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Firms smell business opportunity in an easy ride for commuters

Deepti Chaudhary — Mon, 23 Nov 2009 16:06:00 GMT

Bangalore: It takes Yamini S. at least an hour to reach office, a telecom company that’s less than 6km away. She spends half this time haggling with autorickshaw drivers. “There is not a single day when I don’t pray that there was some way I could just get an auto and hop into it without arguments,” the 26-year-old said.

Cycling through: V. Ramesh, founder-CEO of Ecomove Solutions. Abhijit Bhatlekar / Mint

There are 86,000 autos plying in Bangalore, but they are not easy to hire, with drivers sometimes asking for a premium on the fare or just simply refusing to go to the desired destination.

This spelt a business opportunity for Smart Commuting Services Pvt. Ltd, which started a call-an-auto service called Easy Auto on 15 October. The firm has 51 autos equipped with GPS (global positioning system), making it easy for the nearest driver to reach a commuter within 10-15 minutes.

“The idea is to offer an auto service to a commuter in an easy, hassle-free manner, with no extra charges,” said chief executive Padmasree H. Sundaram. Easy Auto installs a digital panel on all autos signing up with the firm and earns money by displaying advertisements on these panels. In return, the auto driver gets a monthy wage. Sundaram declined to specify the sum.

Smart Commuting plans to have 250 autos on its rolls by January and intends to launch the service in New Delhi, Chennai and Hyderabad within six months. It is now looking at raising capital from institutional investors.

Experts say that in India, where commuting services are not efficient enough, building businesses around these could be a sure way of gaining traction.

“Sky is the limit for any service that touches the day-to-day life of a customer,” said Sanjay Anandaram, founding partner, JumpStartUp Venture Fund. “While Indians are service minded, the current mechanisms for providing services are highly inefficient.”

Smart Commuting is not alone in providing such services. Thane, Maharashtra-based Ecomove Solutions Pvt. Ltd will launch the first-of-its-kind bicycle service in the city and Mumbai on 1 January. The firm plans to provide an eco-friendly and cost-efficient alternative mode of transport for short commutes by setting up a network of bicycle pick-up and drop points. It has finalized three such locations in Thane, each with parking space for 50 bicycles.

“On an average, from a railway station like Thane, it takes 40-45 minutes to get an autorickshaw for a distance of 4-5km. So much time is wasted in waiting and bargaining with the driver,” said chief executive V. Ramesh. “With our service, it would take a commuter 20 minutes to reach home.”

This firm is also looking for funding of Rs1 crore. It intends to launch the service in Pune, Bangalore, Chennai and New Delhi in six-eight months.

In New Delhi, two Delhi University graduates have started a call-a-chauffeur service called Home Safe. Within 45 minutes of making a call, a chauffeur will be at your door, promises the firm SNI Hire A Driver Pvt. Ltd. Started in September, the firm has so far attended to 60 client requests.

“We have a fleet of chauffeurs across Delhi who have been trained and tested by us. They are well-versed with all kinds of car models,” said co-founder Shiven Madan. SNI is planning to get female chauffeurs for women commuters.

Though this is a large space, experts said scalability would be a concern for the transportation firms, with their services available in single cities.

“Sustainability has to be seen as there is a fair mix of commuting through vehicles in cities,” said Abhaya Agarwal, senior professional, infrastructure practice, Ernst and Young India. “How much can an individual model scale up remains to be seen.”

Investors say that while these services will attract customers, these do not have high entry barriers and can be replicated easily. “I don’t know how need for local transport can lead to the formation of a Makemytrip.com sort of a company,” said Vishal Sharma, chief executive, Tuscan Ventures, a venture capital fund.

Companies are now moving to a single-fund structure

Madhav A. Chanchani — Mon, 23 Nov 2009 16:05:00 GMT

New Delhi: California-based venture capital (VC) firm Canaan Partners, which has so far focused on early-stage technology deals in India, is now open to early- to mid-stage deals in microfinance, clean technology and healthcare.

Canaan, which raised its eighth fund at $650 million last year (Rs3,029 crore now), plans to invest 20% of it in India.

New focus: Mittal (left) and Kamra analyse the latest trends. Hemant Mishra / Mint

“A lot of that capital is still left,” said Canaan’s Menlo Park-based general partner Deepak Kamra. Kamra who started Canaan’s India practice in 2001, and Alok Mittal, Canaan’s India office head, spoke about the trend towards a single-fund structure. Edited excerpts from an interview:

What is the sentiment about venture investments in Silicon Valley ?

Kamra: The technology industry has recovered faster than most industries at Wall Street. At Sand Hill Road (an area in Menlo Park, California, which has a large concentration of VC firms), you can really see that change.

With regard to financing, anything related to social media, gaming, applications on Facebook, there are signs of recovery. The mood is pretty good and sectors like (the) Internet, digital media and software are still pretty exciting. So if you are a winner, the money is very available.

Is the exit environment improving?

Kamra: That’s what drives our business and you are seeing good exits every day or two. A number of our companies (Canaan’s US portfolio firms) are talking to investment bankers about IPOs (initial public offers). We would like to see the Indian markets kick in for some of these venture-backed IPOs as there have been only a couple like Info Edge (India) Ltd and OnMobile Global Ltd. We invested in e4e Inc. (an outsourcing services firm) and I am still on the board. The companies are still private and we are hoping to get some exits on those soon.

What is your take on early-stage investing in India?

Kamra: You saw people moving from early-stage investing in the US when the downturn started as it is riskier and has a longer time horizon. The average time for exit from start to finish has gone up to nine years in the US. That’s a long time and you can see why people are concerned about doing early stage. But we are continuing to focus on early- to mid-stage. It’s great if other people move into late-stage investing, which means less competition for us.

Also, a lot of firms are moving to a single-fund structure. That’s one of the trends that seem to be happening as opposed to multiple funds.

What do you make of this trend?

Kamra: People have tried multiple funds like early and growth stage, sector or geography-focused funds. They are finding a lot of overheads in terms of fund-raising as they are forced to invest a certain amount either in a sector or stage or a country. In a single fund, there is a lot more flexibility in terms of going where the action is.

And it also depends on what the LPs (limited partners who are the investors) want. If they have a certain India allocation, then you will see VC firms opening India funds. But we haven’t seen a lot of that, at least not with the group of LPs we talk to. So if the LPs don’t care that much, then it is usually about having a global fund and investing out of that.

Do you see any other advantage in this set-up?

Mittal: From an entrepreneur’s standpoint, we are able to bring them our entire network and expertise regardless of where we make the investment. So we are seeing a lot of parallels between what is happening here and in the US, Israel or other parts of the world.

Consumer Internet has held out a lot of promise in India but has not delivered as per expectations. What do you think of it?

Kamra: Things are following the US market. If we look at the number of video views online or people using Facebook and Orkut, there is no reason why there shouldn’t be companies built around those models in India. The advertising money is not big here so we need to think about business models. We think just the numbers will create some good opportunities. It will obviously have to be something unique and not just a US thing lifted over to India.

Mittal: The transaction capability that’s developing is interesting. If you look at online travel, it has been proven that you can scale transaction-based businesses on the Internet. The same philosophy can be applied to multiple businesses.

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Norwest raises $1.2 bn venture fund, biggest of this year

Tim Mullaney / Bloomberg — Wed, 18 Nov 2009 17:26:00 GMT

New York: Norwest Venture Partners raised a $1.2 billion (Rs5,556 crore) venture capital fund, the biggest to be completed this year, to expand in Israel and India while broadening the range of companies it backs.

Bullish: Norwest managing partner Promod Haque. Hemant Mishra / Mint

The fund, Norwest’s 11th since its founding almost 50 years ago, will give the firm more money to fund larger companies, managing partner Promod Haque said in an interview. Norwest has backed at least 450 companies, including software maker PeopleSoft Inc. and social gaming start-up Playdom Inc.

“Some of our initiatives in growth-investing and globalization have done pretty well, and we need a larger fund so we can scale them,” said Haque, 61, who emigrated to the US from India in 1972. “It took a little bit of time, but we have a track record.”

Venture fund-raising fell by two-thirds in the first nine months of the year from a year earlier, according to the National Venture Capital Association in Arlington, Virginia.

Along with a $575 million fund announced by Greylock Partners this month, Norwest’s new fund shows that venture capital firms with a proven track record can still attract investors, Haque said.

Norwest expanded in India and Israel when it raised a $650 million fund in 2006, Haque said. The Palo Alto, California-based firm has since hired at least seven partners in India and Israel.

It plans to expand US investments in medical devices and health-care information technology.

It is also investing more money in later-stage companies that once would have gotten capital from public investors, Haque said.

