Inside India’s VC Boom
Introducing, Shailaja Neelakantan, our India correspondent. A seasoned journalist, Shailaja is an old friend, and we worked together at Forbes, where she was a staff reporter.
She did stints for Fox News and Dow Jones. She will write mostly about start-ups, venture capital, telecom and technology scene in India and other parts of South Asia. She is a fantastic writer, and you will find that outHer coverage will dovetails with my belief that broadband has freed innovation from geographic limitations. Hopefully we can add more voices from our broadband planet. Stay tuned, and if you get a chance, say hello. Meanwhile, here is a great overview of the Indian VC market. – Om!
With a booming mobile phone user base, a steady rise in the number of Internet users, high capital efficiency and a big opportunity for exits, India is seeing the return of venture capital –in the real sense of the word — through funds and via cross-border investments. After a lull between 2000 and 2004, the prospects for Indian start-ups are looking good again. Last year, India saw venture capital investments worth $482 million across 52 deals, and this year until June, there have already been investments worth $240 million across as many as 49 deals, according to Venture Intelligence, a research service focused on private equity and venture capital activity in India. (These numbers do not include private equity deals.)
VC firms are realizing they need to invest in companies that are low on investment and high on capital efficiency. “Both those parameters work in India where even $10 million goes a long way. So they are thinking, ‘Why not just invest directly in India?’ “says Arun Natarajan, founder and chief executive of Venture Intelligence.
And unlike in the late 1990s when venture capital bets in India were all over the place, this time around, many bets are in niche emerging sectors — consumer Internet companies like classified advertisements, and online travel, mobile and mobile value-added services companies, online and mobile gaming companies and telecom (including wireless) technology solutions companies.
There are other reasons as well. Asian Private Equity News recently notes that India has raised four times as many funds as China. In a newsletter they recently wrote:
In China, which is preparing to enact stricter regulations for private equity and venture capital activity, the government is in the early stages of completely re-organizing its approach and control over foreign private equity investments in this country. ….. In India, on the other hand, the government has put out the “open for business” sign in large print as the government voted to approve KKR’s half-billion dollar acquisition of Flextronics’ software development arm in India.
According to Venture Intelligence, for the first six months of this year, 23 percent, that is nearly $55 million of venture capital was invested in online and mobile services companies, $44 million was invested in Internet-based services companies and $10 million was in mobile value-added services companies.
Sequoia Capital has started its India Growth Fund I for which it has raised $383 million. It plans to invest in the consumer services segment, which includes the Internet and mobile value-added services. Sequoia recently merged with India’s WestBridge Capital Partners. Matrix Partners’ new $150 million India fund plans to invest in the mobile technology and Internet space, among others. Helion Venture Partners has started a $140 million India fund to invest in, among other things, online gaming and ticket booking, IP-based products and mobile and Internet services. New Enterprise Associates has started NEA IndoUS Ventures, reportedly a $105 million venture fund, with Vinod Dham (yes, that one) as a partner.
“The mobile is India’s PC,” as Ram Shriram of Sherpalo Ventures has said at several forums. There are currently a little over 100 million mobile subscribers in India and that number is expected to rise to a whopping 348 million by the end of 2010. “The local market is world scale, so a company based in India and targeting the Indian market is beginning to be viewed as a great opportunity. Venture capitalists are now seeing India not just as a place to outsource to,” says Natarajan.
To wit, Sherpalo Ventures and Kleiner Perkins Caufield & Byers have invested $5 million in Paymate, a wireless technology solutions provider in mobile commerce. Sequoia India and Intel Capital have invested in Mauj Telecom, and Pequot Ventures has pumped in $10 million into IMImobile, an enabler of mobile content services. Helion Venture Partners has made its first investment of $2.2 million in JiGrahak Mobility Solutions, that allows users to make payments and buy things using their mobile phones.
But the Indian mobile market is seeing stagnating if not declining ARPU, so it remains to be seen if the country’s mobile subscribers will take to value added services in a big way. In addition, currently, revenue sharing is so skewed in favor of mobile operators that it is hard to figure how value added services companies will make money. That scenario could change with wireless technology that enables these service providers to bypass operators.
