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June 25, 2005

I-Flex structures low risk cross-border acquisitions

Financial software maker I-Flex Solutions has created an interesting structuring for its proposed investment in Canada-based insurance software firm, Castek Software Inc. , according to an Economic Times report.
"We might back out from buying 34 per cent of the stake in the Canadian company unless it turns around within the next 18 months," a top company official told the media.

i-flex had recently signed an agreement with Castek that allows it to buy upto 34 per cent of its stake. "The turnaround of Castek is directly dependent on two pending contract negotiations with two US-based large insurance companies. If Castek wins those contracts, which are under progress, the company will come out of the crisis," the official added. i-flex officials said the valuation of Castek would jump manifold if it gets the insurance deals.

"The option is similar to exchange traded derivative instrument-options. We paid a premium to get the right to buy upto 34 per cent over the next 18 months but are not obligated to exercise the option," the official said. i-flex, in its bid to enter the insurance sector, wanted to seal a deal without involving itself with any significant risk by buying the shares upfront.


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.

June 24, 2005

One in five US VC firms looking outward

US-based venture capitalists expect to expand their global investments, with China and India among their top targets, according a survey conducted by Deloitte & Touche LLP and the National Venture Capital Association (NVCA).

According to the survey, 20 percent of U.S.-based VC respondents plan to increase their global investment activity over the next five years, up from 11 percent currently investing abroad. Forty-two (42) percent plan to invest abroad only with other investors that have a local presence; 39 percent plan to develop strategic alliances with experienced foreign-based venture capital firms; and 30 percent plan to open satellite offices in select regions globally. The U.S. VCs indicated they expect to maintain their U.S. investment presence, both in terms of physical presence and investment levels.

Conducted between February and April 2005, the survey measured attitudes and intentions regarding investment regions and industry sectors of 545 venture capitalists worldwide.

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.

June 23, 2005

How VCs can become better board members

Fred Wilson has a great post on how self-proclaimed "hands on" VCs can really add value to their portfolio companies and become better investor and board members.
I guess Jordan and Ron didn't like the idea of some wet behind the ear VC trying to tell them how to run their business.

I quickly recognized that I had to earn the right to tell them what I thought they should do. So a couple weeks later, I cleared my calendar for 2-3 days and flew to Buffalo. Jordan had arranged for me to spend time in every part of the business, from help desk to finance to sales and everything else.

I rolled up my sleeves and got my hands dirty.

I met almost every employee and learned what each job entailed. I even did some of the jobs. By the end of my stay in Buffalo that week, I had a much better idea of what the business was all about. And it made me a much better Board member.

..And if you think about it like you are working for the CEO, not the other way around, it generally is appreciated. Then when things aren't going so well, you can start making suggestions and you'll be heard. And the suggestions you make wil be good ones.

So I think rolling up your sleeves is the best thing you can do as a VC, but its work and it requires a committment that not all VCs have.

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.

June 21, 2005

IBD Network VC event highlights

Highlights from a recent IBD Network event on Venture Capital (held at Menlo Park, CA) featuring Ron Weissman, Apax Partners (as Moderator); Raj Atluru, Draper Fisher Jurvetson; Tim Chang, Gabriel Venture Partners; and Venky Ganesan, Globespan Capital Partners:

* Where are venture dollars going?
o Consensus: consumer media, Internet 3.0, consumer wireless, open source software
o Other areas (no consensus): clean energy, fixed/mobile convergence, software as a service, relieving Sarbanes-Oxley pain points, social software

* What areas would you avoid?
o Consensus: enterprise software (bottom still two years away)

* Five things that make a great deal:
1. An idea that fits with one of the VC's investment theses
2. A rock star team
3. A business model that is highly capital-efficient
4. The VC having good chemistry with the team
5. The ability for the VC to really add value (helping with liquidity events, or helping to hire talent)

* The VCs want plain vanilla, straightforward simple term sheets. Weighted average, no dividends, option pools, etc.


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.

SAIF closes Silicon Valley office

SiliconBeat reports that Softbank Asia Infrastructure Fund, whose LPs include Japan's Softbank Corp. and Cisco Systems, has closed its office in Silicon Valley. The fund will focus on investments in China, India, Korea, Hong Kong and Taiwan, SiliconBeat says quoting a VentureWire report.

"Let's say I put $10 million in a U.S. company - it probably lasts 18 months," said (SAIF's Beijing-based partner Joe) Zhou, "and when I do that it's probably not even profitable. In China, chances are that when we do the $10 million deal the company's profitable and [the funding's] going to last a long time."

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.

