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India a big draw for venture capitalists

By INDRAJIT BASU, UPI Business Correspondent

CALCUTTA, India, Nov. 17 (UPI) -- What a difference a year makes! If you had invited a venture capitalist from the United States to India in November 2002, he would have taken you to his office and put you through the coffee-and-sympathy routine -- coffee from him, sympathy from you. With U.S. venture capitaliusts having burnt their fingers following the 2000 dotcom bust, while most venture capitalists and private equity funds were trying to keep their noses above water avoiding newer commitments and Indian entrepreneurs as if they were drunken visitors, it was then almost impossible to convince a U.S.-based venture capitalist then to invest in India.

However, more than 20 of the world's leading venture capital players landed in India on November 12 to attend a day-long session with Indian venture capitalists and other Indian companies in Bombay, and to scout for investment opportunities. Together, these foreign venture capitalists handle funds over $30 billion, said industry sources, and they included names like Battery Ventures, Sequoia Capital and Bessemer, who were first time visitors to the country.

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Adding to the momentum was the $4 billion Silicon Valley Bank, which is planning to set up an office in India to support its clients to set up operations in India apart from investing here.

Indeed, attracted by an upswing in India 's economic growth -- gross domestic product growth is estimated to rebound in 2004 to as high as 7 percent, and a smartly reviving information technology industry -- particularly the offshore and back office sectors -- venture capital firms are increasing investments in Asia 's third-largest economy. "It is great news that for the first time, some of the leading investors based in the U.S. have come to India", said Saurabh Srivastava, chairman, India Venture Capital Association -- IVCA.

Although the extent of the recent vistors' interest in monetary terms has not yet been made public, according to IVCA, India received $550 million in venture capital funding in 78 companies in 2002, second only to South Korea's $906 million in Asia outside of Japan. Venture capital investments in the six months ending September 2003 are said to have touched $400 million and are expected to cross the $650 million mark for the year ending March 2004.

But there is another story behind the U.S.-based venture capitalists' sudden interest. According to PricewaterhouseCoopers' Global Private Equity 2002, the increase in venture capital inflow to India has been more than for other Asia Pacific economies.

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"Companies having a pan Asian presence have diverted considerable amounts from other South Asian countries to India. With some companies, around 20 per cent of the allocation for South-east Asia has been sent to India," says the report. And, this is expected to go up even further. "With interest rates low, the investment climate buoyant, expectations high and the stock market rallying, private placement is coming in handy," said Prithvi Haldea, managing director, Delhi-based, PRIME Database.

But most importantly, having burnt their fingers in the dotcom bust, venture capitalists are a lot smarter these days. Across the board, says venture capitalist Pravin Gandhi, venture capitalists are laying down stringent timelines for return on investments. While everyone earlier concentrated in investing in early-stage companies at abnormal valuations, today they look for revenue visibility. "VCs", said an IVCA official, "now want to see a customer list with reputed names on it. Valuations have become more realistic and historical methods of determining a company's value, like the company's critical achievements, have come back into the picture."

"Private equity investors have finally realized where they can go wrong," says John Levack, managing director, Electra Asia Partners. "So, having completed their learning they are now ready to take advantage of India's burgeoning prospects."

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Indian entrepreneurs too have turned efficient and wiser forced by over two of capital scarcity. "Most promoters now realize the need for private equity and have learnt to leave value on the table," says Renuka Ramnath, CEO of the $150-million ICICI Venture Funds.

Although one can find the willingness to invest once again, the most prevalent deals are centered on back-office outsourcing and non-IT sectors. However, sources say that venture capitalists are also looking at software services that either already have significant revenue traction or come with impeccable corporate parentage, and therefore, guarantee higher returns at much lesser risk.

Venture capital funds have not lost their appetite for technology. IVCA says many Indian and U.S.-based venture capitalists have approached Intel Capital, which decided to continue to focus on early-stage technology companies, and expressed interest in investing in tech and product companies.

In non-IT sectors, much of the inflow is being seen in fast moving consumer goods, media and entertainment. According to reports collated by TSJ Media, a VC intelligence outfit, as much as $180 million was invested in the period from July to September 2003 in non-IT sectors like food and media. And, according to Pravin Gandhi, "There is also serious money in sectors like pharmaceuticals and retail."

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Nonetheless, the VC scene is not a fairy tale just yet for Indian entrepreneurs or capital seekers. "India is still not the most attractive market point for a large number of investors, and compared to global standards, VC inflows are still puny," said Sanjay Anandram of Jumpstartup, a VC outfit.

Moreover, while private equity firms admit that they are on their way to make greater profits coming out of a recession, "it's too early to say that happy days are here again," said Haldea of Prime.

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