Norwest’s fund bucks an industry trend towards smaller investment pools, advocated by venture capitalists such as Alan Patricof of Greycroft Partners Llc in New York and David Sze at Greylock.

Norwest raised more money because its diversification plans are expensive, and larger companies are more capital-intensive, Haque said. A slowdown in initial public offerings means the firm will need to support start-ups for as long as eight or nine years, he said.

It’s going to take money to get companies to where they can go public or do mergers at a reasonable price, Haque said.

PE firms exit for profits, earn brownie points

Shraddha Nair — Mon, 16 Nov 2009 17:13:00 GMT

Mumbai: Private equity (PE) exits through secondary market sales have picked up significantly this year, as PE managers rush to make good their investments. The number of exits has increased sevenfold since last year.

Graphics: Ahmed Raza Khan / Mint

For the period January-October 2008, only four PE exits worth $164 million (Rs756 crore today) took place compared with 28 exits worth $499 million between January and October this year, according to data from Venture Intelligence, a research firm focused on venture capital (VC) and PE activity.

“There is a better opportunity for exit right now than it was a year back, and the funds are just taking advantage of the situation whenever they can to show some returns to their investors,” said Keshav Misra, head of investments, consumer and fast-moving consumer goods, Baring Private Equity Partners India Ltd.

While the primary reason for this could be the increased buoyancy in the stock market—India’s bellwether equity index, the Bombay Stock Exchange’s Sensex, has more than doubled since March—there are several other underlying factors that have led to the rush for exits.

Graphics: Ahmed Raza Khan / Mint

First, there is pressure on PE firms to show that they are actually making profits. “There has been so much of investing happening that there has not been much of exits,” said Vikram Utamsingh, executive director and head of PE at KPMG India Pvt. Ltd. “So we have 300 PE transactions a year for four-five years and only 30-40 exits, so clearly the funds are under pressure to show that they can exit with good returns.”

Second, the investors in PE funds, otherwise referred to as limited partners (LPs), are also beginning to identify those PE managers or general partners (GPs) who have ensured good returns on exit, and are aligning with them as against those GPs who have made investments, but have refrained from exits.

“The pressure to exit is not so much that the LPs are demanding you to exit, but more for you to be able to show that you are a credible GP in the Indian PE marketplace,” said Utamsingh. Thus, a good exit record comes in handy when GPs hit the road again for fund-raising.

“You are going to earn extra brownie points with the LPs if you give them returns during the downtime. They will value it more now,” said Ashish Dhawan of ChrysCapital Investment Advisors, which completely exited Shriram Transport Finance Co. Ltd early this month.

“We invested in Shriram Transport five years ago and have achieved good returns mostly through earnings growth rather than the forward multiple,” he added.

ChrysCapital invested around Rs100 crore in Shriram Transport Finance in 2005 and made 12 times its investment—or a 12x return, as it is called in the VC industry—when it exited in two phases, in May and November.

A third reason is that many investments made around five years back or even earlier have now matured. Between 1999 and 2003, not a lot was happening in the PE market in India. It was only in late 2003 and 2004 that growth equity deals happened. “So deals done in 2004-05 are now maturing and, hence, people are exiting—whether they are good or bad,” said Dhawan.

This month, US-based VC firm Walden International sold 4% of its stake in Bangalore-based information technology services firm MindTree Ltd for Rs75 crore. Walden had invested in the company nearly 10 years ago.

In September, Temasek Holdings Pte Ltd sold its 13.5% stake in multiplex chain Fame India Ltd for around Rs14 crore. Temasek had invested in the company in July 2005.

Clearwater Capital Partners Llc sold 2.37% of its stake in September in Diamond Cables Ltd for $2.5 million. Clearwater had invested in the company in November 2007.

In July, there were three big exits. Orient Global Tamarind Fund Pte. Ltd sold 7.13% of its stake in India Infoline Ltd for $50 million, Warburg Pincus Llc sold 5.38% of its stake in Max India Ltd for $49 million and Baring India sold 2.1% of its stake in MphasiS Ltd for $40 million.

Finally, the situation in the US and the European markets has also played a role in the increased number of exits.

In March, PE fund 3i India Pvt. Ltd, the Indian arm of UK-based 3i Group Plc, sold 80% of its stake in Mundra Port and Special Economic Zone Ltd (MPSEZ) in the open market. 3i had invested $50 million in MPSEZ in 2007 and its proceeds from the stake sale as of March totalled $33 million.

This move came after 3i Group said it was accelerating its programme to sell assets to meet a mid-2010 target of halving its debt in an effort to reduce its leverage. The Wall Street Journal, in March, reported CEO Michael Queen as saying that 3i was “turning up the heat” on the sale of some of its portfolios and some VC investments.

“3i may have had some pressure because they are facing some challenges, not from LPs, but due to their global restructuring plan,” said an investment banker who did not want to be identified.

According to ChrysCapital’s Dhawan, LPs do not have any expectations of good returns from the deals done in the US and Europe in 2007 and 2008, so if the Indian deals are giving them good returns, they would certainly welcome them.

We look for cases where we can make things work

Shrija Agrawal — Mon, 16 Nov 2009 17:12:00 GMT

New Delhi: Narayan K. Seshadri, chairman and CEO of Halcyon Resources and Management Pvt. Ltd, believes in betting on distressed assets. Halcyon was established in 2004, and Seshadri is now raising a $200 million (Rs922 crore) specialist fund for distressed assets. He spoke about his investment strategy and the opportunities in distressed assets funding. Edited excerpts:

Realizing opportunity: Halycon’s Seshadri. Ashesh Shah / Mint

What made you think of setting up a distressed assets specialist fund?

Initially, my partners and I invested our money to turn around assets. We made some very good returns, too. In 2006, we were asked by a lot of people to manage their money. We partnered with US-based hedge fund investor Baupost Group Llc, which believed in value investing. But after the market meltdown, their focus shifted to the debt market. So we decided to form a fund with multiple investors.

What fund size are you targeting?

Our fund comprises two components, an onshore component of $100 million and an offshore commitment of $100 million.

How will this structure help?

This will help to overcome the inability to replace domestic debt with offshore debt as ECB (external commercial borrowing) guidelines do not permit such end use. Any restructuring, if addressed from overseas, will have to be funded using equity. This makes it unattractive to both investor (risk is higher) and investee (dilution of promoter interest could be high).

Similarly, rupee funds cannot fully access foreign debt of Indian companies. If FCCBs (foreign currency convertible bonds) are trading at a discount, they cannot be bought using rupee funds unless certain RBI (Reserve Bank of India) norms are met.

So, we have a two-fund structure, with up to a third of each fund being available for such investments where there are regulatory restrictions.

How is the fund-raising process coming along?

It has been bit of a hard sell since institutions are typically used to a growth fund model. This kind of a fund is relatively new, and explaining our concepts (to investors) has taken time. We find interest from commercial banks, which look at this as a solution to their long-term exposures. In the global markets, about six months ago, it was difficult to even get a meeting. Now, they (investors) want to meet.

When do you expect the first close?

We expect a first close of $100 million before the first quarter of the next calendar year. It would be a combination of both fund components. Till now, we have been making investments through the earlier Baupost connection.

What kind of companies would you look at?

It has to be a solid business and not something built on a temporary arbitrage. We don’t want a situation where the substance of the business vanishes—either on account of technology or rapid consumer change. We look for asset-rich companies with tangible and proven intangible assets. They have to ensure strong cash flows.

What is your sector focus?

We look for a situation where, along with capital and active management, we can make things work. We would be open to companies in engineering (automotive and non-automotive), textiles, chemicals and food processing.

Would you look at firms in default?

Not an entity which has gone into such deep default where liquidation is the only option. We look for companies which are in deep stress because some money is locked up in contracts or they have borrowed short or invested long. Overcapitalized companies or those with past debt overhang may not be able to service the debt. We try to restructure debt and bring in some equity.

Any trends in valuation that you see in distressed assets?

There are companies that find it difficult to service debt (which are) trading at a premium when, in reality, they should have zero equity value. Effectively, an insolvent company is at a premium. Public markets are our biggest competition. Recently, 10 or 12 companies got money through QIP (qualified institutional placement), which could effectively match their cash flow deficits, replacing debt with equity. Is the equity money free? If debt itself is not serviceable and people are putting in money, when will that equity have any real value?

What returns do you expect out of such investments?

We are a little more moderate compared with growth funds. Since we work with stressed situations, we see to it that each of our investments is properly safeguarded. We look at an IRR (internal rate of return) of 25-30%. While we want the upside to be unlimited, we don’t forego the downside protection for a very high upside. We certainly would want 25% or above IRR.

How would you describe investing in distressed situations?

Individual entities can be structured better for higher growth. There are businesses which look good from the outside. Peel a few layers, and you find that while they have the foundation for growth, they may need to rectify even the capital structure or nature of transactions.

