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Venture capital investors take five-year bet on product plays

Venture capital investors take five-year bet on product plays
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First Published: Tue, Sep 18 2007. 02 10 AM IST

Updated: Tue, Sep 18 2007. 02 10 AM IST
Venture capital investors globally, especially those in the technology space, like to invest in product companies. The risks are higher compared with services companies, but a successful product offers greater opportunities to scale up and, therefore, much higher returns. In India, investor play in product companies has been muted so far. However, several venture capitalists (VC) now believe that the market will gain momentum over the next four to five years, and are re-examining investment opportunities in the space.
Promod Haque, Managing partner, Norwest Venture Partners
“Product innovation is in its infancy, but will accelerate over the next few years. It is a new area of interest for us, after consumer Internet and services sectors,” says Promod Haque, managing partner, Norwest Venture Partners. The firm recently set up office in India, after investing out of the US for the last three years. Firms such as Helion Venture Partners, Nexus India Capital, Intel Capital, Sierra Ventures, NEA-IndoUS Ventures and Peepul Capital Llc. are all looking to invest in technology product companies.
But before we go further, let us take a look at what constitutes a product company, from an investor’s point of view.
VCs differ on what they define as a product company. Earlier, the simplistic definition of a technology product was any technology that could be packaged in a box, such as pagers or network switches. With the introduction of software products and the rise of technology intensive online companies, the lines have blurred. However, by rule of thumb, most VCs look for products that are heavy on intellectual property claim and can be potentially disruptive.
Unlike the services sector, which grew by catering to offshore customers, the product space needs a local market to flourish. This is absent today, but VCs believe a large local market for technology products will develop over the next few years, for a number of reasons. First, as companies here grow bigger and salaries escalate, they will have to deploy technology aggressively to keep productivity gains high. Second, increased foreign competition will raise the bar on technology for all players. “When foreign companies come in with their latest technological expertise, Indian enterprises too will become early adopters of technology. Product innovation becomes easier when the market exists here,” says Haque.
A third reason why the Indian market is conducive for product companies is cost-efficient research and development, compared with the US. The cost of product testing is lower, which makes operating losses smaller. “A product start-up in India could do with $1 million (about Rs4.05 crore) what its counterpart in the US can do with $5 million,” says Nexus India Capital director Sandeep Singhal.
Ashish Gupta, managing director, Helion Venture Partners
The transition, though slow, is taking place. “There still aren’t enough in number, but the quality of product companies is getting better,” says Ashish Gupta, managing director, Helion Venture Partners. Gupta, who was venture partner with early-stage Silicon Valley fund Woodside Venture prior to Helion, says he has been looking for technology product companies to invest in for seven years.
Since India is still largely perceived as a services hub, entrepreneurship has also grown along the services model. “Most product development here is done by large multinationals,” says Naren Gupta, managing director, Nexus India Capital.
The few product companies that have been funded, such as Bangalore-based Tejas Networks and the IIT Kharagpur-incubated Minekey Inc., cater largely to the US market. But more product companies are beginning to emerge, helped along by business plan showcases and events, such as Proto.in. Some of the VCs who are investing in the Indian market now have a strong product focus back home in the US, but have broadened their focus here to outsourced services and logistics. The focus on services allows them to bid their time till product opportunities pick up and understand the complexities of the Indian market. Even Intel Capital, the venture capital arm of chip maker Intel Corp., has made a majority of its India investments in telecom value-added services, software and media solutions companies.
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First Published: Tue, Sep 18 2007. 02 10 AM IST