Making India a hub of venture capital
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By Staff writers
TheDeal.com
Mon Sep 11 10:29:50 PDT 2006
It's monsoon season in India. But these days not only rain is pouring on the subcontinent--venture capital is cascading into Bangalore, Hyderabad and the country's other technology hotbeds as investors try to fertilize one of the fastest-growing economies in the world.
That's just what Sumir Chadha has been waiting for. The 35-year-old founder of WestBridge Capital Partners, a leading Indian venture firm, in May merged his outfit with Silicon Valley lion Sequoia Capital Partners. The move highlights not only the enormous promise that large venture capital firms see in the country but also the mounting risk as competition heats up for the juiciest deals.
"India has become too topical among U.S. VCs," says Chadha, who left Goldman, Sachs in 2000 to form WestBridge just as the Internet boom was winding down. "There is too much enthusiasm without enough knowledge or understanding. As a result, valuations are rising too fast, and more importantly, many deals that should not be getting funded are raising capital from U.S. VCs."
Chadha, formerly a consultant with McKinsey, warns that many inexperienced firms "are going to burn their fingers" in India. Yet for him, the greatest risk was getting left behind in what is an unprecedented explosion of wealth in South Asia.
Venture capital investment in India surged 400 percent, to $3.6 billion, during the first half of 2006, compared with the same period last year, according to the Asian Venture Capital Journal. Though China outpaced India with $5 billion of investment for the first half, India surpassed its northern neighbor in volume of deals, with 124 transactions. Sequoia's new India fund, which will focus on later-stage investments, just closed with investments of $400 million. Sequoia Capital India II, which was raised in 2005 by WestBridge, focuses on early-stage companies.
At least seven U.S. venture firms are raising funds specifically to invest in India. The list includes such established players as Draper Fisher Jurvetson and Matrix Partners, which recently closed a $150 million fund. Other firms, such as Battery Ventures, Norwest Venture Partners and Bessemer Venture Partners, have struck sizable high-tech deals. Bessemer took the further step of setting up an office in India in 2004, and it will soon have company. According to Indian news reports, venture giant New Enterprise Associates is teaming up with New Path Ventures to raise a $105 million fund, reportedly called NEA IndoUS, to invest in India, with the firms jointly opening shop in Bangalore. Other major U.S. venture players exploring their options in India are the Mayfield Fund and Greylock Partners.
Although such activity is priming the innovation pump in India, the torrent of money is already sparking concerns. "This rush of funds has the potential for a short-term oversupply and some digestion issues," says Mark Sherman, a partner at Battery Ventures. He says entrepreneurs are "shopping the term sheet," or playing one venture firm against another not only for the best company valuation, but also for the bidder with the most experience in nurturing young companies. Still, Sherman predicts India will emerge as "one of the core venture capital investing hubs in the world."
Only a few years ago, WestBridge and rival JumpStartUp had the venture tech space in India to themselves. Early this decade, several firms, including Rupert Murdoch's eVentures India, had withdrawn from venture investing in the country after suffering losses tied to the dot-com bubble. Others, such as ChrysCapital, had turned to less risky private equity investments.
Then, over the past year, venture investors began turning up in India in droves. The wave of interest dates back to 2003, when executives with Silicon Valley Bank organized a junket to India for high-level American venture capitalists, including Dick Kramlich of NEA and Rob Chandra of Bessemer. Impressed with the dynamism of "Silicon India," several of the venture firms subsequently set up temporary digs at the bank's Bangalore offices, dubbed Sand Hill East.
Venture capitalists who, as recently as a year ago, might have thought twice about investing in India are now on the march. In the past six months, Norwest Venture Partners has invested in two Indian companies--travel site Yatra Online and software product developer Persistent Systems. Norwest managing partner Promod Haque predicts that Indian companies in the Internet, media and mobile sectors will soon eclipse the current crop of homegrown corporate giants.
