Global venture capital firm Norwest Venture Partners managing partner Promod Haque bet on India’s technology companies in 2001, at a time when the country was vastly unknown to the majority of the US Silicon Valley’s venture capital community. Haque, along with members of his team, started visiting India two or three times a year to test the Palo Alto-based firm’s initial investment thesis for this market—Indo-US cross border technology start-ups. The US market, at the time, was just going into a recession, and building start-ups in the Valley had become an expensive proposition. Haque saw the potential to leverage India’s low-cost and skilled technology pool as back-end support for Silicon Valley start-ups.
Since then, Norwest has invested $300 million (Rs1,218 crore) in 22 cross-border technology companies and five pure Indian companies—Sulekha.com, Yatra.com, Mobile2win, Adventity and Persistent Systems. Having established a track record and presence that has led more than 10 Valley-based firms to troop into the country in the last 12 months, Haque is now ready to put the second phase of Norwest’s India game plan into play. It is moving managing director Niren Shah from the Valley to Mumbai, which will be its India headquarters. Shah, who moves in January, will be flanked by two more managing directors. The decision to set up an on-ground team, after nearly five years of offshore investing, follows the firm’s stated purpose to drive up direct investments in India from the $650 million NVP X fund, which was raised in 2006. It invests $10-15 million over the life of a company. About 10% of NVP’s current portfolio of 60 companies are now in India and this will grow significantly, promises Haque, who spoke to Mint about how he wants to play round 2 in India. Edited excerpts:
How much of NVP X has been deployed? How much will be invested here?
About $100 million has been deployed globally. The US is obviously very large. If you look at dollars, India is No 2 and Israel is pretty close.
What sectors are you looking at?
We see three or four different kinds of opportunities in India. One is the consumer Internet space in general and includes mobile Internet. We have two or
three bets in that space such as Yatra.com and Sulekha. The reason why it continues to be an interesting sector is the mobile aspect to it. Mobile Internet will be bigger here than broadband, PC-based Internet. The second area of interest is what we call second generation services companies, not basic IT-enabled services because we believe that space is taken. But companies that are more in the area of product development, such as Persistent Systems, and KPOs (knowledge process outsourcing).
India Round 2: Norwest Venture’s managing partner Promod Haque says product innovation in India is still in its infancy
BPOs (business process outsourcing), we believe, are now commoditized and we’re not interested. The revenue per employee is very low. KPOs bring in fairly sophisticated talent to address basic outsourcing issues. The third area of interest, which we believe is fairly new, is the product area. We believe that product innovation is taking place and will accelerate over a period of time, but is still in its infancy. Those opportunities will predominantly be in the software and mobile space. Less so, probably, in the core hardware space because India still lacks manufacturing capabilities.
Semiconductor deals naturally gravitate towards China. But, I think we’ll see a lot of opportunities in wireless infrastructure and software. The fourth area, where we haven’t done anything yet, is related to infrastructure. This is away from our core sectors, but interesting because of the growth of the economy here.
How will you spread deals among these four sectors? How will the portfolio mix change in a few years?
We’re investing in the first three sectors mentioned earlier. Most of it has been in the first two, consumer Internet and second-generation services companies. We have been looking at the third area and are now starting to look at the fourth. The portfolio mix changes as the economies change. When I joined the firm 19 years ago, we had a very vibrant retail and pharma practice in the US. We haven’t done that in the last 10 years. But India opens up some interesting opportunities – healthcare and even healthcare and pharma outsourcing. We’ll look at them on an opportunistic basis, but for that we’ll have to acquire relevant talent. It’s hard to project what the portfolio is going to look like in future.
If you look at our global portfolio five years ago, the ratio was very different. Today, there are quite a few consumer Internet companies, less of telecom infrastructure equipment companies. But that is changing now. Telco infrastructure in US and Europe is getting very stressed and is in need of upgrades. So we’re investing more in telco infrastructure companies now than we did five years ago. Software is a little different today. Five years ago, we had a lot of application software. Now, the real opportunity is in the small and medium enterprise business.