The consumer Internet space seems a surer bet at this point. VC firms are looking for where the Internet has had disruptive effects (in the US) and that has happened in travel, and classified advertisements. “So they bet it will happen in India and China too. It’s just a matter of time,” says Natarajan, adding, “They went to China first and had some successes and now they are coming to India.” So, study what’s in the U.S., take it to China and then to India!
And that’s where consumer Internet companies come in. India has far fewer Internet users –35 million — than mobile subscribers, but the former are growing at 50 percent a year. Combine that statistic with the fact there is a tourism boom, a real estate boom and a jobs boom and what you have is a huge opportunity in online consumer companies.
Recent investments in Indian online travel companies include Softbank Asia Infrastructure Fund’s $10 million in Makemytrip.com, Sequoia India’s $10 million in Travelguru, and Norwest Venture Partners, Reliance Capital and Television 18’s $5 million in Yatra Online. Kleiner Perkins and Sherpalo ventures have invested around $4 million in InfoEgde, a company that owns jobs portal Naukri.com (jobs portal) and property portal 99acres.com. In June, BillDesk, an Indian online payments company, received $7.5 million from Clearstone Venture Partners and India’s largest public sector bank, State Bank of India.
Oh and let’s not forget that many Indians still prefer to get married the traditional arranged way so matrimonial sites with advertisements for prospective brides and grooms are also big money spinners. Sequoia India has invested $8 million in matrimonial site shaadi.com and Canaan Partners and Yahoo followed with an investment of $8.6 million in the Bharat Matrimony Group that also owns clickjobs.com, indiaautomobile.com and indiaproperty.com.
All these companies should thank, in part, India’s best-known success story- outsourcing. With so many companies outsourcing back-office functions to India, many potential investors have already tested the waters and think highly of India’s technology development skills and cost efficiency. “So much so that Sequoia is blunt about it. They say that if any company they are thinking of investing in (in the U.S.) does not have more India then China, and an R &D center in India, they don’t invest,” says Natarajan.
Don’t forget Intel’s US$250m India Technology Fund!
Indian mobile numbers are, well, dubious to say the least.
Even the consumer space on the net front is not all that developed. Very few of the new players have the ability to make the business case for a service or an application, the best they come up with is something like “hey, look this is cool” and that does not cut much ice with the VCs. So the VCs end up doing the same 10 firms, the Shaadis, the Naukris and their ilk, but the imagination is really lacking from the developer/entrepreneur perspective.
BTW, I assume this is Shai of Delhibelly fame. If so, nice to see you here.
While the numbers are murky at best, as you describe them, I think they seem to be a tad more transparent than a lot of other countries.
I agree with you – lack of imagination on part of the VCs is quite clear. Replicate what has worked in the US is a good philosophy but who knows. Sequoia or one of them did a deal with Times of India, aka Indiatimes instead of backing something new.
I think it is interesting to note that folks who are investing in retail and infrastructure are going to do much better in the long run.
Om,
It is not really about the transparency, but about actual, active numbers. People in cellcos happily admit to the numbers being fudged, in a manner of speaking. But it is not a market where you can push premium plays a lot. At the lower end, they are already fighting like street dogs for the half paisa margin and even with the diabetically-charged deals they come up with, explosive growth quarter-on-quarter on actual numbers is a tough ask.
As as a result they keep on the lookout for things like Hello Tunes. Honestly, I should not be complaining much, since the rates are rock bottom, but this kind of thing does not last forever, especially when you are basically taking money out of one market segment to underwrite another. I’ve been meeting vendors and providers on and off in the past six months and I’ve not met a single company that is looking at things beyond basic plumbing or providing ring tones and other similar bullpoop as value added services. Everywhere else location-based services and GIS is rocketing off, there is nothing of the sort here. All you get is a shrug when you ask someone.
