Devonshire Capital
Saturday, November 25 2000

New VCs on the block - A new crop of venture capitalists get ready to loosen their purse-strings - and they say they have learnt the lessons of the past

Business Standard - India

In June this year, three Indian executives from US investment bank Goldman Sachs were attending a seminar in San Francisco. Back at their hotel, they got talking and decided to chuck their high-flying jobs to become entrepreneurs.

First, they thought they’d set up a technology company in wireless space. Then they changed their minds: the risks involved with start-ups were too high. So the next best thing was to use their financial expertise to leverage the boom in information technology back home in India.

Not ready to pay $20,000 to a consultant to pull out a corporate name out of his hat, they began playing around with names over a couple of beers. A starting point was the hotel they were staying in – Best Western. That was the beginning of West Bridge Capital, the $140 million venture fund launched a fortnight ago in Mumbai by Sumir Chadha, K P Balaraj and Raj Dugar.

The trio is part of the second wave of venture capitalists (VCs) lapping at Indian shores. Before you ask, they’re not suicidal, considering the casualty rate among Indian dotcoms. No, these VCs are looking at mature opportunities in which to invest. They claim they are the specialists who cherrypick their investments.

In the last couple of months, as many as two dozen venture funds were launched, both by domestic outfits and non-resident Indians. By the end of next month, venture money floating around is likely to touch $1 billion, up from $130 million last year and $50 million in 1998.

Says Rasesh Shah, head of Edelweiss Capital, an angel fund and a fund facilitator for entrepreneurs, "At this moment, there’s about Rs.6500 crore of venture money available here". In fact in November alone, nearly $400 million has been pledged, according to Munesh Khanna, country head, corporate finance of Arthur Andersen. br>

Only three days ago, Ramesh Vangal, erstwhile chif of Pepsi India, kicked off AtIndia, an India-dedicated fund. In January US-based Accordiant Ventures will flag off its $150 million fund. San Jose-based Satwik venture Capital Management has earmarked $10 million. K B Chandrashekar (co-founder Exxodus Communications) and Sridhar Mitta (ex-chief technology officer of Wipro) launched e4en which will invest $300 million over the next three years.

Then there’s Connectcapital’s $75-100 million fund. And Devonshire Capital, which acquired Times Guarantee last month, will begin by investing $35 million which will balloon to $100 million over a period of time. Even established funds like Infinity, Chrysalis, ILFS and Sykblaze Ventures are setting up another fund. And there are many more on the way.

"It is the recognition of the entrepreneurial spirit and India’s global competitiveness in the services business where cash flow financing is hard to come by," says Vishal Nevatia, CEO of GW Capital (launched by General Electric veteran Gary Wendt) which came in early this years with a plan for a $200 million fund. Adds Raj Dugar, a Director of West Bridge, "Venture funds have recognized that the true opportunity in India is its technical assets and they are capitalizing on it."

He should know. As the Hong Kong-based investment banker in the high technology group of Goldman Sachs, Dugar has been involved in some of the high profile tech financing assignment. West Bridge has already identified a $2 million investment in Intercept, a Chennai-based software company. Its investment portfolio will comprise IT-enabled services, networking management and the like.

e4e has similar plans. According to co-founder and chairman K B Chandrashekar, e4e will focus on IT and infrastructure services companies with special focus on network management services, e-business consulting and implementation service and wireless data services.

Satwik Venture Capital, promoted early this year by two NRIs Dinesh Gupta and Bindu Chextal, plans to invest in infrastructure back bone technologies in networking, telecommunications and enabling technologies.

Devonshire Capital is planning to be a specialized boutique. The Indian arm of the Hong Kong-based Devonshire group promoted by a British trio, it will focus on restructuring, mergers and acquisitions (M&A) and placement. As an entry vehicle it acquired Times Guarantee last month for $2 million. "We don’t give advice and walk off. We will put money in small companies and help them restructure and realize their value. We will hold hands till the company is back on its feet and then sell off," say Kush Varma, managing Director of Devonshire.

The entire gamut of the services sector is what GW Capital is looking at. From IT to telecom, media, healthcare, logistics to retailing, the focus is on convergence, according to Nevatia.

US-based Accordiant Ventures, which has invested in Bangalore-based Unimobile, is setting up a $150 million India-centric fund shortly. When the fund was announced earlier, Raj Popli the NRI promoter said that the fund would look at firms operating in wireless Internet security and management and semiconductor spaces.

