With traditional sources like debt still not easy to come by, entrepreneurs are increasingly looking to VCs for meeting their capital needs. The future looks promising for venture capital funds in India in the backdrop of a buoyant economy and healthy growth of companies, Sudhir Sethi, CMD, IDG Ventures India, tells Balaram Keelapattu
Q: How attractive are the opportunities for VCs now?
A: In 2007, India witnessed a total of $17 billion of PE/VC investments; up from $12 billion in 2006. In 2008, I expect PE/VC investments to grow to $20 billion. With the consistent GDP growth of over 8% for the past four years andthe emergence of a domestic market in sectors like retail, telecom, automotive and technology amongst others, Indian companies are witness to a healthy year-on-year growth. This growth requires significant capital infusion in Infrastructure, human capital build-up, technology, backbone and acquisitions. PE/VC funds form a significant portion of capital infusion due to traditional sources like debt not being able to meet this demand alone; hence PE / VC funds contribute to risk capital infusion significantly. Venture capital infusion crossed $1 billion in 2007; up from $0.5 billion in 2006; this is expected to be $1.5 billion in 2008. PE/VC growth in India is expected to continue in the next three to four years. However, it must be noted that most venture funds have moved towards PE funding for expansion/ growth funding.
Q: What are the key challenges for a fund?
A: A key challenge for a fund in India is lack of full cycle venture professionals i.e. those who have expertise in Venture investing. Another challenge which is likely to grow is the issue of fund raising; specially from domestic investors. First time funds will find it difficult to raise capital in the near future.
Q: Are there any specific segments that are attractive in the present market condition?
A: For a venture fund like ours, the technology sector looks very encouraging. Areas of traction for us include software products and services in business intelligence, security; niche BPOs like legal; digital consumer; financial services and payment; mobile VAS; engineering/ electronics, medical devices and semi conductors / embedded.
Q: Don't you think the possible global slowdown is like to change the equation in the market?
A: The global slowdown is a challenge for all companies, hence the need for seasoned management is higher. In addition, focused sales strategies and ensuring scale of revenue/profit on a highly differentiated product/service is critical.
Q: How supportive is regulatory environment in India?
A: Regulatory environment in India can be improved to facilitate local investors to invest in PE/VC funds beyond the existing norms at 5% of total assets. This will help additional capital to be raised from within India.
Q: What is the roadmap at IDG?
A: We at IDG Ventures India invest in seed and early stage technology companies. We have seen in the past 18 months over 750 companies. The $150 million IDG venture capital fund is likely to invest in a total of 25 companies; we have invested in eight already. IDG has committed approximately $40 million to our companies so far. Our vision is to be "the first top venture fund" for entrepreneurs in India. We just had Kiran Karnik join our board of advisors which includes N Balasubramanian, K B Chandrasekhar, Arjun Malhotra, Sridhar Mitta, Jagdish Sheth and V Sumantran. Our pace of investments is carefully calibrated to back the best of entrepreneurs over the next two years.