India is emerging as a key destination for global venture capital investing and a prominent hub of technology innovation. There have been some compelling venture investments recently, especially in the technology innovation space. In this interview, Mr. Sethi, Chairman, IDG Ventures, talks about the key trends in the domestic VC scene and the investment process. Mr. Sethi highlights how IDG adds values to the companies it invests in and also shares some advice for entrepreneurs seeking VC funding.
What are some key trends that you are observing in the Indian venture investing landscape?
India has risen as a key emerging market destination for global venture capital (VC) investing over the last few years, with one of the fastest growing economies globally, driven by a large middle class leading to vibrant domestic consumption, robust domestic talent pool and strong manufacturing base.
India witnessed close to USD 5 billion VC investments across 973 deals between 2007 and 9M 2012. Technology defined as Enterprise Software, Digital Consumer (internet, mobile and new media), and Engineering – has been the critical growth engine of Indian venture investing, accounting for about 70% of all VC investments between 2004-2009.
The development and adoption of new technologies is spreading out from the Silicon Valley as an epicentre, to tech hubs around the world. India is now globally recognized as the second most likely new global centre for technology innovation, behind China and ahead of Japan, Brazil and Russia. Bangalore has emerged as India’s premier technology and entrepreneurship destination, with a unique combination of 76% non-local population, presence of global and domestic R&D labs, land availability, availability of risk capital and English as a widely spoken language. Tech hubs such as Bangalore are competing to move up the innovation ladder, from being pure outsourcing destinations to emerging as originators of cutting edge technology innovation, R&D and IP.
Asia leads the charge in mobile communication and commerce, skipping past the ‘PC generation’ of western countries. India has skipped the landline phase and is in process of skipping the PC phase. It is also likely to skip the need for physical retail outlets through e-commerce, the need for physical schools through e-learning and partially, the need for physician consultation through e-healthcare.
India is now globally recognized as the second most likely new global centre for technology innovation, behind China.”
How has the exit environment been for Indian VC investors?
Technology has dominated the venture-backed exit landscape in India, both in terms of number of exits and return multiples for investors. Between 2004 and August 2011, there were 152 venture-backed exits in India, with 111 (73% of the total) tied to technology companies. In terms of returns, the average multiple on invested capital for technology exits was about 5.2x, compared with 3.4x for non-technology exits. Close to 30% of technology exits resulted in return multiples in excess of 4.0x to investors. Further, approximately 32% of these exits were larger than US$100 million in deal size, indicating the presence of highquality technology exits in the Indian venture eco-system.
Within the technology sector, Indian venture capital investors have utilized a variety of exit modes to realize value from their portfolio companies, including IPOs and strategic sales (M&A) to both foreign and domestic acquirers. Between 2004 and August 2011, strategic sales dominated technology VC exits, followed by IPOs and buy-backs. In terms of average returns on invested capital, both strategic sales and IPOs were at par, thus indicating the attractiveness of Indian start-ups for both companies and public investors.
Within strategic sales, Indian companies have increasingly become valuable to foreign acquirers, primarily due to India’s growing domestic markets and the country’s emergence as a global innovation hub. Between 2004 and August 2011, foreign acquirers comprised about 61% of total technology exits (by number) via strategic sales. On average, foreign acquirers paid a multiple of 7.0x on invested capital compared to 4.1x for domestic acquirers.
Indian companies have increasingly become valuable to foreign acquirers, primarily due to India’s growing domestic market and the country’s emergence as a global innovation hub.
The e-commerce sector has been the centre of attraction from an entrepreneurship perspective over last 2-3 years. What are your views on it?
Multiple factors – such as rise of a young, well-earning and globally exposed middle class, Mobile Internet and broadband wireless access and affordable smartphones, are giving rise to a digital consumption wave in India. The Indian Digital Consumer segment comprises of close to 150 Mn Internet Users (projected to reach 450 Mn by 2015), close to 50 Mn Mobile Internet users and about 900 Mn wireless subscribers . This large base is driving rapid consumption of products, services and content via digital mediums. Time spent online by Indians is expected to quadruple between 2009 and 2015, boosted by Mobile Internet use.
