Venture Capital Hits India's Web

SAN FRANCISCO (03/15/2000) - Venture capital is coming to India. From Draper International to Chase Capital, from News Corp.'s eVentures to Softbank, major venture capital firms are looking at Indian Internet ventures. New angel investors include Indian expats like Rakesh Mathur, founder of Junglee.com; B.V. Jagadeesh, cofounder and managing director of Exodus Communication; Ram Sriram, formerly of Amazon.com; and Rao Cherukuri, of Euclid Network Solutions.

All have either already invested in Internet Economy ventures in India or are scouting around. The capital is flowing despite the obstacles India presents to the spread of the Web. Among them: The Indian government has been slow to pass the kinds of policies that would encourage such investments. The country's telecommunications infrastructure remains weak. And few Indians have access to a PC, let alone to the Internet. Nonetheless, the increased funding has encouraged many who have started their own businesses.

"There is a tremendous amount of activity happening on the entrepreneurial side in India ... and VC funds come in when this activity is good," says Sudhir Sethi, San Francisco-based Walden International's chief India representative.

"We get to see one new business plan every day in the infotech sector and that is just a third of the total activity. Even a year ago, this was unimaginable."

Since its inception in April 1998, his sector-specific India fund has invested $30 million of the $63 million available to it. Walden has just invested in MindTree Consulting, a Bangalore-based startup. The Indian Venture Capital Association, or IVCA, says that in 1999, "The pool of funds available for VC activity rose to $700 million from $600 million in 1997." According to IVCA, annual investments made during the year grew from $230 million in 691 projects in 1997 to $300 million in 728 projects in 1999.

The infotech sector got the largest chunk of the total funds invested: $75 million. "Today about 40 per cent of IT venture funds in the U.S. are going to Indians who come up with great ideas there," says Exodus' Jagadeesh, himself a venture capitalist. Jagadeesh has invested in Greycell in Bangalore, and is seeking to play the angel investor in at least three more startup ventures soon. Jagadeesh, Mathur, Sriram and Cherukuri are part of a new breed of venture capitalists in India who come back to the homeland with ideas and money from enterprises in the U.S.

Mathur, however, wants to get involved in India in a much deeper way. He plans to come back to India within five years and devote himself to using the Net to help his country of origin. "I don't have answers to the questions of how I will do that, but what matters is that my full time and energy is going to be dedicated to this task of building India's economy. I can chase, all my life, making a billion (dollars) but that would be meaningless," he says.

He thinks his goal could be advanced if the Indian government would "do just one thing: Make free access to the Internet a constitutional right."

Individual investments ranging from $1,000 to $1.16 million are being invested in the Indian markets for local IT startups. Estimates show that the total amount available from such angel investor clubs is close to $93 million.

One such club is the Mumbai-based "Angel Club," which comprises 40 members representing close to $7 million; it plans to expand to 100 members soon. But why are so many investments taking place in India so fast? The inspiration can be traced back to the success of the Nasdaq listings of Bangalore-based Infosys Technologies - India's most respected software company - and Satyam Infoway - India's first private ISP. Their market capitalization reached $10 billion plus and $1 billion, respectively. U.S. investors may still find India daunting.

The subcontinent continues to have serious problems with infrastructure and the law. A VC in India, for instance, cannot bring in more than 50 percent equity.

"That is just not enough," says Jagadeesh. "The venture capitalist comes in with expert knowledge, contacts and evaluation processes, and techniques. You cannot impose rigid guidelines and expect them to perform."

Equity norms in India are another sore point: Preferred shares are not allowed in India, so the U.S. model of stock options doesn't work here. But there is hope. K.B. Chandrashekhar of Exodus Communications has been appointed to the Securities and Exchange Board of India. In addition, the government recently formed a Ministry of Information Technology, and announced a plan to improve the telecom infrastructure by laying fiber optic cable across the country within 2-3 years. Mathur cautions investors against waiting too long. "If one can't do a lot of things on the Web within the next two or three years, it will be too late," he says. "One will have to wait for the next revolution."

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