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Start-ups look to cash in on a stream of 3G services for handsets

Deepti Chaudhary — Mon, 09 Nov 2009 15:26:00 GMT

Bangalore: At a time when most start-ups are struggling to raise the first round of funding, Apalya Technologies Pvt. Ltd is an exception. The firm has raised funds twice over the last two years—an undisclosed amount from Mumbai Angels in 2008 and $3 million (Rs13.98 crore now) from IDG Ventures and Qualcomm Ventures last month.

Hands on: Live streaming on cellphones (left - PTI) is one of the latest attractions for start-ups; Apalya’s CEO Vamshi Reddy.

Apalya is a mobile video delivery platform that streams video content on mobile handsets, in long and short formats—live and on demand.

Streaming content on handsets is the latest attraction for start-ups and investors, triggered mainly by the uptake of handsets and the likely launch of 3G, or third generation, high-speed telecom technology services by the end of the year. According to the Telecom Regulatory Authority of India (Trai), there were 471.73 million wireless subscribers by the end of September.

“An alternative (to a single TV set in a home) is always welcome,” says T.C. Meenakshisundaram, founder and managing director, IDG Ventures India, who is on Apalya’s board. “Instant snacking information is required. This would be the USP (unique selling proposition) of such services.”

Start-up MobileJockey.tv is offering animated jokes on handsets. Entertainment is the most watched category on cellphones in India, says its CEO Venkat (he goes by one name). The firm is now looking for venture capital (VC) funding.

Meanwhile, Motvik Technologies Pvt. Ltd is conducting trials for an application called ShowLiv, which allows live coverage of events via handsets. “We intend to launch the service in six months. We are speaking to operators and are meeting media companies, urging them to get their reporters (to) use this,” says its co-founder, M. Thiyagarajan.

Mobisy Technologies Pvt. Ltd has started a news aggregator service called NewsTop, which collects news from various sources and delivers it on the handset. “The response has been good. TOI (The Times of India) and The Indian Express has maximum traction,” says its chief Lalit Bhise.

Hyderabad-based Apalya has started live streaming on the 3G mobile services of state-run telecom operators Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd. It also powers Mobile ESPN (of sports channel ESPN Star Sports) through which subscribers can access all the programmes on the TV channel.

“With the Indian market opening up to 3G, we plan to introduce additional mobile entertainment services, including customized entertainment channels, premium video programming and mobile-exclusive original programming,” says its co-founder and chief executive Vamshi Reddy.

The 2010 Commonwealth Games is also likely to act as a trigger for these services. “I believe Commonwealth Games and 3G roll-out will bring new technologies enabling usage of handsets for various coverages,” says Sudhir Sethi, chairman, IDG Ventures India.

To be sure, revenue sharing with telecom operators has always been an issue with firms offering value-added services (VAS), and the problem continues with these firms. “We are not really happy with the revenue sharing. We are no different from what VAS firms feel,” says Reddy.

Experts caution that globally, not much success has been seen in streaming rich media content. It needs to be snacking content of 3-4 minutes and works well only for that, says Harish Gandhi, executive director, Canaan Partners. “My concern is that if available bandwidth would be enough for this streaming of content,” he says. “Also, how much degradation of quality will it have when there are many people using it in the same area?”

Given that the services would be expensive, how many would adopt it is a concern, says Diptarup Chakraborti, principal research analyst, Gartner India. “(3G) auction prices would be high. Therefore, the service would not come at cheap prices,” he says.

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Raja Kumar | Exit early if the biz isn’t working and stick on with the winners

Shrija Agrawal / VCCIRCLE — Mon, 09 Nov 2009 15:26:00 GMT

Managing director and chief executive of UTI Ventures Management Co. Pvt. Ltd, Raja Kumar is adept at exits. In one of his best deals, Kumar recovered 50 times his firm’s investment in Excel-Soft Technologies Pvt. Ltd by investing Rs2.5 crore in 2001 and taking out Rs125 crore in 2008.

Kumar spoke in an interview about the changing power equation between limited partners (investors) and general partners (private equity managers). Edited excerpts:

On the money: Raja Kumar says he doesn’t think there is room for 300 general partners. Rajkumar / Mint

What are the concerns of limited partners (LPs)?

One, LPs feel that India is a highly intermediated market. A venture capital deal here will walk into a PE (private equity) fund through an intermediary. When there’s a smart intermediary, the deal is hyped up. Two, as the public market bias is high, private market valuations are derived from those benchmarks. Three, entry valuations are high. Four, LPs are not comfortable with PEs focusing on public markets. They expect you to identify private companies, grow them and find an exit.

Can retail investors be a big source pool of funds for PE investing?

The first goal of any general partner (GP) is to raise money from sophisticated limited partners who understand this alternative asset class and give you the full window of time to invest and exit. In a typical LP–GP model, if your track record is good, the concept of once an investor always an investor works. But in the case of retail investors, irrespective of the performance, it depends on their ability to commit again. I am not sure if many people are aware that they have to share 20% (of their) returns with the manager. Besides, fund administration becomes cumbersome because of the larger LP base.

I believe that PE is a business of the LPs, by the LPs, for the LPs. If retail investors are aware of this asset class and can commit a minimum threshold of Rs5 crore or more, it might still be feasible. But the bottom line is, why raise retail money if long-term LP money is available?

What do you think of the emergence of domestic LPs?

The emergence of domestic LPs—banks, institutions and family offices—is long overdue. UTI Asset Management Co. Pvt. Ltd, Life Insurance Corp. of India and some banks have been investing in PE for over a decade and their experience has been good. Regulations are clearer and lack of liquidity is no longer a concern with a good secondary market. I expect the domestic LP base to provide a sustainable source of funds to domestic PE fund managers.

How do you think the changing LP-GP equation will play out?

The overseas pool of capital will dominate for some more years. So it is important to possess a good exit track record for GPs. I expect a lot of fund managers to go away from the radar of LPs. I don’t think there is room for 300 GPs. Also, LPs are seeking more commitment to the fund from GPs. Earlier, we were not committing any money but now we are made to commit 1%. When I launch Fund IV, I expect the minimum commitment would be 5%. So one needs to reinvest the carry (private equity manager’s share of the profits made on investments) because you need to have the skin in the game.

What should one keep in mind when making exits?

As we are the first institutional investor, we deploy capital at attractive valuations in our companies. A lot of them have raised next rounds at higher valuations. We might have done 21 exits till now but some of them were small. In Four Soft Ltd, we made 5x (five times the investment made). In Excel-Soft Technologies, we made 50x. We also went wrong in some exits like Subex Systems Ltd, where we were at 16x at one point. Perhaps we were greedy and we knew about the company a lot more. Now, we are 3x and we are still invested in the company.

One lesson that we learnt is that you need to have discipline. One should get out early if the business is not working and stick on with the winners. Our second fund is showing a lot of promise. In CCCL (Consolidated Construction Consortium Ltd), we made around 5.4x. We are already 3x in Koutons Retail India Ltd and about 2-2.5x in Shriram EPC Ltd. We are holding on to these companies. We made 250% on Shree Renuka Sugars Ltd in a PIPE (private equity investment in public enterprise) deal.

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Making a difference with patient capital in energy, healthcare

Shraddha Nair — Mon, 02 Nov 2009 19:18:00 GMT

Mumbai: The Economist has described Jacqueline Novogratz as the “patient capitalist”. The 48-year-old founder and chief executive (CEO) of Acumen Fund, a social venture capital fund, does not run out of anecdotes, or patience, to explain what patient capital means for an impact investor like her.

Impact investor: Acumen Fund founder Novogratz says business is never perfect, but one does find entrepreneurs whom one can trust. Abhijit Bhatlekar / Mint

In an interview in October, ahead of the TED (technology, entertainment and design) conference she was to attend in Mysore, Novogratz cited the example of Noida-based D.light Design Inc., one of her portfolio companies.

D.light makes Nova, a low-cost, solar-rechargeable portable LED (light emitting diode) lamp for the poor, an alternative to kerosene lamps that are expensive, hazardous, polluting and produce low-quality light.

When D.light first started, it was trying to figure out how to convince people to buy LED lights instead of kerosene lamps. So it gave a woman running a shop selling samosas outside its office in Noida an LED light for a 30-day free trial.

D.light officials visited her daily and at the end of the month found that her sales had doubled because there were no fumes or lingering smell—common problems with kerosene lamps—to put off customers.

But when they asked her whether she would like to buy it, she said no. “We thought what does this mean?” remembers Novogratz. “And the problem was she had no trust because why should she trust us when the whole world had given her low-quality things and had not been there for her?”

The only reason the woman had agreed to take the LED light in the first place was because she had thought they had taken pity on her!