Several venture capital investors, including Norwest, have looked at the product space here for a while. How promising is it?
I have a thesis on that. Today we have around 20 companies that are US-based, doing some element of product development in India, either a little or all the way. We call them cross-border companies. The CEO, marketing teams and initial product architecture teams are in the US while product delivery is done from India. The obvious question that comes up is: when will India get to a point where even the initial team is based here. There are a few impediments to that issue. First, let me explain what kinds of product companies we’re interested in. We’re not interested in companies that want to replicate something at a cheaper cost. You can’t build large companies that way. We’re interested in finding disruptive opportunities. One of the things we’ve learnt the hard way over many years of investing in product companies in the US is that, companies fail for a variety of reasons. The issue isn’t about building the product. It is building the right product. Sometimes engineers build a product that nobody wants. That’s the problem with setting up product companies in India today – the early adopters of technology are 10,000 miles away. Customer intimacy becomes a problem. Product development skills are available in India today but not product management skills. The reason for that is customers are too far away. You need to set up a front office in the US and empower those people. So you might as well have a cross-border company.
Do you see this changing soon? What factors will drive the change?
I think the picture will change slowly over the next four to five years. In some ways, the story is not dissimilar to what happened in the US. Twenty years ago when wages started rising rapidly, companies began to use technology efficiently and very aggressively to improve productivity. Companies India will face the same escalation in salaries and will have to deploy technology so that productivity stays ahead. When that happens, this will become a larger market for products. The second factor is that as the market opens up more, Indian companies will have to compete with foreign companies. Foreign companies will come in with their latest and greatest technological expertise. Case in point – Reliance Retail. They will face competition from Bharti Retail, which is aligned with Walmart. When Walmart comes in with the back-office, they will have the latest data warehousing and analytics capabilities. Now, if Reliance is going to succeed, and I believe they will, they will have to use the same technology. So, Reliance will become an early adopter of technology. As more Indian enterprises become early adopters of technology, product innovation will become easier. Some of that is already happening in the wireless sector. Our goal is to lay the groundwork and figure out what kinds of technology is more likely to get deployed here.
How do view the mobile wireless opportunity here?
India is growing at 5 million subscribers a month, which has mind-boggling issues. The larger players, about three or four of them, will be handling 100 million subscribers very soon. No one in the history of mobile phones has managed 100 million subscribers on a system. The question is, what platforms are available that can handle 100 million subscribers? There aren’t any. You can’t draw upon the expertise of Verizon or NTT Docomo. How are we going to manage seamless roaming, billing systems and so on? Scalability of platforms becomes a huge opportunity. Innovation in the wireless space here, such as billing systems and provisioning systems will be a big area for us.
How many people do you plan to have on the ground here?
Niran (Shah) is our first hire. We’re looking to add two more managing directors, and associates and so on. Niran will look at consumer Internet, media and mobile investments.
What percentage of your current investment portfolio is in India?
The active portfolio now is about 60-70 companies. Of this, India would be about 10 percent. And this will grow, as we add more people here.
Will your investing style change as well? Will you (Haque) continue to be as hands-on in India?
I’ll stay on the board of companies that I’m on. But as we add people here, the percentage of portfolio companies will probably grow in India. By and large, we’ve done some early-stage and some mid-stage deals. We’ve also done a few late-stage deals. In fact, we believe we’re pretty well equipped to do the lower end of the private equity market. That requires more capacity. We’ve done it selectively in the US.
Are there specific situations you will look for PE-type deals?
Yeah, situations that make a lot of money (smiles). Usually, they would be in our domain. Sometimes, there might be other private equity players involved, but they would bring us in because of our expertise and understanding in changing trends and new technologies. We’re looking at a fairly large investment in the US right now where there is a private equity player involved. But we have relationships with customers valuable to the company, so they want us to come in. Either they need to do acquisitions of smaller companies or they need to be on top of changing trends, so they want to bring in someone to help them.