IDG Ventures India is an early-stage venture capital firm investing in the country’s technology and technology-enabled companies. Sudhir Sethi, founder and managing director of the firm’s Indian operations, says there are plenty of deals making opportunities in this relatively untapped sector.
Recently there have been several reports of traditionally tech-focused PE firms from the West setting up shop or reinforcing their offices in India. Do you feel the space in which you operate is becoming more crowded?
If you look at the venture market in India, between 2004 and 2009, technology investments by venture firms totaled about $2.5 billion. Between 2010 and 2015 we are expecting about $7.5 billion in tech venture investments - that’s the size of the technology investment markets we work with. The crowded market is in the growth private equity market; in the venture technology market there is some crowding in the internet space, but in enterprise software, in medical devices, in the whole energy sector, there is no crowding. In fact, there are a number of players who know the space very well, and most of us work very closely with each other. So we do not see crowding in the space at all.
How does IDG Ventures differentiate itself from its competitors?
As far as differentiation in concerned, the biggest differentiation comes from the operating background of the IDG Ventures India team. And that’s a very important thing; most of us have built companies in the domain. The other differentiating factor is the whole area of mentoring members and growing the best team in the country, knowing the markets and knowing how to scale a company over a period of time in a capital efficient manner, knowing how to get new capital into the company.
Infrastructure seems to be a key story in India at the moment. How does technology tie in with the trend- especially at the stage in which IDG Ventures operates?
The lack of infrastructure or the inefficiencies in the physical infrastructure in the country provide a technology opportunity for people like us. IDG Ventures India has invested in a company called ConnectM, it’s in the space of energy management. Power management and efficiencies can be increased by software and technology; this is one classic example in the country. Another example of technology enabling infrastructure is in the space of location mapping. Education in the country is physical in nature. IDG Ventures India has invested in a company called iProf, which does distance learning through technology, through tablets. And its courseware is tuned to tablets. There are about 10 million students in India who study business on paper today; we are transforming 1.5 million students this year to use technology enablement. The other kind of infrastructure is digital security. IDG Ventures India has invested in two companies that are providing enterprise security on the digital highway. So yes, there is a lack of physical structure which is creating opportunities through the use of technology in education, enterprise, energy management, and location management and so on.
What has the exit market been like for the technology sector?
Exits have been good over the last six years - there have been 142 exits with 100 exits in the technology sector. For the 55 tech exits where full data is available, the return on capital has been 5.9 times capital invested. The majority of the exits that took place have been between $100m-$500m valuations, and 63 percent was through M&A.
Do you agree with sentiments that there is a capital overhang in India at the moment, and if you exclude infrastructure, is it a challenge to find good deals in the country?
I would disagree with that. For the last 12 years I’ve heard that there was a capital overhang in the country. If you look at India, we’re an economy growing at 8.5 percent per annum for the last five years, and we’re likely to grow at anywhere between 8 and 9 percent for the next five years. There are tremendous growth opportunities. The total private equity investments in the country were $40 billion between 2004 and 2009. Between 2010 and 2015 we expect this to be about $70-75 billion. This does not include infrastructure, and this does not include real estate. So, is this large? I don’t think it is from an economic point of view where we are growing at 8.5 percent per annum. However, if you’re talking about deal levels, then yes, good deals are always in short supply. The manufacturing level, in my mind, is going to be increasing in terms of capital absorption. I think the other sector which will be increasing, where many PE funds do not have an expertise on today, is technology. The technology sector in B rounds and C rounds, including e-commerce, is rapidly growing. The amount of capital going into technology ventures in the country, out of this $75 billion in the next five years, will cross at least $10 billion. So one of things I am seeing is that the large PE players will have to learn non-traditional sectors like technology and e-commerce because that’s not what they’ve been doing so far.