So you think it’s a new technology and it’s cheap and people will actually buy it, but it’s not true in markets where people are not viewed as consumers, explains Novogratz. “This was a big insight to me on why patient capital in energy (is needed). Here it shows why it takes long and it is not that hopeful.”

So far, Acumen Fund has invested $35 million (Rs165 crore) worldwide and has a mandate of committing Rs30-50 crore every year in India. Though the amount is meagre compared with the investments made by venture capital firms today, it has managed to attract the attention of reputed businessmen in India such as Nandan Nilekani, former co-chairman of Infosys Technologies Ltd and now chairman of the Unique Identification Authority of India, and G.V. Prasad, vice-chairman and CEO of Dr Reddy’s Laboratories Ltd.

“We have donors from 18 countries and I just came from Dubai and Egypt where we signed around five or six people to invest anywhere between $10,000 to $100,000,” adds Novogratz.

These funds are then invested in private companies as early-stage capital in the form of equity or debt.

The only, but crucial, difference—for the entrepreneur, social impact must be primary and profit or financial impact secondary. Whatever profit Acumen earns is reinvested in other companies.

However, the success rate of such ventures can be low, forcing many of them to deviate from the original goal. Some of Acumen’s portfolio companies have been no exception to this.

“It’s not ever going to be perfect, but you find entrepreneurs whose moral compass you trust,” says Novogratz.

She writes off such experiences as failures that have only made her business acumen “more sharp”.

Acumen has invested in sectors such as renewable energy, healthcare, water and agriculture. Its portfolio companies include LifeSpring Hospitals Pvt. Ltd, a maternity hospital for low-income women; Global Easy Water Products Pvt. Ltd, a provider of low-cost irrigation solutions for farmers; and Ziqitza Healthcare Ltd, which started an ambulance service called Dial 1298 for Ambulance. While she refuses to name any favourites among Acumen’s Indian portfolio, Novogratz does mention that Dial 1298 could be a model for delivery of emergency medical services not just in India, but also globally. Acumen currently is close to announcing another deal in India in the healthcare sector.

A group led by Acumen Fund, and philanthropic organizations such as Salesforce.com Foundation and Skoll Foundation, is working on developing a system to measure the impact of such social venture investments. Called the “Portfolio Data Management System”, it will track the tangible aspects that can be measured, she explains.

Novogratz also plans to have a benchmarking process for her investments. “So if I see a difference in a venture in Pakistan compared to a similar venture in Kenya, I can actually point out if the difference is because of land mass, labour, or bureaucratic red tape.”

VC firms’ new mantra: preserve your capital

Shrija Agrawal — Mon, 02 Nov 2009 16:22:00 GMT

Venture capital (VC) firms in India are showing a tendency to avoid risk and invest in more established companies or those who are already backed by VC firms. Even if it means lower returns, VC firms seem to prefer to preserve their capital for now.

B versus A: Nexus India Capital co-founder Suvir Sujan says there are only a handful of VCs doing early-stage investments in India. Abhijit Bhatlekar / Mint

According to data compiled by VCCEdge, the financial research unit of VCCircle, series B, or second round of funding, is turning a favoured investment stage while series A is shrinking in importance.

Usually, VC firms prefer to be the first institutional investor in a start-up. Though risky, funds enter at a lower valuation in the first round, and hope to multiply the value of their investments when the company goes for subsequent rounds of funding or an exit. So, ideally, VC firms’ sweet spot has been the first round of investment, or series A funding. But, if the trend in investment stages in the last two-three years is any indication, this seems to be changing.

In January-September, there were 17 series B deals with a disclosed value of at least $130 million (Rs611 crore today). In the same period last year, there were 13 deals valued at $93 million, and in the first nine months of 2007, there were eight series B deals valued at $52 million.

For the 12 months of 2008, there were 19 series B deals with a disclosed value of $184 million, which shot up from 14 deals in 2007 with a disclosed value of $99 million.

VC firms’ affinity for series B is much clearer when one looks at the number of series A deals during these years. There have been only 25 series A deals in the first nine months of this year with a disclosed value of $19 million (13 deals did not disclose the value of their investments). Compare this with 45 series A deals valued at $103 million in January-September 2008, which rose from 25 deals valued at $98 million in the same period in 2007.

For the 12 months of 2008, there were 66 series A deals of a disclosed value of $184 million (around 30-odd deals did not disclose the value of their investments) and 44 series A transactions in 2007 with roughly half of them declaring $155 million in transaction value.

Ashish Gupta, co-founder and managing director of Helion Venture Partners, reasoned: “When markets take a beating, everyone becomes cautious and you look for stuff that is slightly older.”

The appetite for risk is much less when the VC firms are under pressure to show not just returns, but also the real state of their portfolio.

“The downturn has made venture capital firms realize that companies will take time and (a lot of) capital to scale in India. Companies require a lot of heavy-lifting at the early stages. But venture capital firms have a limited bandwidth to do this,” said Mohanjit Jolly, executive director (India) at Draper Fisher Jurvetson (DFJ), a Silicon Valley-based early-stage VC fund.

Moreover, limited partners, who invest in VC firms, are pushing for a near-time exit horizon. “Even though venture capital firms are not doing exclusively late-stage investments, they are balancing out their portfolio with Bs and Cs (the third round) along with As,” Jolly added.

In fact, a fallout of this strategy has been that most VC funds have earmarked a part of their fund for growth capital investments (a minority investment in relatively mature companies looking for capital to expand or restructure operations) or even launch a separate fund for this. Sequoia Capital India pioneered this concept in India when it launched its first $400 million growth fund in 2006. Last year, it came up with another growth fund of $725 million.

Sequoia now straddles early- stage, late-stage, private equity and even pre-IPO (initial public offering) and private investments in public equity, deals in India. It recently made two times its investment of, or 2x returns as it is called in the VC industry, from a $25-30 million investment in Nasdaq-listed Cognizant Technology Solutions Corp. within eight months.

Norwest Venture Partners last year hired former Goldman Sachs investor Sohil Chand to spearhead late-stage investments. It recently picked up a 2.11% stake in the National Stock Exchange for Rs250 crore and bought less than 5% stake from the open market in mobile value-added services firm OnMobile Global Ltd.

Accel Partners India—which till now has been consistent in its strategy of doing seed/early stage deals in the country—recently brought Neeraj Bharadwaj from Apax Partners India as its managing director to lead its growth equity investing initiative in India

“There are only a handful of venture capital firms doing early-stage investing in India,” said Suvir Sujan, co-founder of Nexus India Capital Advisors Pvt. Ltd.

But more and more VC firms will do a mix of early-, mid- or late-stage investing. “Most firms will at least balance their portfolios and look at series Bs and Cs in parts if not exclusively late stage,” said Jolly of DFJ. “Ours is a balanced portfolio approach, we will do early-stage with mid-stage, going forward.”

Helion aims to be among the top three in India

Deepti Chaudhary — Sun, 01 Nov 2009 15:07:00 GMT

Bangalore: For a person who does not believe in planning too far ahead, Ashish Gupta has come a long way.

As managing director of Helion Venture Partners, a prominent venture capital (VC) firm, he has been taking huge bets since 2005 on entrepreneurs, their business ideas, their aggregate performance, and the Indian market for the next seven-eight years.

Flexible approach: Helion Venture Partners’ managing director Ashish Gupta. Hemant Mishra / Mint

Gupta, 42, started Helion, among India’s earliest country-focused funds, when local entrepreneurs were just waking up to the concept. It now has a corpus of $350 million (around Rs1,650 crore) and 22 companies in its portfolio, including online travel web site MakeMyTrip.com, JiGrahak Mobility Solutions (Pvt.) Ltd, which offers a mobile commerce service called ngpay, yellow pages publisher GETIT Infoservices (Pvt.) Ltd, and UnitedLex Corp., a legal consulting and outsourcing firm.

“The goal is to become one of the top three VC firms in the country and not just by perception,” says Gupta. “We would like to have returns and exits to substantiate our position.”

His office in the upmarket Embassy Golf Links business park in Domlur, Bangalore, is minimalist, the tone interrupted by a lone yellow coffee mug and photographs of his children. He was in a grey MakeMyTrip.com T-shirt.

Gupta says his formula has been to “stumble” into his path—be it floating start-ups, joining a VC firm after a fellowship to understand the business, or returning to India to float one himself. “It’s a very exciting business here. This market keeps changing,” he says. “People who walk in (entrepreneurs) are experts. It’s an endless treadmill.”

Over the past five years, Gupta has seen remarkable changes in Indian entrepreneurship. He has seen investors flock to India hoping to riding its rapid growth, only to realize that without infrastructure, it’s tough for start-ups to rise up the scale. “In 2006-07, investments were made on huge valuations. We were not seasoned investors. Now investors are realizing how long it will take a company to mature and generate revenues.”

