Young companies are hotbeds of ingenuity. And a smart way to spot them is to watch where venture capitalists park their money. Sudhir Sethi, Founder, Chairman and MD, IDG Ventures India, tells you where to look.
By Sudhir Sethi
The drive for entrepreneurial technology investment in India is about 15-years-old now. We are going through a second tech-investment cycle and we are seeing plenty of serial entrepreneurs. The kind of applications that typically get invested in, come from different domains and include enterprise, mobility, BI, security, machine-to-machine communication, robotics, healthcare, engineering, automotive, aerospace and maintenance for on-road and off-road capital equipment.
What’s the big trend today? It’s that almost 45 percent of new companies are product ventures. It is apparent that the global Indian has acquired the expertise to develop world-class technology products. These companies also have a sharper focus on product, the range, and the market, and I think these are safe formulas for success.
Here’s another trend: investor interest (and the number of companies that are looking for investors) aren’t ebbing with the slowdown, as many may think. In 1999, during my first year as a venture investor, we sifted through 297 new ventures. In 2008, our fund looked over 700 new companies, most of them typically less than three- or four-years-old. And in the current year, we have been studying about 250 companies every quarter.
Where the Ideas Are
The geographical spread of these investments seems to have a lot to do with the local industry of the region. So, for example, Delhi has a high concentration of mobile technologies (taking after the success of Bharti Airtel) and media companies (since it’s the home of channels like NDTV and others).
Bangalore remains a technology hub and, true to that reputation, the largest venture chunk goes to companies that deal in technology, the Internet, software products, aerospace, for instance. Interestingly, there are just under 300 investors in the country which focus only on technology and, combined, have between $2 to 2.5 billion (about Rs 10,000 to 12,500 crore) at their disposable. We believe that the Internet is picking up good investments because there is still a large return expected from it. Mobile devices and mobile apps are other hot areas mainly because India has a large market for these — both in the enterprise and consumer space.
In the Western sector (like Mumbai and Pune) there is an emphasis on media and Internet-related ventures, in addition to a substantial amount of interest in automotive and civil engineering industries. Take for instance, how during a meeting in Pune, I learnt that in the next 15 years, 80 percent of the bridges in the US will have to be re-constructed or re-engineered and a large part of those projects will come to India. As customers, CIOs should talk to new ventures. Technology solutions available in India are world class and even though the focus is on less expensive platforms, there is no compromise on quality.
Where the Money’s Going
One area of interest (with a high return potential) — where I believe Indian companies have the domain expertise to see success is BI and analytics. This is because BI is used in areas like retail, finance, telecom, and general enterprise applications, too.
Facilities management is also attracting a lot of venture capital. This includes water, oil, gas, electricity, and waste products management. Of course, software, engineering, manufacturing, healthcare, and medical devices never go out of fashion. These are the areas where you will see a lot of capital flowing to, from both domestic and international investors.
Security has potential. We recently conducted a landscape survey in the domain of digital security to study its profitability. We found that among the top 20 IT players, only five have relevant and serious practices in security. Another observation is that there’s enough investment going into energy generation but very little is going into managing it. We found that there were no young companies in that area. Also, electronic waste management is another area for good funding.
Most product companies are also focusing on remote management. Reva for instance, has a remote management application that helps in car maintenance — whether their clients are in India or elsewhere.
The New Dynamic Among Ventures
What seems to drive these newborn companies, irrespective of their domain, is the fact that their first customer shipments are headed for domestic consumption — mostly to big Indian companies. Earlier, companies like these aimed their first shipments to global markets (because they had no domestic customers). This is a very heartening trend because this makes it easier and therefore faster for young companies to fine-tune their services. Also, these companies have enough funds to create world-class teams and their investors have the patience to stick with the company and build products — rather than focus on quick gains. Also, investors are helping their ventures broaden their horizon to a global scale.
A big differentiator in new ventures is that most of them, in addition to having a technology map, also have a sharp business focus, and a compelling business case. Revenue enhancement seems to be a key focus. Also, the approach is on getting IT to help increase revenue, even advertising. Increasingly, companies are using IT for processes like shipments, logistics, human resources and energy. And this is resulting in sizable cost savings for many large companies.
At the same time, we’ve observed that IT deployments have lower costs because a renewed focus on ROI requires that these deployments have a 12- to 18-month payback period. The key here is simplicity — in terms of usage and the speed of a deployment — and an increased focus on product.
Another trend is that because Indian companies are beginning to emerge as global players, they need to supply service at international locations. So with the clear business opportunities, there is also a growing pressure on smaller companies to service their clients on a global basis.
On the flip-side, customers today are more willing to take a risk with young companies. One reason could be the international quality of products and services they offer. That is a very powerful theme because the benefits of a product or a service are available at a much lower cost today.
I would say that the technology solutions available in India are world-class and even though the focus is on less expensive platforms, there is no compromise on quality. If CIOs feel the need to de-risk themselves, they should open talks with new ventures when their first customer shipment is already out of the door.
Sudhir Sethi is founder, chairman and MD, IDG Ventures India, early-stage venture capital firm investing in technology and technology-enabled companies. Send feedback on this column to email@example.com