to a predominantly late-stage (mostly PIPE and non-tech) one within just a few years.
Says a Delhi-based VC who knows Dhawan closely: "If Dhawan hadn't survived the (dotcom) crash and had not managed to raise his second fund, he would have ended up as a middle-level manager in one of the investment banks."

Fact is, Dhawan did not just survive but went on to thrive. With his second fund, he built what could be described as his comeback portfolio. He's picked up stakes in hot new companies like IVRCL (an up-and-coming infrastructure player), Yes Bank and Suzlon Energy. For instance, he paid a measly $5 million (Rs 22 crore) for a 7.5 per cent stake in Yes Bank (it works out to Rs 14 a pop). That investment today is worth $15 million, or Rs 66 crore, thanks to the bank's recent IPO that priced the stock at Rs 45. (The stock is slated for listing on July 12). In the case of IVRCL, Dhawan grew his $9-million investment to four times in just one year when he exited it via public market.

Of Fund Three's $250 million (Rs 1,100 crore), Dhawan has already invested $90 million: $55 million has gone into construction company Gammon (the investment was made in December last year) and $35 million into Chennai-based truck finance firm, Shriram Transport Finance. Stocks of both the companies are trading at a significant premium over the deal price, but Dhawan says he's in no hurry to sell. "We now have the ability to be really long-term oriented. Early on, there was pressure to show returns. Now, I don't mind holding on to companies for more than five years."

Why founder sales are actually a good idea

Venture capitalists never like deals where their money is used to buy the shares owned by founders and other early investors. They like their money to go "into building the company" - ie, towards hiring people, building a product, etc. Unless, that is, they are desparate to get in on the deal.

Gary Rivlin of The New York Times reports that such "founder sales" deals are now becoming more common in the US. Companies like eHarmony, Webroot Software, Fastclick, etc., have witnessed the founders "using venture deals to cash out some of their equity without the bother of a public offering or an acquisition".

If the VCs are so hungry for the deal, why then do the founders want to cash out early? Are they not as confident as the VCs about the success of their businesses?

The reason, as Woodside Fund partner Thomas Shields explains in the NYT article, is because a founder is typically "stock rich but cash poor". Shields feels such a situation is actually bad for the company as a whole since such a founder "might be overly conservative in his or her business decisions for fear of losing everything."

"If you can give these guys a little bit of liquidity so they're comfortable taking more risk, but not so much that they're not hungry anymore, then it can be a very good thing."

What Shields says makes a lot of sense. So much so that I think it might be a good idea for VCs to actually insist on "limited founder sales" when they invest in a company. I think this will help reduce the all-too-famailiar clashes between founders and their VC backers post the initial honeymoon period. Letting the founders take "a little bit off the table" reduces their risk in doing what VCs what companies all their investee companies to do: grow faster.

The players in India's gaming software sector

Business Today has a good article on India's gaming software sector and its players.
Mobile telephony! That's what's driving mass gaming in India. Telecom operators say subscribers are downloading 500,000 games every month from their GPRs or WAP portals (Reliance through its R-World); this is likely to cross 1.5 million by the end of the year. "Mobile phones are making gaming a mass market phenomenon," says Pravin Pinto, GM (Marketing) at LG's CDMA Handset Division. Nasscom estimates that the Indian gaming industry will tot up revenues of $500 million (Rs 2,200 crore at current exchange rates) by 2010. In much the same vein, research agency In-Stat/MDR says the Indian mobile gaming market alone will touch $336 million (Rs 1,478.4 crore) by 2009...

...Says K. Rajesh Rao, CEO, Dhruva Interactive, who worked with Microsoft Gaming Studio for an Xbox game, Forza Motorsport: "Global biggies now seek us out and want to do business with us. It's a nice position to be in." Rao, a computer science engineer from Sweden's Royal Institute of Technology, started his company with a bank loan, and remained cash-strapped till 2001 when Atari (a global gaming company) founder Eric Moffet came in as an angel investor and ploughed in $500,000 (Rs 2.35 crore at the exchange rate prevailing then). Dhruva is cash-positive now, and is looking for venture capital to scale up operations.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.