Every so often India is rediscovered. Hippies in the ’60s sought enlightenment there. Then came the Deepak Chopra enthusiasts. And now, venture capitalists are seeking to cash in on a raft of Internet startups. But like the early spiritual travelers, most VCs are about to discover how elusive nirvana can be. Emboldened by the meteoric rise of Internet stocks on the Nasdaq, and starstruck by the billions made in the Silicon Valley, many Indians — bankers, industrialists, and stock brokers — have decided to become venture capitalists. In the past 18 months, the equivalent of $500 million was invested in more than 500 dot-com startups. The result: the subcontinent now boasts no fewer than 16 broad portals on India, 30 on cricket, 15 on women, and a dozen Web sites devoted to youth. The problem is that while India appears at first to be rich with possibilities, in reality there’s not a great deal of online opportunity. Those dot-com enterprises are vying for the mere 3 million Internet users among India’s billion-plus population (compared with 40 million users in the United States). Like their hippie predecessors, few VCs or Internet entrepreneurs are likely to gain anything close to enlightenment.
Slowly but surely this Indian dot-com madness is becoming doubt-com. “In India we don’t really believe that the plain vanilla business-to-consumer dot-com plays are going to work. Sooner or later there is going to be some fallout,” says Rakinder Grover, a San Francisco-based partner at the Walden International Investment Group . The venture capital neophytes — former stock brokers and Wall Street backroom boys — who have pumped billions of rupees into these shaky Internet companies will soon be hit by a train the size of the Rajdhani Express. A single example: Chrysalis Capital invested undisclosed millions in ZipAhead.com , a youth community site whose business model depends on advertising. How can ZipAhead and Chrysalis make money when only 0.2 percent of India’s total ad spending in 1999 went to dot-com companies?
But while India’s Web market may be primitive, it is home to some of the world’s most skilled technologists. The smart money is ignoring ephemeral Internet startups in favor of the nation’s single biggest resource: human capital. Established VC firms like WaldenVC and ConnectCapital are focused on sectors where India is unmatched, like software development, software services, and remote services.
India’s elite engineering college network, the Indian Institute of Technology produces thousands of world-class engineers every year. Government-run universities educate millions of English-savvy graduates. Add to this the many Indian engineers hungry for work after solving the world’s Y2K problems, and it’s clear that India’s resource pool is not likely to dry up any time soon. And if India lacks a solid domestic market for its brainpower, demand in other markets is sky-high.
“Leveraging Indian talent for global markets is a no-brainer,” gushes Somshankar Das, former Walden International partner who set up e4e Ventures , a $150 million fund-cum-incubator operating in India and Silicon Valley. “India has created a wonderful raw material for the technology business,” concurs K.B. Chandrasekhar, Mr. Das’s partner in e4e Ventures. Mr. Chandrasekhar is a serial entrepreneur who founded Web-hosting giant Exodus Communicationsand Jamcracker , a Sunnyvale, California-based application service provider (see “Who’s Laughing Now?” September).
India’s billion-dollar operations like Wipro Infotech Group and Infosys Technologies rely on Indian talent to serve global markets. Likewise, two-year-old TechSpan , an Internet services company based in Sunnyvale with backroom operations in India, is expected to generate $75 million in revenue this year. It is already profitable. Says Mr. Grover of Walden International, which has been doing business in India for nearly four years now and is a TechSpan investor: “Cross-border investing has proved to be a good thing for us.”
Other Walden investments include wireless messaging company Unimobile (formerly Gray Cell) and MindTree Consulting , an e-business services company based in Bangalore, India. No surprise — both companies follow the same strategy of back-office and tech operations in India, and sales and marketing operations in Europe, Japan, and the United States.
The newly established WestBridge Capital adheres to this same principle. “We want our fund to be a bridge between India and the United States,” says Sumir Chadha, general partner of WestBridge. Mr. Chadha and his cofounders, Raj Dugar and K.P. Balaraj, plan to back only those Indian companies that can easily market their services to the West.
Founded by three ex-Goldman Sachs bankers, the firm does not fall into the neophyte VC category. WestBridge has $125 million under management and is based in Mumbai, Bangalore, and San Francisco. While at Goldman, Mr. Chadha invested about $140 million in 17 companies like FreeMarkets, WebMethods, and LivePerson. For WestBridge, attractive sectors include IT services, Internet infrastructure products, and online customer-relationship management companies.