I don’t know if the Sequoia/WestBridge money came through at Indiatimes, at least not in the time that I worked there when speculation regarding the same was rife and if my memory serves me right, the moolah that eventually went in was a fraction of what was being discussed, which was said to have eventually led to the top dudes walking the plank. That company has the unique distinction of having the most potential (even globally) and doing nothing with it, but that’s a story fit for a book for someone to write someday.
The lack of imagination is more on the part of the companies here, the VCs are pretty much in the same mold across the board, all they ask is: “What’s your growth rate for this quarter? Operating costs/margins? How many more users do you expect to acquire in the coming quarter and in % points the quarter after that?” Most operations, other than the Shaadis and Naukris won’t have answers to most of those questions and since those two types have a fairly robust business/model already in place, the VCs put money into them.
At the same time, I am yet to run into/hear of a VC who is willing to stay invested with you for the first couple of years, knowing that you’d break the surface in the second/third year. For that matter, I am yet to see a genuine start up who shows enough promise to just acquire an active user base in the first two years and then make good money in the third. We are very much stuck in the use your users just as page view fodder mentality.
Nice commentary on recent developments in the Indian VC scenario. I represent Canaan Partners in India and we are very excited about our investment in Bharatmatrimony.
I myself have had the opportunity to build and exit an internet business in India (JobsAhead.com acquired by Monster.com). Having been in both positions, I think that the relative lack of “imagination” of VCs is good for the industry. Noone, including entrepreneurs, should be bargaining for more risk than they can bite (or is justified by returns). Concept arbitrage models offer an immediate opportunity, as do midstage internet businesses. The success (hopefully) of VCs on these models will only reinforce the confidence in India as a destination for venture money. Another imaginative period like the dotcom bubble in 1999-2000 will lead us where we know it will.
Again, I do insist that the lack of imagination is only “relative”. There are seed stage businesses that are unique to the Indian environment being nurtured. And most of the uniqueness has lied in execution rather than in the high level concept. A mobile payment solution in a cash driven economy is potentially different from one in a card economy (even though at a high level, both are mobile payment solutions); a search engine is very different; a DVD rental business may look very different in an environment where piracy is the dominant form of usage.
As all of you, we look forward to sustainability of Indian venture industry, and that is contingent on demonstrating success.
Most of the VC investment in India seems to be narrow minded. All the VC’s seems to be interested in pumping in money into firms like Naukri, Shaadi or Bharat Matrimony. Though these are good business models, technologically they are not at all innovative. Another point to be noted here is, most of these portals are backed by big media houses or they are becoming one. I doubt innovation flows from top down unless you are a Yahoo or Google. This is very unlike US. VC in US seems to like creative techies or rather innovations. It’s one of the reason why diggs, del.icio.us, linkedins, 37signals, flickrs are almost impossible to find in India. Unless VC firms back techies India will continue to be a outsourcing hub rather than an innovation hub. Outsourcing was 1.0 but innovation is 2.0. That’s the growth path India should look at.
INDIA IS IN BOOM PERIOD BUT NOT IN ALL SECTORS CERTAIN SECTORS NEED TO BE DEVELOP
Dears,
The comments seem to nail the VCs on thier imagination – the lack of it. But its their business bottomline – the OM of thier existence – to be profitable themselves first, to develop profitable companies next and then develop the economy of the country thus. Do not expect the VCs who have come to India to throw money on “innovation” or “ideas”. They have seen “ideas as ten-a-penny”, as someone said.
If you want to take on the trend really, be an entrepreneur and take on. It is the onus of the Indian entrepreneur to showcase innovative solutions to the problems that may exist in the indian marketplace – and simultaneously build the confidence in the VCs that they can make it work financially – atleast as good as their money can work in a shaadi or a naukri. period.
Same old corruption and sleazy business minds have tarnished the online business boom in India. Most of these big name matrimonial sites – bharatmatrimony.com, shaadi.com “steal” profiles from community oriented non-profit traditional marriage bureaus like tejaswini. It is disgusting to see such dirty business practices from bharatmatrimony.com and shaadi.com who claim to have trusted and verified profiles. Most of the traditional marriage bureau owners who are middle aged and have built their business through trust and sincerity have been cheated and robbed of profiles by these online matrimonial sites.
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