It helps that promoters are more willing now to admit mistakes and refine business ideas. “Entrepreneurship attracts more seasoned executives now-a-days than straight-out-of-college enthusiasts.”

In an earlier avatar, Gupta co-founded two companies, angel invested in 35 firms, and worked at International Business Machines Corp. (IBM) and Oracle Corp. “I left those jobs. I realized there was something wrong with me and not the companies.”

The PhD from Stanford University, California, and computer science graduate from the Indian Institute of Technology, Kanpur, then co-founded Junglee.com, a database technology firm in the US, only to sell it to Amazon.com two years later in 1998.

In 2000, Gupta and his wife Nita Goel, whom he met at Stanford, and two others co-founded Tavant Technologies Inc. in the US. Venture capital at the time was on a roll in the US and Gupta applied for a Kauffman Fellows Programme to learn the business. Two years later, he joined the Woodside fund, an early stage VC firm in Silicon Valley.

By then, the bug had got to him.

“I seriously started thinking about starting a fund and left Woodside in 2004 and raised Helion in seven months,” he says.

In India, Helion has taken the lead in VCs turning more flexible in their approach to investments and dabbling in new sectors. It started as an early stage technology-focused firm, but today invests in both tech and non-tech companies. In 2009, all of Helion’s deals were in non-tech firms with a strong focus on domestic demand.

“They have made this move this year and it’s commendable for any investor to be flexible enough to move away from their original thesis,” says Mohanjit Jolly, executive director, Draper Fisher Jurvetson India, a Bangalore-based VC firm.

To Gupta, Helion, too, is a start-up. A start-up that drew in the right people—Kanwaljit Singh, Rahul Chandra and Sanjeev Agarwal—and grew fast. While Singh and Chandra are friends-turned-partners, Agarwal is his sister’s husband. Without them, Gupta says he wouldn’t have started looking to raise capital.

While Gupta would like his portfolio firms to grow as fast as Helion, he acknowledges making mistakes would be a part of the process. “We have agreed that we are running a business which is unknown and unpredictable,” says Sourabh Jain, chief executive, JiGrahak, the first firm Helion invested in. “There is no operation interference. Helion teams offers only suggestions and guidance and it’s up to me take them or not.”

Draper Fisher’s Jolly says Gupta, because of his stint as an entrepreneur, is a promoter’s investor.

“Entrepreneurs need someone grounded, not someone who lets success get into their head and become a self-centric, headstrong egoist. Gupta is a complete opposite.”

VC companies facing lower returns, pressure for early exits

Deepti Chaudhary — Mon, 26 Oct 2009 14:23:00 GMT

Bangalore: The economic downturn has affected India’s venture capital (VC) firms because the companies they have invested in are performing below expectation, thus pulling down their internal rate of return (IRR).

Time for pragmatism: Subrata Mitra, partner, Accel Partners. Experts say the internal rate of return may continue to fall for at least another six months as revenue generation for portfolio firms may take more time.

IRR is the average annual rate of return received by investors over the life of their investment. It is a key indicator used in assessing the quality of investments.

VC firms, which typically seek an IRR of 25-30%, managed to garner just 15-20% in the past six-eight months, according to Deepak Srinath, director and co-founder of Viedea Capital Advisors Pvt. Ltd, an investment bank.

This decline, VC firms say, will result in portfolio companies taking an additional 12-18 months to reach revenue targets that trigger exits.

General partners (GPs), or private equity managers, are now under pressure from limited partners (LPs), or those who invest in VC firms, for early exits, even if that means lower returns.

“As many LPs themselves are getting impatient due to lack of venture returns, many are strongly recommending to GPs to opt for an exit in the near term of 6x or 7x (six or seven times of the investment) instead of a longer-term exit at a 10x or 20x,” says Mohanjit Jolly, executive director, Draper Fisher Jurvetson India.

Generally, VC investors have an exit horizon of seven-eight years, which could come about either through an initial public offering or strategic sale of stake.

Investors say another problematic issue is that quite a few companies were funded at high valuations. On top of this, some of these had to raise capital during the slowdown in the past year. As a result, expectations of return on investments have fallen significantly.

“Exits getting pushed are a worst case scenario for an investor,” says an investment adviser on condition of anonymity, due to company policy on speaking with the media. “LPs can take drastic steps like locking capital, thereby constraining further capital infusion.”

Indian companies have also not been as capital-efficient as most VC firms had earlier anticipated, these investors say. Kanwaljit Singh, managing director, Helion Venture Partners, says investors have been forced to recalibrate expectations on the market situation and how a business will turn out.

“Mid-last year, we may have been bullish on something,” says Singh. “Today, we are more pragmatic about it.” Singh, however, adds that these changes are market-driven and the situation may change. In a muted market, even exit options are limited.

“It is not even clear who potential acquirers may be for some types of companies now, and that may add another dimension to the problem,” says Subrata Mitra, partner, Accel Partners. Experts say IRR may continue to fall for at least six more months as revenue generation for portfolio firms may take some more time.

Reviving IRRs is difficult at present, says Viedea Capital’s Srinath. “Early-stage companies are struggling to generate revenues,” he says. “It will be very difficult to give such returns.” Those looking at late-stage deals are also finding it difficult to make investments as stock prices are up significantly, thus making it difficult to ensure high returns.

“Structured deals could be very interesting in the current market as it is hard to price private deals based on inflated public market multiples,” says Sohil Chand, managing director, Norwest Venture Partners India, adding that a structured deal offers the investor good downside protection if the market corrects itself and the promoter makes a neat profit if the market stays at current levels.

However, the challenge in such deals is ensuring due diligence on such listed companies, given the restrictions on access to information not available to the public, he says.

Market rally opens exit doors for PE companies

Madhav A. Chanchani — Mon, 26 Oct 2009 14:23:00 GMT

It has been a busy exit season for the Indian private equity (PE) industry. Triggered by liquidity pressures and a stock market rally, the first nine months of 2009 have recorded a 50% jump in the number of exit deals.

Graphics: Yogesh Kumar / Mint

Between January and September, PE firms made exits worth $953 million (Rs4,441 crore) across 60 deals compared with $1.24 billion in 40 deals in the same period last year, according to data from VCCEdge, VCCircle’s financial research unit.

The spurt in exits was pronounced between April and September, which saw 53 exits worth $900 million compared with less than 20 deals valued at $87 million between October 2008 and March. This reflects a tenfold rise in deal value and a increase of 150% in the number of deals.

The buoyancy has been largely led by a stock market rally, with the Bombay Stock Exchange’s benchmark Sensex index shooting up by at least 72% from 9,708 points on 31 March to 16,740 on 26 October.

“The market has ramped up phenomenally over the last few months and it’s not a bad time to take some chips off the table,” says Sanjiv Kaul, managing director at ChrysCapital, which made the best of the market rally by exiting Shriram Transport Finance Co. Ltd and Redington India Ltd.

ICICI Venture Funds Management Co., Citigroup Venture Capital India, ChrysCapital, Baring Private Equity Partners India Ltd, IDFC Private Equity and Warburg Pincus Llc, too, are mulling exits.

“You will see much more exits through secondary sales and M&As (mergers and acquisitions),” says Pranav Parikh, managing director of Q-India Investment Advisors, the India arm of US hedge fund Q Investments Lp.

Q Investments’ sale of passive telecom infrastructure firm Xcel Telecom Pvt. Ltd to American Tower Corp. for $150 million in May was one of the biggest exits and through an M&A.

This year, most PE exits have been through stake sales in the open market, as opposed to M&A activity in 2008. In the first nine months of 2009, at least three-fourths of the exits, or 44 deals worth at least $751 million, were through the open market.

Also, a rush for initial public offers (IPOs) by PE-backed companies is offering investors another exit route.

“PE firms are preparing grounds for liquidity by reviewing portfolio and seeing which firms can be taken public,” says Bhavesh Shah, executive director, JM Financial Consultants Pvt. Ltd.

Around 16-17 PE-backed firms have filed draft red herring prospectuses with market regulator Securities and Exchange Board of India (Sebi) for listing on the stock exchanges.

A couple of liquidity events for PE investors have already occurred this year with IPOs of Adani Power Ltd and Pipavav Shipyard Ltd.

Nearly half-a-dozen companies that have filed draft prospectuses have said their PE investors were diluting stake through the IPO. These include DB Corp Ltd, with Warburg Pincus as the PE firm, and Emaar MGF Land Ltd, in which Citi Venture Capital International (CVCI) is a PE investor.

Vikram Utamsingh, executive director and head of private equity advisory at KPMG India Pvt. Ltd, says the market rally has come as a windfall for PE firms that even a year ago were thinking they would have to nurture these companies for the next three-four years.