June 20, 2005

The Tejas Networks Story

Tejas Networks' $17 million third round funding led by Battery Ventures is getting the firm a lot of ink. Businessworld magazine recently published a three page profile of the telecom equipment firm describing its founding and evolution. An extract:
Tejas still gets 80 per cent of its revenues from the domestic market, which is all of $250 million in size. Compared to this, the global market for Tejas's products is worth more than $5 billion. Apart from large companies like Lucent, Nortel and Alcatel, this global market is served by players like Huawei, ZTE and UT Star. And (Tejas' angel investor Desh) Deshpande estimates that the Chinese companies are going to corner a quarter of the entire telecom equipment market in a few years.

He says: "Tejas needs to grow 100-fold to get the critical mass to compete globally." That's why the OEM route is a good way for Tejas to grow. Though it earns lower margins, it ensures that the company doesn't have to spend large chunks of its earnings in marketing abroad. It would also help Tejas achieve its target of getting 40 per cent of revenues from global sales in two years.

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.

From contractors to designers

Whether Indian IT services companies make this shift and embrace innovation and R&D based excellence will determine whether India will "find its place in the sun in the years to come", argues Sanjay Anandaram, Managing Director of Indo-US cross-border VC firm JumpStartUp, in a recent Businessworld article.

Anandaram draws an interesting parallel between the state of the Indian software services industry and contract manufacturing (which is the domain of companies like Flextronics, Solectron, etc.)
Worldwide, CM companies, under margin and revenue growth pressures, have been morphing from original equipment manufacturers (OEMs) to original design manufacturers (ODMs). Today, the entire design, development, sourcing, manufacturing, testing, packaging and shipping is undertaken by the larger ODMs, leaving customers like Cisco to manage the customer, channel and marketing relationships.

Some ODMs are venturing into launching their own brands (Haier, BenQ) in carefully chosen markets. Complex technological products from PDAs to PCs to digital cameras to phones to networking gear are being increasingly supplied by ODMs from Taiwan and China. More importantly, these companies are investing heavily in innovation in technology, marketing and business models! (See 'Low Premium Software Services'.) Indian IT services need to see the writing on the wall and start investing in innovation now, when they have the luxury of enviable margins and revenue growth.



Investments in R&D, sales and marketing and business development activities have to dramatically increase. Such investments take time to fructify, but they will stand the Indian companies in good stead when growth starts tapering off. The past 10 years have seen the Indian IT services industry successfully perfect the equivalent of the CM business model, but will the next 10 years see them perfect the equivalent of the ODM model? After all, pay-offs from investments in soft infrastructure like R&D, culture, and mindsets take a lot longer than investments in hard infrastructure like land and buildings.

DISCLOSURE: Sanjay Anandaram has a small investment (in his individual capacity) in TSJ Media.

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.

June 10, 2005

Ray Lane interview in BusinessWeek

BusinessWeek has an interview with KPCB partner and former Oracle executive Ray Lane.
I was always afraid I was entering into a new business, a new career -- venture capital. Well, I have no desire to learn venture capital. But I found that the entrepreneurs weren't looking for venture capitalists. They're looking for venture capital money, but they're looking for people who have operating experience. So I wondered, "Can I really do this business?" Well, yeah, I can, because that's what they really want: Someone who has experience and the contacts and all of that. So yeah, I like it.

...Q: You mention ego, and I imagine there's a good deal of that being a partner at Kleiner Perkins, too. Would you have joined any other venture firm?

A: No.

Q: Why not?
A: John [Doerr], it's really John. If John weren't here, I'd seriously think about something else to do. [Doerr is a Kleiner Perkins general partner, who funded Sun Microsystems and Amazon, among other companies.] What I want to do now is: I want to have a Google. Virsa is a candidate. Visible Path is a candidate. I have about three or four candidates. I have some that never will be candidates. I want them to have a good transition to something, but it will not be a big, important billion-dollar company. I know that already.


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 organizational stability is important for VC firms

Going by what a former LP investor says (as part of his comments on Paul Kedrosky's posting), VC firms who face significant churn will find it difficult to raise their next fund:
When I used to do fund of fund investing, we looked at 3 things
1) Organizational stability
2) Track record
3) Competitive advantage, usually through proprietary deal flow, or value add as vouched for by CEOs of succesful portfolio company exits.

The #1 reason funds fail is due to a lack of organizational stability. Venture funds are remarkably unstable given the small size of the staff and the large size of the egos. Also, issues of sharing the carried interest when every GP has up and down cycles is challenging. Also, if the fund's returns deteriorate and people leave, the LPs are left holding the bag on how to harvest the portfolio. Successful harvesting of a mediocre fund can be the difference between returning your capital or losing it.

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.