An attractive area of growth in Digital Consumer is e-commerce, which is being fuelled by a combination of rising consumption power in Tier II and III cities, and lack of availability of high quality branded products in offline channels. Indian ecommerce (travel + e-tailing) is expected to grow from close to USD 9 billion in 2012 to about USD 24 billion by 2015. This growth will be driven by industry leaders such as Flipkart and Myntra. Segments such as apparel, shoes, luxury items and baby products are emerging as large online categories.
Taking advantage of this growth, IDG Ventures has built a strong e-commerce portfolio in India. With an eye on the USD 60 billion fashion market that is ripe to go online, IDGVI invested in Myntra that has since gone on to become India’s #1 online store for fashion and lifestyle. Another IDGVI investment in the space is Firstcry, which is the #1 e-commerce platform for babycare, maternity care and kids products in India. The company is targeting the Indian Babycare products market, currently at USD 4+ billion and growing at 15%+ YoY. Valyoo Technologies (Lenskart.com, Watchkart.com and Bagskart.com) is a fast growing e-commerce company in the eyewear and accessories space, while Zivame is a leading online retailer in the lingerie space. Another unique investment by IDGVI is in eShakti.com, which sells customized India-manufactured western apparel over the Internet, to women in the US market.
India is currently witnessing a mobile revolution of sorts, with mobile devices becoming the first screen for an Indian consumer. Is IDG Ventures excited about this segment?
Vserv is a global mobile ad network that partners with mobile app developers and WAP publishers. Vserv’s pioneering technology AppWrapper powers monetisation across 10,000+ mobile apps across Android, Windows7 & J2ME platforms.
Another high growth mobile investment is Apalya, which is the #1 live TV and video-on-demand platform for handheld devices in the country. Apalya aggregates TV/video entertainment content from multiple content providers and then delivers the same in live streaming as well as video download use optimized for different mobile phones. IDGVI has also invested in the mobile apps space through Sourcebits, which is one of the world’s leading development services players in the Mobile App and Game Development area.
With success stories of product companies such as Tally and Zoho emerging out of India, do you think India is now a major force to reckon with on the global enterprise software stage?
The Indian enterprise software sector has been a favourite part of India’s strong economic rise over the last decade. With total revenues of the Indian IT and ITES sector pegged at USD 100 Billion, India is only behind the US in global enterprise software prowess. The sector continues to be highly export oriented, with export revenues estimated at USD 59 bn in FY2011, and about 61.5% revenue coming from the US.
The first generation Indian IT companies grew by doing generic outsourced services work for large global companies. The IT sector gradually transitioned from generic IT services to providing niche and specialized Business Process Outsourcing (BPO) services to global clients in the early-mid 2000’s. These included advanced services such as healthcare/ pharma research, legal support, intellectual property research, design and development (auto, aerospace, etc.), and animation and graphics.
IDGVI believes that the earlier 2 waves have created conditions that are leading to emergence of India as a global product development destination. Both earlier waves have created a mix of high quality skilled technical talent, exposure to global clients and practices, domain expertize in specific areas and entrepreneurial spirit to set up companies. This is creating attractive investment opportunities for VC investors in Indian companies playing in the global pure-play product development space. The space is already seeing global product companies such as Tally, Manthan and Zoho being built out of India. As per Zinnov, software product revenues of Indian companies will reach close to USD 10-12 billion by 2015, out of which close to USD 6-7 Billion will be exports.
IDGVI has formulated two investing thesis in the space – Business Intelligence and Analytics and Security Products and Services. According to IDC, the business analytics software market will grow from USD 34 billion in 2012 to reach close to USD 51 billion in 2016. IDGVI has invested in 2 product companies in this space – Manthan, which provides BI Software for Retailers & CPGs; and iCreate, which provides BI Software for the BFSI segment. Similarly, as per Gartner, worldwide security software revenue totalled USD 17.7 billion in 2011. IDGVI has 2 investments in the space – one on the services side in Aujas, which offers global Information Risk Management services; and one on the cloud side in iViz, which offers cloud-based penetration testing service for web applications.
IDG Ventures is one of the few funds in India to have taken a lead role in medical device investing. What are your views on this space?
