What is venture capital’s new killer investment theme in India?
If you’ve taken a close look at new investments in start-ups and early-stage companies in the first six months of the year, you will find quite a variety of themes. Top of the list are Internet-led service providers—DVD rentals, airline ticketing, localized search, social networking and so on. Next come the mobile-centric plays, which offer services similar to the Internet-led segment and really falls within the converged Internet-mobile space. Then follow the odd lot—software applications, diagnostic clinics and restaurant chains. And bringing up the rear are next gen outsourcing firms in areas such as equity research and paralegal work.
The overlying theme, barring exceptions such as restaurant chains and diagnostic clinics, remain technology or rather, technology-enabled businesses. That does not make technology the killer theme. And though it may appear so, neither is it the Internet. It is something more basic—the rising, wallet-happy, urban Indian consumer. The U-turn from the previous decade of venture capital investing is unmistakable. That decade was dominated by business process outsourcing (BPO) whose end consumer was primarily in the US. The top five venture capitalists (VCs) investing in young Indian firms today are scouting businesses that have a clear plan to capture a share of the Indian consumer’s wallet. It could be a business model that originated in the US, but if you have not been able to adapt it to serve the Indian consumer, cannot demonstrate that your product or service has a substantial market here, you won’t get those greenbacks.
There’s also a corelation between BPO and the new wave of investments. One VC in Bangalore calls it “the flip side of outsourcing”. BPO firms have created jobs for more than 400,000 people in this country and most of them are in the 25-35 age group—upwardly mobile and big spenders. The stock market has been a close ally. Businesses that target this lot are most likely to be backed by VCs. In recent months, even Silicon Valley’s top-rung VCs, which fled India in the aftermath of the 2000-01 Internet bust, have trooped back for a share of the booty.
Now why is it important to understand venture capital’s new theme? In the overall private equity (PE) funding cycle, venture capital, which is a sub-set of PE, performs the most critical function. It seeds the businesses of the future. In BPO firms, this exercise started literally with three start-ups— Spectramind, Daksh eServices and CustomersAsset. Three VCs took an early call—Chrysalis Capital (now ChrysCapital), eVentures India and CDC Capital Partners (now Actis). The $16 million (Rs72 crore then) collectively invested by them somewhere in 2000 spawned a $8 billion industry. Of course, captive BPOs run by General Electric Co. and American Express did play a part, but the birth of third-party start-ups is what spurred the phenomenal growth of the sector.
Funding the next wave of start-ups has just taken off. For an entrepreneur, it’s a great time to start a business. Just be very sure of your prospective VC’s sweet spot before you hawk that business plan.
Snigdha Sengupta is Mint’s resident expert on private equity and venture capital. Comments and questions are welcome at venturematters@ livemint.com