“If there is PE money in real estate, they will be keen to get out at the earliest,” says Praveen Chakravarty, chief operating officer and head, institutional equities sales at BNP Paribas India. “In more asset-owning sectors like infrastructure, they would think there is more upside.”

A record number of Indian companies raised PE funds between 2006 and 2008 and investors would like to realize their returns. As the Indian PE market matures, an ongoing exit cycle would become part of the healthy ecosystem required for such investments.

Most PE firms seem to be getting decent returns as they are exiting investments made before 2006.

Of the five biggest exits this year, four were able to get good returns. Investments made before 2005, which includes Warburg Pincus’ investment in Max India Ltd and ChrysCapital’s in Shriram Transport Finance, fetched the highest returns.

Those made in the peak period of 2007, such as Singapore-based Orient Global Capital’s Rs550 crore in financial services firm India Infoline Ltd, took a loss of at least 50%.

Narayana Murthy sells 8 lakh Infosys shares to set up VC fund

PTI — Thu, 22 Oct 2009 14:30:00 GMT

New Delhi: IT major Infosys’ chief mentor Narayana Murthy has sold 0.13% of his stake in the company for Rs174.30 crore, which will be utilized for setting up a venture capital fund.

Murthy has sold Infosys shares through the market sale on the Bombay and National Stock Exchange, according to a disclosure made by the company on bourses.

“Narayana Murthy has intimated the company that the proceeds of the sale will be used as seed capital for a proposed Venture Capital Fund to be set up by him in India,” Infosys said in a statement.

“The Venture Capital Fund will encourage and support young entrepreneurs having brilliant business ideas. The Fund will primarily invest in India and may on a case-to-case basis consider investing overseas,” it added.

The sale of shares was carried out on Wednesday and on Thursday on the exchanges. Post sale, Murthy holds 23.79 lakh equity shares or 0.41% stake in the company, the filing said.

According to the Infosys’s latest shareholding data available on the exchanges, Murthy held 0.55% stake or 31,79,672 shares at the end of September quarter.

Murthy’s wife Sudha holds 1.62% stake in the firm, while daughter Akshata and son Rohan hold 1.41% and 1.39%, respectively.

Shares of Infosys closed 2.13% at Rs2,211.50 on the Bombay Stock Exchange.

Doing more of the same is no longer an option

Shrija Agrawal / VCCIRCLE — Mon, 19 Oct 2009 15:35:00 GMT

The managing partner of Baring Private Equity Partners India Ltd, Rahul Bhasin, embarked on an organizational revamp four months ago. “The transition has been difficult but essential to face a hyper-competitive market,” he said in an interview.

The private equity firm has witnessed several high-profile departures in recent months. Cofounder and managing director Subbu Subramaniam and Akhil Awasthi, another managing director with the firm, quit in August and October, respectively. “No one likes change,” Bhasin said.

The industry veteran spoke about likely deals, the new organizational structure and key drivers of return in the private equity (PE) business in the current environment. Edited excerpts:

How did you go about the organizational revamp?

Growth trajectory: Baring Private Equity’s Rahul Bhasin says the firm’s deal flow, response time to market and growth in portfolio companies have improved dramatically after restructuring of the organization. Rajkumar / Mint

In the last five years, our assets under management have grown from under $40 million (Rs185 crore today) to around $750 million. In today’s hyper-competitive market, we realize that doing more of the same is not an option.

So, we started with a formal skill-set mapping of every person in the team. We did a 360-degree feedback of people within the team, our portfolio companies and our internal staff. We redefined jobs. We now have specialized people performing specialized roles... We defined every aspect of our business to see how we could be the best in class.

What about your talent strategy?

We got back Ajith Singh Karan, who grew All Out (a mosquito repellent brand) from Rs50 lakh to Rs100 crore in less than five years. We have Munish Dayal (partner) for banking and financial services, Ajith Singh Karan for consumer practice, Karthik Ranganathan for energy and infrastructure, Rohit Raman for media and Keshav Mishra for growth of portfolio companies. I personally look at the IT (information technology) practice.

We have 17 people and we are looking at crossing 20 in three months. The good thing is we are attracting a lot of very senior talent.

Besides, we already have an India advisory board that has helped us in a lot of transitions...

We have also partnered with several companies who do market research, incentive alignment, HR (human resource) for us and our portfolio companies. So, everybody is doing what they are good at.

Do you think this exercise took a long time? Has the revamp been easy?

Nobody likes change. It disturbs a nice status quo but the environment has changed. If we were still eight funds in the country, I don’t need to change anything. We are over 300 funds in the country now. We are not growing at 9.5% any more. And, if I have to meet my cost of capital, which is not coming below 25%, I have to raise the bar.

What kind of improvements have you noticed with these changes?

I think our deal flow, response time to market and growth in portfolio companies have improved dramatically.

How do you ensure returns in this environment?

What gave returns in the past was underlying growth in businesses. So, if you picked your companies well and added some value, you enjoyed phenomenal returns as a consequence of a very benign environment. Now, growth has got muted for several reasons. Our investment hypothesis has to improve dramatically for us to make money when macro-growth is not there. Our ability to understand how industries will evolve, consolidate and look like in five years has to improve dramatically. For that, we need to scale our people, train them and get the best possible talent.

You are sitting on $600 million of uncommitted capital. When is your next investment coming?

We have four transactions at the diligence stage. These are in the consumer, infrastructure, energy and banking and financial services segments.

Would you continue to look at majority transactions? What about exits?

Yes, because it (majority transactions) ensures alignment of interest, exits and corporate governance. A few exits are in the pipeline. We actually sold our stake in GITT (Gi Terminal i-Tech Pvt. Ltd, a Chennai-based online gaming solutions company).

Will you ever exit MphasiS Ltd? (In September, it sold 2.1% in the IT company for Rs190 crore. The PE firm now holds a stake of around 10% in the firm.)

My cost of capital is 25%, compounded. If I can earn more than that, why should I exit? The growth rates expected from the company are way higher than that.

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VC activity picks up with companies raising funds

Deepti Chaudhary — Mon, 19 Oct 2009 15:34:00 GMT

Bangalore: At least five venture capital (VC) firms are raising funds, reviving a sector that saw a decline in excess of 70% in deal value in the nine months ended September.

Ventureast Fund Advisors, a $300 million (Rs1,389 crore) early-stage investor based in Hyderabad and Chennai, is raising a fund that will focus on life sciences, healthcare, agri-business and clean technologies.

Listen to Omidyar Network India head Jayant Sinha talk about the firm’s plans (Download)

While Ventureast has not decided on the corpus yet, it said it would disclose the fund size after the first closing later this year.

“It’s a little too early to say how much the fund would be. The fund-raising plans are very much on track and a bunch of investors has committed capital to us,” said managing partner Sarath Naru.

VC activity is picking up slowly as economic growth accelerates and the markets rise. Micro-venture capital fund Aavishkaar India Micro Venture Capital Fund is raising a $100 million fund for microfinance institutions, which it intends to close before March. The company also has investors who are ready to put in money.

“Money is there with people and they just cannot sit on it. For people with a good record of accomplishments, money is not a constraint,” said Vineet Rai, chief executive.

India Rizing Fund, which is slated to be the country’s first fund exclusively targeting the defence sector, is set to announce its first closing by December.

Initial hurdles: Helion Venture’s managing director Kanwaljit Singh says it’s difficult for a first-time fund to raise capital. Madhu Kapparath / Mint

The fund, which is expected to have a corpus of Rs750 crore, is generating a lot of interest among Indian investors, claimed founder Rajesh Narayan.

Though some investors do not invest in first-time funds, the sector-exclusive approach of India Rizing Fund has given it an advantage, said Narayan.

“We know our target market as well as companies. Our investors understand that we are bound to have successes,” Narayan added.

In the January-September period, VCs invested $201 million across 46 deals, compared with $709 million across 124 deals a year earlier, according to Venture Intelligence, which tracks VC and private equity activity in the country. The number of deals fell 63% and their value 71.7% as economic growth slowed.

The conditions aren’t all rosy even now. A prominent VC firm, which started its fund-raising effort earlier this year, has cut back on deal-making in a market where capital raising typically takes a year to complete even in average market conditions.

An official at the firm, who didn’t want to be identified because it is in a fund-raising mode, said it had come to terms with the fact that the capital raising may take four-six months longer than usual. Another factor which may stretch the duration of capital raising is that most fund managers prefer having a bigger corpus than the previous one they raised.

Funds that have a track record of investment would find it easier to tap investors, experts said.

“It’s difficult for a first-time fund to raise capital. Investors will question them,” said Kanwaljit Singh, managing director, Helion Venture Partners. “If a fund has a record of accomplishment and their strategy makes sense, they can raise funds a little easier.”