Silicon Valley kingpin Kleiner Perkins Caufield & Byers has placed its own bets on India. Pairing up with India-based Sherpalo Ventures, which was founded by Google angel investor Ram Shriram, Kleiner Perkins has made early-stage investments in three start-ups: travel portal Cleartrip travel Services, job site Info Edge (India)--called "Naukri" in Hindi--and wireless payment software developer Paymate India.
Kleiner Perkins' Ajit Nazre, who is spearheading the firm's India strategy from Sand Hill Road in Menlo Park, Calif., recently toured India with KP Partners' Ray Lane and John Doerr. Over a two-week period, they met with execs of U.S. portfolio companies with operations in India and with entrepreneurs seeking funds for their start-ups.
"The big takeaway for Doerr and Lane in India," Nazre says, "was the high quality of the entrepreneurs and the amazing pace of the market."
With such competitors, Chadha, now a senior managing director at Sequoia Capital India, will have to demonstrate some of the same dexterity he used in starting WestBridge. In launching the firm six years ago, he craftily signed up former employer Goldman Sachs as one of three anchor investors for an inaugural $140 million fund and handpicked two Goldman alums, KP Balaraj and Raj Dugar, as co-founding partners. In 2001 Chadha opened a Silicon Valley office for WestBridge and established a networking group, the U.S.-India Venture Capital Association, to draw attention to investment opportunities in India. As WestBridge's profile rose, the firm later succeeded in attracting such top venture firms as NEA, Charles River Ventures and Sequoia as co-investors in a number of India deals.
Despite such successes, forming WestBridge during the dot-com meltdown proved challenging. Indeed, the firm was forced to write off three of the five investments it made in 2000 and 2001. It caught a break in 2002, when the outsourcing boom hit India. Chadha and his team signed deals as fast as they could, eventually adding 11 companies in the outsourcing sector to their growing portfolio. When the outsourcing arena overheated, Chadha and his five partners quickly shifted their focus to the rapidly developing wireless, Internet and biotech markets. Out of WestBridge's current portfolio of 25 companies, three are in the wireless domain, four are in consumer Internet and three in biotech.
Chadha also has proved his fundraising skills. Although WestBridge has seen only three exits to date (with two public listings in the pipeline), Chadha tapped his financial connections last fall to raise a second fund of $200 million from prestigious limited partners such as Princeton University, the University of Chicago and the William and Flora Hewlett Foundation.
Today, Sequoia hopes to combine its experience in helping to turn start-ups into technology powerhouses such as Apple Computer, Oracle and Cisco Systems with WestBridge's knowledge of local market conditions in India.
Not that everything has been smooth sailing. In December, Chadha was set to bring Sequoia in as co-investor in Indian portal Times Internet. But the deal quickly unraveled when managers of the portal suddenly demanded a higher valuation based on the soaring stock price of a rival, Nasdaq-listed Rediff.com India.
Sequoia pulled out, leaving Chadha to scramble to pick up the pieces. He charged ahead and did the deal solo, investing $7 million for a small stake in Times Internet, far lower than his original target of $36 million and a 15 percent share. Chadha also persuaded Sequoia to take a consolation prize by co-investing with WestBridge in a $13.5 million deal with telecom services company Bharti Telesoft.
In February, Sequoia and WestBridge co-invested in a second deal, doling out $10 million to mobile entertainment service People Infocom, known as Mauj Telecom.
The U.S.-based side of Chadha's Silicon Valley- and Bangalore-based team has moved into Sequoia space on Sand Hill Road. And Sequoia Capital India has maintained a rapid pace of investment, over the past two months contributing $2 million to online tutoring company TutorVista.com and $10 million in a follow-on investment in software testing developer AppLabs Technologies. The firm also has made an uncharacteristic detour into the fast-growing consumer goods area, pouring $20 million into a coffee producer and retailer known locally as Coffee Day.
"We have believed in Indian entrepreneurs even when it was not the popular thing to do," Chadha says. "We think that they are capable of building large, valuable, lasting companies, given the right capital and assistance."
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