It isn’t only NRLs that are investing in India. Three months ago, Kotak Mahindra Finance announced a Rs.70-crore venture fund. According to Nandip Vaidya, senior vice president of Kotak Mahindra Finance and head of the fund, they will invest in all the growth areas like Internet, services retailing and media ."We have an open canvas," he says. Even Infinity, promoted by Praveen Gandhi, Saurabh Srivastav and Gaurav Dalmia which launched a Rs. 145-Crore fund in January, is looking at another $75-100 million fund soon.

So how different are all these new funds from those launched barely a year ago? Vastly different. Says Dugar," India is a small market and how attractive can a large part of small market be. So everybody is leveraging on what India has –a knowledge base –and not what it doesn’t have –a market."

For one, the new zeal is defined by large doses of market reality. The first flush of venture capitalists plunged headlong into the global craze for dotcoms ranging from pure content sites to business-to-business (B2B) and business-to-consumer (B2C) destinations. Vying with each other to pick up deals, revenue models were given the go-by as they focused on eyeballs , potential advertising revenues and e-commerce sales. What happened over three years in the US was being replayed in India in six months. Add to that the market meltdown, and the exit route for venture capitalists was blocked.

No wonder then, today, the new lot of fund raisers and suppliers are not in a hurry to tie up deals. Eleven months after they first set foot in India, G W Capital is yet to announce a deal. "We will not invest in more then 12 to 15 companies and that too only in stable enterprises with a track record. Our philosophy is to invest and help build businesses on start-ups for us," says Nevatia. Adds Devonshire’s Verma," We will invest in deals we are involved in."

This cautious approach has also spilt over into their portfolios. As a result, instead of simply focusing on dotcoms like their predecessors, the new funds are more broad based. Even as they are loath to admit, earlier, dotcoms accounted. for 60-70 per cent of their portfolio. Take ICICI ventures which has invested around Rs 150 to160-crore. Of this, more then a dozen ventures are dotcoms, say company insiders. Today they are scrutinizing a larger canvas which talks of technology, IT-enabled services, chip design and convergence.

In other words the venture capitalists are leveraging their overseas contacts to equip Indian enterprises go global. The common goal for these cross border is to make Infosys and Wipros out of small enterprises. " There are not too many India plays. Everybody wants to focus more on India being the back-end and make them global entities. Infosys is Infosys because 80 per cent its revenues come from global operation," say Shah of Edelweiss.

Again, this time around, the venture boys are not bestowing their generosity on start ups. "Everybody is cautious. They are all following a risk-return strategy," says Shah. Adds Dugar, "We are fortunate about our timing as the earlier madness is behind us. "Last year as part of a market phase, most of the venture funds came in at the first stage of funding. The logic being that valuations at the early stage were less, and by the time the venture was ready for a second and third round of funding, valuation would skyrocket."

The wait and watch game is giving them a chance to scrutinize businesses even more stringently before they pump in money. In fact it appears that the new entrants have picked up tips from their predecessors Says Dugar," We’ve learnt not to have a market share approach so we are not doing too many deals. Don’t copy what others are doing."

These learnings are something that even established venture capitalists have imbibed. So much so that many are reorienting their portfolio. Take Infinity for instance. After pumping in Rs. 55 crore in 15 companies which include nearly a dozen dotcoms like brainvisa agency-faqs, coolstartups, expopoint, boardcastindia e-mecklai and indiagames a chastened Infinity is now considering mature enterprises. It will shortly launch another $75-100 million fund.

Says Praveen Gandhi, veteran venture capitalist and director of Infinity, " For a while, after Indiaworld was sold to Satyam, everybody forgot that there was something called building a company. But now there appears to be a reoriented entrepreneurial zeal."

So if earlier Infinity looked at 10 deals a day, it now considers only one deal a day "We will continue to do deals where as promoters we can add value instead of just financing it," he adds.

Chrysalis, set up by Harvard business school friends Raj Kondur and Ashish Dhawan in November 1999 was one of the first India funds to be launched. The $65 million fund has invested in seven properties including baazee.com fabmart and e-gurucool, even as director Kondur says that 80 per cent of his funds are in export-oriented businesses. But shortly the company is said to be launching another $60-70 million fund to look at IT-enabled services. "Our focus is to build some good companies," says Kondur.

In all this, the players are skeptical about the market size. "Eventually, the question is, do we have enough management bandwidth, managers and deals to put all this money into?’ asks Andersen’s Khanna. " There no opportunity for more then $300 million," cautions Shah. But this is not turning off the new poster boys of the Internet age. Dugar says," The risks are lower here with no big break-throughs. But we are playing the cost arbitrage game."

In any case, he adds, they’re here to stay. “We are here for the long term and the market has to evolve."

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