The VC industry is also set to see new funds from older market participants.

Lightspeed Advisory Services India Pvt. Ltd’s former country head Srini Vudayagiri is all set to start his own investment fund.

Vudayagiri said it would be a fund for both venture and private equity deals.

Meanwhile, international firms are showing renewed interest in India. California-based Omidyar Network, which is India’s first philanthropic investment firm to fund both for-profit and non-profit entities, last week appointed its India head.

“Our ratio of striking deals for both for-profit and not-for-profit deals in the US is 50:50. In India, the bias is more for for-profit deals as non-profit organizations in India are not set up to absorb a lot of capital,” said Jayant Sinha, country head, Omidyar Network India Advisors, in his first interview after taking over.

“For-profit companies are managed better and have the ability to absorb cash and can scale better,” Sinha added.

Omidyar is looking at deals typically ranging in size between $2 million and $5 million in India. The philanthropic investment firm would also consider investing as much as $10 million depending on the company’s business and needs.

Indian cos see $77 mn VC funding in July-Sept

PTI — Mon, 19 Oct 2009 10:25:00 GMT

New Delhi: Venture capital investment in Indian companies rose by 20% to $77 million (around Rs 360 crore) in July-September this year and is poised to grow in the coming months, a report has said.

Venture capital (VC) firms invested $77 million over 17 deals in India during the third quarter of 2009, the data compiled by research firm Venture Intelligence in association with Global-India Venture Capital Association showed.

During the April-June quarter, VC funds had invested $64 million across 17 deals.

“Liquidity position of the limited partners is improving and by December quarter we will see funding returning to 2006 levels, wherein investments were at a more sustainable level,” Venture Intelligence chief executive Arun Natarajan said.

Although no new funding is expected, existing investors would shore up investments and by next year we might see total deals valued at $200 million across 15-20 deals, he said.

“The return of confidence in emerging markets in general and India in particular is now getting reflected in the quarter-on-quarter numbers. Going forward, we expect the investing momentum to pick up even further,” GIVCA director Sudhir Sethi said.

Despite the positive sentiment returning in the VC space, investment are still low on an year-on-year basis.

During the July-September quarter last year, VC firms have invested $298 million across 55 deals, the highest ever quarterly investment so far.

“Year-on-year figures are likely to improve in the December quarter. Investments to the tune of $100 million would be good enough to surpass previous year’s figure,” Natarajan said.

The first nine months of the year saw 46 VC deals valued at $201 million, against 124 deals worth $709 million in the same period last year.

A VC firm invests in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.

Among the largest investments reported investment during Q3 2009 was the Lightspeed Venture Partners-led investment of $10 million (about Rs50 crore) in Mumbai-based Itz Cash Card, the data showed.

Information technology and IT-enabled services companies attracted investments of about $32 million via seven deals, followed by the BFSI industry which got $25 million across five deals.

PE firms seek mega deals in education, healthcare

Madhav A. Chanchani / VCCircle — Mon, 12 Oct 2009 20:26:00 GMT

Although private equity (PE) firms remain optimistic on investment opportunities in sectors such as education and healthcare, the deal scenario does not show an encouraging trend.

Data from VCCEdge, VCCircle’s financial research unit, shows divergent trends in these two sectors in the first nine months of 2009.

Across nine deals in each sector this year, PE investments in education tripled to $108 million (Rs503.2 crore) in January to September against $35 million in 2008, but healthcare suffered a steep fall.

Graphics: Yogesh Kumar / Mint

The first three quarters of calendar year 2009 saw healthcare deals worth $37 million compared with $269 million in the same period last year. The number of deals in the 12 months of 2008 stood at 10 and 13 in education and healthcare, respectively.

Even in education, deals have been struck mostly in the test preparation and skills development category as against the formal segment. The biggest investment was Navis Capital Partners’ $30 million for a majority stake in ITM Trust, an executive education service provider. TutorVista Global Pvt. Ltd, Career Point Infosystems Ltd and FIITJEE Ltd, which together attracted investments worth $15 million, are in the same genre.

On the face of it, these two sectors have everything going for them for a bigger PE investment. Their non-cyclical nature and untapped potential have, in fact, stoked the appetite of sector-focused funds.

For instance, Milestone Religare Investment Advisors Pvt. Ltd is raising a Rs600 crore healthcare and education fund. Spring Healthcare, an investment company set up by Sabre Capital with commitments of Rs250 crore, will hike its fund size to Rs400 crore.

Kaizen Management Advisors, whose education-focused fund hit the road last month, is looking at raising $150-200 million.

Despite this, PE firms say there are few scalable opportunities. “There is very little representation of the education sector in the capital markets,” says Praveen Chakravarty, chief operating officer and head of institutional equities sales at BNP Paribas India, a banking and financial services firm.

One of the few listed companies is Educomp Solutions Ltd, which provides infrastructure services to education firms. The company, which investors consider a proxy for education in India, trades at a high value as it gets a so-called scarcity premium. The same holds true for healthcare. Though there are listed firms such as Apollo Hospitals Enterprise Ltd and Fortis Healthcare Ltd, the entry premium is high.

“If someone wants to directly invest in healthcare including domestic LPs (limited partners), it’s tough given the valuations,” says Ajay Nair, senior associate at Sabre Capital, which has opted for the roll-up model by setting up Spring Healthcare to build a portfolio of hospitals and diagnostic chains. A roll-up transaction is one in which smaller companies in a traditionally fragmented industry are consolidated to achieve scale.

PE investing is also challenging in healthcare due to structured ownership and management of doctors in India, says Aluri Srinivasa Rao, managing director of Morgan Stanley PE.

Despite the challenges, these sectors offer huge potential. The $35 billion healthcare industry is projected to touch at least $75 billion by 2012 and $150 billion by 2017, says consulting firm Technopak Advisors. Education is an $80 billion market in India skewed in favour of the private sector ($50 billion).

There are some policy upsides that could spur investments. The Foreign Educational Institutions (Regulation of Entry and Operations, Maintenance of Quality and Prevention of Commercialization) Bill, expected to be tabled in the winter session of Parliament, proposes to allow 100% foreign direct investment in higher education.

Also, the classification of educational institutes and hospitals as infrastructure by insurance and banking regulators is expected to raise investor interest.

“A lot of limited partners are realizing that there are very few markets expanding and moving in the right direction as rapidly as education in India,” says Sandeep Aneja, managing director of Kaizen.

For LPs looking to gain entry at relatively cheaper valuations in these sectors, PEs prove a good bet. This is also reflected in fund-raising. “Sectoral themes are more appealing to LPs,” says Rajesh Singhal, managing partner at Milestone Religare.

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Content from VCCIRCLE

P2P lending companies bring funds to the poor

Deepti Chaudhary — Mon, 12 Oct 2009 20:17:00 GMT

Bangalore: Himanshu S. is the founder and chief executive of user interface design firm Cheese Corporate Care, an enthusiastic squash player and an avid reader—all fine for your typical overachieving 29-year-old.

He is also a a social investor looking for opportunities to help the poor in their small business ventures. To date, he has extended loans to at least 50 such people.

Fresh chance: Kaushalya Devi from Uttar Pradesh was helped by Rang De and now runs a provision store.

He lends up to Rs5,000 to each individual. He doesn’t make much money from the loans on which he earns a 2% flat rate of interest. Thus far, no defaults have come his way. His social endeavours started in October 2008 when he came across a website featuring the profiles of those requiring small loans. His first borrower was a woman who made incense sticks. She was looking for a loan of Rs5,000 to expand her business.

Himanshu is appreciative of the website that directed his attention to people who needed small loans. “There is no other organized platform to invest in the poor….to help them change their life.”

The website that put Himanshu across to the incense-stick maker is a start-up called RangDe.org. It’s a peer-to-peer (P2P) lending platform, which facilitates person-to-person lending by putting up profiles of the needy. There is no ceiling on the loan amount, which has to be paid back within 12 months. Loans start at Rs100.

Rang De is one of several P2P micro-lending start-ups that have emerged in the past 18 months. Others are DhanaX Information Services Pvt. Ltd, Lendesk Financial Services Marketplace Pvt. Ltd and Nanofin Enterprises Pvt. Ltd. All are facilitators. DhanaX, which has facilitated the disbursal of Rs1 crore since it started in May 2008, says its default rate is zero.

The firms leverage the microfinance model, targeting the poorest who do not have access to even microfinance companies that charge between 18% and 27% a year on loans to cover their higher transaction costs.