CURRYING LOCAL FLAVOR
Having experience in India as well as in end markets like the United States may prove the vital difference for VCs embarking on this bridge strategy. Establishing overseas operations, helping forge alliances in the United States, and recruitment overseas are critical. “It is easy to raise funds, but you need to have the experience to guide a business through its life cycle and build a global-class company,” says Ramanan Raghavendran of ConnectCapital. He speaks from experience: as a partner at General Atlantic Partners, he led that firm’s investments in winners like ETrade and Proxicom, a feat he repeated at New York-based Insight Capital Partners. ConnectCapital’s approach is markedly different from the “take-my-money” attitude adopted by the VCs who have recently discovered India.
The current wave of entrepreneurship and venture funding in India has been inspired by the success of Indian entrepreneurs in Silicon Valley and their billions. The chutzpah-laden careers of Mr. Chandrasekhar, Sabeer Bhatia (cofounder of Hotmail ), and Gururaj “Desh” Deshpande, the founder and chairman of Sycamore Networks , inspired others. The success of the IPO of Infosys Technologies last year did not go unnoticed either. InfoSys raised $61 million in March 1999 and currently enjoys a market cap of $17.2 billion.
And what a free-for-all it’s been. In 1998 there were less than half a dozen venture capital firms in India. Halfway through 2000, that figure has jumped to more than 50. More are likely to set up shop in India soon. ING Barings is putting together a $100 million India fund, while H&Q; Asia Pacific has plans to establish a presence in India.
Over the past 24 months, millions of dollars have been thrown at any Indian company with a dot com in its name. It’s little wonder that venture capital investments in India are expected to jump to $3 billion in the next 18 months, almost ten times the $320 million that flowed into the country in 1999 (up from $292 million in 1998 and $233 million in 1997), according to the Indian Venture Capital Association.
According to Merrill Lynch, in 2000 alone more than $100 million has been invested in 80 pure-play Internet companies. Leading the pack is Chase Capital Partners investing $26.6 million in 12 companies, followed by Chrysalis Capital pumping $20.9 million into six dot coms, and the Citibank Private Equity group doling out $12.5 million to eight Internet startups. As a result, there are over a dozen players in almost every vertical category — women, news, youth, financial content, and auctions.
Nobody has bothered to ask one basic question: how can India — still largely in its Internet infancy — support dozens of portals, free email services, ISPs, and hundreds of online retailers? Total ad spending last year across all media in India was $2 billion, according to Merrill Lynch. This leaves room for only one or two companies to survive with an ad-based business model, and already there is at least one leader: Rediff , which has established itself as a domain name to remember. On June 15, the three-year-old portal site made its debut on the Nasdaq, where it raised over $50 million.
Despite Rediff’s market dominance, other portals continue to receive millions of dollars in venture funding. One of them, DigitalHT (now called Go4i.com ), received a rumored $40 million in funding.
Warning signs of an investment fiasco can be gleaned from market research. Less than one in a thousand people in India have Internet access, compared with four of every ten in the United States. Only 4 out of 1,000 Indians have PCs, against the global average of 64. The miniscule base of users, even if it grows to 11 million as some research firms predict, will not be enough to justify the hundreds of millions in investments pumped into the dot coms. Add to this the arrival of deep-pocketed companies like Microsoft Network and Yahoo, which have launched Indian portals. Their presence will undoubtedly accelerate the shakeout predicted by Mr. Grover. In fact, an August 1999 survey by research firm IDC showed that Yahoo, not even a localized portal, was the most popular site among Indian Net users.
“Over the past few months things went totally out of whack, as no one really paid any attention to business models,” explains Arjun Malhotra, CEO and chairman of TechSpan. Mr. Malhotra is no stranger to the entrepreneurial world. In 1975, he and five others cofounded India’s first technology startup, Hindustan Computers. Today the company and its offshoots enjoy a market capitalization of over $15 billion.
Still, e4e Ventures’s Mr. Das — and others — are confident that within a few years excellent investment opportunities in India will arise. Mr. Das points to areas like chip design, which have been totally ignored by VCs. Brainpower and human capital are two resources that India has in abundance. It’s only a matter of time before India’s entrepreneurial engineers apply their know-how to growing world technology markets.
And as Indian brainpower makes its mark on the planet’s high-tech markets, there will likely be two successive waves of Indian companies funded: those that target the overseas Indian population, followed by those that serve maturing domestic markets. Though far off, that could open up opportunities for the VCs left standing after the coming Internet shakeout.
Lessons learned the hard way offer their own kind of enlightenment.