| Are VCs now finally venturing in India ? |
Venture capital is different from traditional sources of financing. Venture capitalists finance innovation and ideas, which have a potential for high growth but with inherent uncertainties. This makes it a high-risk, high return investment. Apart from finance, venture capitalists provide networking, management and marketing support as well. In the broadest sense, venture capital connotes financial as well as human capital. The big focus of venture capital worldwide is, of course, technology. In 1999, US$30 billion worth of venture capital was invested in the U.S. of which technology firms got 80 percent approximately. By contrast, in India, cumulative disbursements to date are less than US$500 million, of which technology firms have received only 36 percent.
But now, India is recognised for its globally competitive high technology and human capital. India’s recent success story in software and information technology is almost a fairy tale against several odds such as inadequate infrastructure, expensive hardware, restricted access to foreign skills and capital, and limited domestic demand. India has the second largest English speaking scientific and technical manpower in the world. Some of its management (IIMs) and technology institutes (IITs) are globally known as centers of excellence. Every year, over 115,000 engineers graduate from the Government and private-run engineering colleges. Management institutes produce 40,000 management graduates annually. Many also specialise through diploma courses in computers and other technical areas. India also has a vast pool of existing and on-going scientific and technical research carried out by a large number of research laboratories, including defence laboratories as well as universities and technical institutes.
However, there are beliefs that India lacks strong anchor companies like HP and Fairchild, which funded the start-ups of early Silicon Valley entrepreneurs. Others believe that Indian entrepreneurs are not yet globally connected and are often unwilling to share equity with a quality risk capital investor. There was also a perception that start-ups in India typically do not attract the right managerial talent to enable rapid growth. Finally, exit options were considered to be few, with the general feeling that entrepreneurs were unwilling to sell their start-ups even if it was feasible. As a result, much of the risk capital available was not quickly deployed.
India certainly needs a large pool of risk capital both from home and abroad. All this can happen provided there is the right regulatory, legal, tax and institutional environment; there are risk-taking capacities among the budding entrepreneurs; start-ups have access to R&D flowing out of national and state level laboratories; and universities and infrastructure support, such as telecom, technology parks, etc. keep pace.
Thus steps are being taken at the level of the Government, Ministry of Information and Technology, and the CSIR for improvement in infrastructure and R&D. Certain NRI organisations are taking initiatives to create a corpus of US$ 150 million to strengthen the infrastructure of IITs. Meanwhile, since March 1999, things have been changing dramatically for the better. The initiatives of the Government of India in formulating policies regarding sweat equity; stock options; tax breaks for venture capital along with overseas listings have all contributed to the enthusiasm amongst investors and entrepreneurs.
Nasscom’s vision for India states that it should become one of the top five global locations in the creation of technology ventures, leading to annual investments of over US$ 10 billion by 2008. New ventures should cover all priority areas of growth: value-added IT services, IT-enabled services, software products, and E-businesses. The following chart exemplifies the growth of venture capital and angel investments in India’s I.T. software and services sector (including dotcom companies)
VC / Angel Investments in High-Tech firms in India
Year
Rs. Million
U.S. $ million
1996
700
20
1997
3,200
80
1998
6,100
150
1999
14,000
320
2000
32,000
750
2001*
50,000
1200
2008*
450,000
10,000
* Investment expected
In the year 2000, the finance ministry announced a major liberalisation of the tax treatment for venture capital funds to promote the flowering of knowledge-based enterprise and job creation. Besides this, SEBI was made the single point nodal agency for registration and regulation for both domestic and overseas venture capital funds. This liberalisation and simplification of procedures is expected to give a strong boost for NRIs in Silicon Valley and elsewhere to invest some of their capital, knowledge and enterprise in ventures in their motherland.
The Government of India has reiterated its commitment to give a fillip to the Indian software-driven IT industry by nucleating a National Venture Capital Fund for the Software and IT Industry (NFSIT). NFSIT, set up in association with various financial institutions and the industry, would operate under the umbrella of the Small Industries Development Bank of India (SIDBI). The objective of the fund is to encourage entrepreneurship in the areas of software, services, and other IT related segments in which India has inherent as well as acquired competency.
While only 8 domestic VCFs were registered with SEBI during 1996-1998, 14 funds have already been registered in 1999-2000. Institutional interest is growing and foreign venture investments are also on the rise. Many state governments have already set up venture capital funds for the IT sector in partnership with local state financial institutions and SIDBI. These include Andhra Pradesh, Karnataka, Delhi, Kerala and Tamil Nadu. The venture creation is happening in India. But an exponential growth is on the anvil. The opportunity that India presents is becoming evident, as pieces of the puzzle fall in place. With the Government of India backing the IT industry whole-heartedly and investors and entrepreneurs realising the potential upside in creating something of value, it won’t be long before all pieces fall in place to present a picture of the Indian venture creation and incubation engine running at full steam.
K Venu Babu
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