P2P lending firms charge 8-15%. Some of them have non-governmental organizations (NGOs) as field partners that vet the credentials of the borrowers before their profiles are put up on the site or the P2P company lends them money. “We think we can do a lot more by involving the country’s middle class,” says Rang De’s chief executive Ramakrishna, who goes by only one name. Rang De, an NGO, facilitates loans worth Rs3,000-10,000 to individual borrowers at an interest rate of 8.5%. Since it started in January 2008, it has facilitated the disbursal of loans of Rs79.9 lakh to 1,400 entrepreneurs. It has 589 social lenders, a term it uses to describe people such as Himanshu. The 8.5% is split between various partners: 5% goes to field partners, 2% to social investors, 1% to Rang De and 0.5% to a contingency fund. “These investments are not for maximizing returns. The idea is to see how life changes for a few with your support,” says Ramakrishna.

Since these firms do not collect the money from lenders but only offer a platform for lenders and borrowers to connect, they don’t fall under Reserve Bank of India (RBI) regulations. However, the companies say they need protection and support from the government for accelerated growth. “We need a regulatory method so that we can have pool funds, so that loans can be disbursed as and when required,” says Siva Cotipalli, co-founder, DhanaX.

RBI, however, says its regulations are only for banks and non-banking financial companies. “Peer-to-peer lending does not fall under our purview,” says an RBI spokesperson. Currently, RBI has a regulation in place applicable to the unorganized sector, including moneylenders and others, but this merely prohibits lending at exorbitant rates.

Meanwhile, P2P lending has helped people such as Kaushalya Devi from Uttar Pradesh’s Bahraich district. A mother of four, Devi was looking for ways to supplement her family’s income. “An NGO worker approached me and said he would help me in getting the loan. He put my details (profile) on the computer and I got Rs5,000 in about two weeks,” says Kaushalya, who was helped by Rang De and now runs a provision store.

Experts say while P2P lending will always find takers, scalability will remain a huge issue. And these firms may not generate interest among regular venture investors as returns are low, since it is more of soft loans rather than investments with an eye on profits, and it is a long-term play. “There is no precedent of success of such firms in the country. Peer-to-peer lending hasn’t been a success story anywhere,” says Rajesh Srivathsa, managing partner, Ojas Venture Partners.

Microfinance companies don’t see P2P lending as competition, but expect these firms to come under RBI’s scanner in the long run. “If someone is lending Rs1 crore, it’s no more just individual lending. There will be questions as to how they are running it (the business),” says Chandra Shekhar Ghosh, managing director, Bandhan, a Kolkata-based microfinance company.

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Casino project to get Rs35 cr PE funding

Madhav A. Chanchani and Sarimul Islam Choudhury / VCCircle — Fri, 09 Oct 2009 19:22:00 GMT

In a first in India, a casino being built by Daman Hospitality Pvt. Ltd (DHPL) is raising Rs35 crore from Madison India Real Estate Fund Ltd, a $150 million (Rs698 crore) fund managed by Paracor Capital Advisors Pvt. Ltd, a person familiar with the matter said on condition of anonymity.

DHPL is building the casino at a resort in the Union territory of Daman near the west coast in Maharashtra.

The resort is being developed and managed by the $172 million, New York-listed gaming, entertainment and hospitality chain Thunderbird Resorts.

Srinidhi Rao, country head of Thunderbird, confirmed the development. Anil Pathak, CEO and managing director of Paracor Capital Advisors, had earlier this week declined to comment on the transaction.

Paracor’s previous investments in realty have been in hotel chain Sabari Inn and a residential development near Chennai.

In India, casinos are legal only in Daman and Diu, Goa and Sikkim.

The private equity (PE) investment in an Indian casino comes at a time when the global industry is facing depressed consumer spending and huge debts. Station Casinos Inc., one of the largest in Las Vegas, US, which became the biggest PE-controlled firm to file for bankruptcy earlier this year, is a case in point.

The deal is interesting in the Indian context, too. PE deal flow in leisure and hospitality businesses, largely driven by consumer sentiment and discretionary spending, has suffered a steep fall in the first nine months of calendar 2009.

Even though PE firms invested $127 million across 11 deals in January to September last year, they pumped in only $40 million over nine deals so far in 2009, according to VCCEdge, the financial research platform of VCCircle.

DHPL’s casino, which aims to start operations by the end of this year, will be branded as Fiesta and have a gaming licence under the Gambling Act of Goa, Daman and Diu, 1976.

The project, spread across 40,000 sq. ft, is expected to cost around Rs375 crore, including a 200-room resort. The casino is expected to have 500 electronic slot machines and will host games such as poker, blackjack and roulette.

DHPL is promoted by Ketan Patel, son of former Daman and Diu Congress MP Dahya Patel.

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Content from VCCircle

Investors back social initiatives, fund ventures

Deepti Chaudhary — Mon, 05 Oct 2009 16:20:00 GMT

Bangalore: When Pune-based sanitation services provider Saraplast Pvt. Ltd started hunting for funds late last year, it was confident of attracting investors. The company had all its documents in place, a three-year track record of profits and a business model that it thought could be scaled up.

Vineet Rai, founder and CEO of Aavishkaar, talk about why social venture funds are so active despite the slowdown. Download here.

However, Saraplast was baffled when investors indicated that they did not think its business of operating portable toilets was a business at all, even in a country where 55% of the population is forced to defecate in the open because of lack of sanitation facilities.

Filling a gap: Workers arrange portable toilets in Bangalore. Pune-based Saraplast has 600 portable toilets installed across India. Hemant Mishra / Mint

Saraplast has 600 portable toilets installed across India, in areas with a paucity of sanitation services. The firm leases out these toilets to clients and provides waste evacuation services on site on a daily basis through its network of cleaning trucks.

“We are offering a solution to address the sanitation crisis we are facing, but everyone is extra conservative. Our business would not appeal to a regular VC (venture capitalist), who looks at pure returns,” says Rajeev Kher, chief executive, Saraplast. The bulk of the demand for Saraplast’s services comes from the construction industry, followed by tourism corporations, municipal councils and event organizers. It is now in talks with the New Delhi municipal authorities for providing portable toilets for the Commonwealth Games next year.

Saraplast is what is called a social enterprise, aiming to accomplish social or environmental goals, besides meeting financial benchmarks. The conventional wisdom has been that such ventures under-deliver on financial returns although they can eventually become self-sustaining.

The firm ultimately found an investor. Micro-venture capital fund Aavishkaar India Micro Venture Capital Fund backed the firm in August, taking a 21% stake for an undisclosed amount. Saraplast is not the only social enterprise to be funded by Aavishkaar, which has backed four such firms this year. The investor deal-making spree comes at a time when VC funding in the country has declined by 70% amid the economic downturn. In fact, Aavishkaar, which had struck four deals last year, plans to double its investment this year. It is set to announce three more deals in about a month.

When compared with conventional VCs, Aavishkaar is one investment short of this year’s most active VC firm, Helion Venture Partners. Conventionally, social venture funding is less than a fifth of VC funding in the country; there are only a handful of investors in the space and the size of these deals ranges between Rs10 lakh and Rs15 crore.

What makes social enterprise investors tick? New unconventional sectors with unproven return records, the recession-proof nature of these businesses, opportunities to invest at a very early stage, small-ticket deals and the social impact of such projects.

“We are trying to demonstrate a large number of deals at a very early stage. We are trying to create value by discovering new sectors which have social impact and can offer returns of 20%,” says Vineet Rai, chief executive, Aavishkaar. Another prominent firm that has been making deals throughout this year, but has remained silent, is Acumen Fund India, the Hyderabad-based arm of a global fund. The fund has so far made five deals, as many as it struck last year. These deals are a combination of follow-on and new deals.

The follow-on deals include Dial 1298 for Ambulance, which provides affordable ambulance services through an easy-to-remember telephone number, and Global Easy Water Products Pvt. Ltd, which sells micro-irrigation systems.

“We have a mandate of committing Rs30-50 crore every year in India and we are on track,” says Varun Sahni, director of Acumen Fund.

A number of long-term foreign social investors are looking at funding Indian firms in the next 12-18 months, Sahni says, although liquidity is an issue for companies looking for short-term working capital.

“Primarily, all funds believe in looking at the growth story, so be it drinking water, agriculture or education, there is a market size of 300-400 million people here,” he says.

Besides Aavishkaar and Acumen, other prominent players in India backing social enterprises include Omidyar Network, Song Investment Advisors and Bamboo Finance.

California-based Omidyar Network has backed social initiatives such as the Rural Development Institute and Unitus Equity Fund, as well as Quikr India Pvt. Ltd, an online classifieds company. It is stepping up its plans to support entrepreneurship in India. It has committed $30 million (Rs142.5 crore) to support global entrepreneurship, especially in India and sub-Saharan Africa. “The ultimate goal of the commitment is to improve the quality of life for more than 10 million people living at the base of the pyramid,” says managing partner Matt Bannick in an emailed reply.

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