The Indian Medical Electronics market size is expected to reach about USD 6.4 Billion by 2020 . Demand in the space is being driven by robust public and private investments in domestic health infrastructure, leading to rising number of hospitals, clinics and clinical laboratories. Interestingly, high quality products are sought after in the domestic market (particularly in the private sector), with the higher end of product spectrum dominated by multinationals with extensive service networks. In addition, the Indian government is introducing initiatives to provide affordable healthcare to rural citizens as well.
IDG Ventures is one of the few VCs in India to have pioneered medical device investments, and has built a robust investment thesis in the space with two investments. The first is Perfint, a medical device company in the space of image guided interventional oncology assistance solutions. The other is Forus, which has an integrated image guided product platform in the ophthalmology space. Both companies are leading the way by building globally relevant and IP driven medical device product platforms out of India.
What according to you are the biggest advantages a VC fund like IDG Ventures India brings to the board of companies it invest in?
There are four ways venture capital investors can create value in their portfolio companies. First, one of the key value additions by funds such as IDG Ventures India has been the ability to engineer rapid global and domestic scaling of young companies through deep operating experience. By partnering with VC firms, entrepreneurs can benefit from decades of experience in building large companies across multiple sectors and dealing with diverse business situations.
The second critical value addition from VC funds in India has been in senior-level management hiring, as investors can utilize their deep networks to hire the best talent for portfolio companies. The VC firm brand also lends that much more credibility to a start-up as an employer of choice.
Third, VC investors ensure that the company remains adequately capitalized. In the Indian venture market, 60% of the companies involved in series A financings of less than US$2 million failed. VCs attract both high quality co-investors as well as follow-on investors, thus ensuring that entrepreneurs don’t run out of fuel.
Finally, Indian venture capital investors have ensured that Indian start-ups are on the path to sustainable and high quality growth by enforcing high standards of corporate governance and financial prudence.
What do you look for while investing in an early stage venture?
We look to invest in high-potential technology and technology enabled businesses with the following characteristics:
IDG is the world’s largest IT media company, and has played the role of a global technology proponent and thought leader through IDC Research. That philosophy has percolated down to IDGVI as well, wherein we look to invest in companies that are disruptive, differentiated and potential global category leaders in their segments, and sectors that are high-growth and can potentially provide venture returns.
What do you think differentiates IDG Ventures in the Indian venture investing landscape?
Our key differentiators include:
What are the characteristics of a good business model according to you?
A good business model is one that is rapidly scalable, has robust unit economics that helps the company achieve profitability within a definite time frame, and complements the disruption that the venture brings vis-à-vis competition.
What are some of the most common things most start-up entrepreneurs routinely lack?
Hiring quality talent is often a key challenge for most early stage entrepreneurs, given constrained resources and lack of an established brand. Having reputed investors on the Board helps the company as they bring strong recruitment networks to the table. Also, they lend their brand to the venture which helps it enhance credibility of its offerings.
“Hiring quality talent is a key challenge for most early stage entrepreneurs, given constrained resources and lack of an established brand.”
Another challenge is the ability to think big and think global. With the world getting increasingly flat, rapid scale up of Indian early stage companies will be contingent on whether Founders have a global perspective, and whether they can penetrate new geographies and launch global offerings. Funds such as IDGVI bring with them global expertize and best practices on how companies can scale up across geographies.
What are your views on Venture Capital as a career option?
VC offers an extremely rewarding career option with Investment Professionals being at the cutting edge of technology and business trends, getting early exposure to Board level issues and direct interaction with CXOs, as well as intellectually challenging in terms of identifying right investment opportunities and nurturing them. At IDG Ventures, our team consists of professionals from diverse backgrounds such as technology, engineering and operations, consulting and investment banking.
What advice you would give to an entrepreneur who is building a company today and seeks VC funding?
Indian entrepreneurship space is seeing a definite trend of young Indian companies going after global markets, and we see that in our portfolio as well. Companies such as Perfint, Manthan and Aujas Networks now serve customers across both developed and emerging economies.
The key to going international is being adequately capitalized. Raise enough capital to be able to fuel your growth. Also, don’t have Indian professionals heading up your US operations; hire locally.