What wannabe VCs need to raise their first fund

Paul Kedrosky has some advise for wannabe VCs on how to raise their first fund:
(Have) some combination of the following:

1. Proprietary deal flow
2. A (good) investment track record, including at least two exits, ideally an M&A and an IPO
3. Previous successful deals on which you pulled the string
4. Namebrand CEOs & entrepreneurs who will vouch for your added value and usefulness
5. Relationships with capital providers
6. Presence & personality
7. A differentiated background
8. Board experience
9. Proposed venture investment market sector(s) in which people are interested
10. Other name VCs who have nice things to say about you
11. A team of similar people

...Finally, people need a reminder on what constitutes "proprietary deal flow". It is not that your Stanford friends will come to you first. There aren't that many of them, and most MBAs are, de facto, not entrepreneurs anyway (why would they waste two years in school?). Nor is it that you know some serial entrepreneurs who have promised you their next deal. You need more than that, whether reputationally-driven or relationship driven, so that you're not just another venture wannabe confusing aggression with what it takes to create a first-quartile IRR in an illiquid and unusual market.


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.

How the "overhang" affects the VC business

Jim Breyer, Partner at Accel Partners, spells it out nicely as part of a Churchill Club roundtable featured in the AlwaysOn Network.
We still are in a business which is at significant over-capacity, both in terms of dollars and people. Something has to give. And the manifestation is that there are simply too many businesses being funded per segment. Back in the old days when Geoff and I worked together on deals like Foundry, we would do a new deal and we would have a year or 18 months to build some defensibility, get product to market. Maybe one or perhaps two competitive deals.

Today in similar areas, whether it's storage management [or] wireless 802.11, I would guess that there are 15 to 20 deals per segment being funded by venture capitalists, and while all venture capitalists think their deals are pretty good and they'll make money, the math obviously doesn't work out, and that's where I think the real issue is, both for Silicon Valley and for the technology investment business in general. It is simply an area where there are too many me-too projects in areas that are quite interesting, but where the negotiation with either exit partners—Cisco, HP, Intel, or others—will have completely different dynamic from what it was 10 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.

June 04, 2005

OATSystems in trouble?

Jeff Nolan of SAP Ventures has "heard" that Prasad Putta and Sridhar Ramachandran co-founded OATSystems, a Watertown, MA based provider of radio frequency identification (RFID) software, is up for sale.
I know they have been having a hard time recruiting a CEO, in fact they had a great guy lined up to take the gig and he pulled the plug at the last minute. Further complicating matters is that the investors had committed to investing more $$ upon successfully recruiting a new CEO but pulled back when the CEO-to-be walked away.

As reported in the Venture Intelligence India newsletters, OATSystems had raised a $11.5 million first round financing from Matrix Partners and Greylock in September 2003. Founded in 2001, OATSystems has a R&D center in Hyderabad, India.


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.

June 02, 2005

And the biggest acquirer of IT companies is..

Via Brad Feld:



No major surprises. Nevertheless, nice to see it represented visually.

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.

June 01, 2005

Vinod Khosla beyond KPCB

Business Week's Deal Flow Blog has an article on what Vinod Khosla has been up to post his decision not to participate as a General Partner in KPCB's (Kleiner Perkins Caufield & Byers) latest fund.
The new schedule also lets him devote time to ventures that aim for maximum social impact rather than maximum profit. Khosla is especially interested in social ventures that use Silicon Valley-style entrepreneurship to create self-sustaining organizations. Two weeks ago at the TiECon 2005 conference, he moderated a panel with some of the organizations he has been working with: Share Microfin Ltd., Aravind Eye Hospital, and Institute for OneWorldHealth.

Investing solo lets Khosla fund pet projects that many VCs wouldn't touch. "I can invest in more seed and speculative ventures," he says. Khosla has always had an interest in pure research that promises to produce breakthrough technologies--the kind of initiatives that don't yet fit neatly into a business plan. He calls them "science projects."

For example, he recently teamed with MIT professor Srini Devdas on a project they're calling Puffco. Devdas is developing a tiny chip that can uniquely identify an object and, according to Khosla, can't be counterfeited. Applications for the invention aren't yet certain. It could be placed inside a Rolex watch to ensure authenticity. It could be incorporated into radio frequency identification (RFID) tags to uniquely identify each tagged item. It could ship inside every laptop to make sure only a rightful owner gains access to stored contents...

...Investing alone also lets Khosla explore industries VCs have rarely funded in the past. Recently, he has looked at investing in bio refineries, which use sustainable crops or agricultural waste to produce fuel. He has also considered synthetic biology, the creation of new life forms (or alteration of existing life forms) through genetic engineering. He's also interested in fuel cells and solar cells.


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.