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Sunday, February 19, 2006

Venture Investment In India - Slow Progress

India is certainly in the centerstage of attention as the recently concluded - World Economic Forum annual meet and Nasscom meets showed. If you can't beat 'em, join 'em and figure out how to take advantage of it - That says the Indiana Business Journal reporter summarising the sentiment of venture capitalists like Hoosier's attitude towars investing in India and India based firms. As the visiting investors see it, India after decades of tepid growth under the shelter of a formerly protectionist government, is now starting to embrace entrepreneurship.Some investors believe India's own high-tech startups are finally ripe to produce explosive returns.American executives are drawn to India by the chance to locate business functions in a nation whose talent is reliable and cheap, whose commercial laws are based on British tradition, and whose business language is the queen's English.India's biggest question marks remain its marginal infrastructure and its lack of reliable middle management.India has clear advantages over China, its main competitor. There, U.S. executives have to bridge a language barrier. And in China, intellectual property protections are spotty. That's critical when a company is writing proprietary software or researching new drugs. David Kerr, part of the Indian contingent finds that in the next two decades, incomes will begin to rise and India will create another market the size of the U.S, and highlights the need to establish in a market in the nascent stages of its emergence, as it creates incredible opportunities. The current state is that silicon valley venture capitalists want to do deals in the millions. As the group sees it, most Indian entrepreneurs aren't ready for that. They need investments in the thousands. (Am not sure about this - I can point to a few seeking early stage angel investments running into millions). The visting group while noticing infrastructural probelms, also notes the ethos of circumventing such difficulties to carry on. While some investments are beginning to happen, the ground reality very much echoes what we covered earlier here. Vast majority of venture money tends to go into existing and later-stage businesses. There is little or no real VC money available in India. Companies that are receiving money in India are either spin outs from existing large businesses, captive units or second tier outsourcing providers that may lack the size or scale to compete with IT service giants and want the private equity money to grow through rollup and acquisitions. In the US, venture money goes into early stage, pre-product or pre-revenue companies , while in India, a majority of the private equity is going into late stage businesses. A friend upon seeing this post asked me when to expect the likes of next Google to come out of India. I had no answer to provide. Truth is that in general most indian enterprises are hardly innovation chasing entities, and the framework for VC entry & exits are poorly defined. Coupled with limited VC activity in the past and archaic regulations – these make it a tougher breeding ground for enterprises like that of what is seen in the valley. Red Herring writes that early-stage funding in India has been the bane of would-be entrepreneurs, with starry-eyed young men and women rejoining the ranks of the employed after failing to raise any capital. The recent economic boom in India has resulted in increased entrepreneurial opportunities for people with new, innovative product ideas, or disruptive business and delivery models. It’s a climate where startups are springing up in every area. The fear is they will die if they are not supported early enough. For all the interest, mindshare, the actual venture flow is pretty limited into the system, while interests in investing are clearly multiplying. Seen from an indian perspective, the talent levels inside India continue to be very high – all it requires is a vibrant ecosystem - but not many recognise the issue there - talking india's growth for granted may be the biggest mistake - the country can't afford it. I also want to point out that without an effective, continual presence in India the VC's and angel investors themselves would be running the risk of shooting themselves on the foot - while visits can give a flavour, its realtime presence that could help appreciate things better and adapt - for both sides. Also the world needs to understand that Bangalore is not the be-all & end-all of Indian IT.Too many US investors think that there are only set ways of doing business - their way - NO, doing business in Asia is different - the call is to recognise this and take appropriate steps. The recently concluded Nasscom leadership summit unfortunatley did not provide the focus needed at that level - hopefully other would - thats what the Indian experiment has shown thus far - success emerges from the edges of the instituition.

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