In July, a former marketing head with a US-based chipmaker, a serial entrepreneur and a first-generation BPO entrepreneur set up a venture capital (VC) firm. In California, the cradle of the world’s VC industry, this would have been all in a day’s work. But this firm is special — it has been conceived in Bangalore. Helion Venture Partners, which debuts with a $140-million corpus, is India’s first VC firm fashioned in the Silicon Valley mould — founded and led by operating managers and entrepreneurs. Over the next 8-12 months, eight more such funds are tipped to hit the Indian market with funds close to $1 billion.

Finally, venture capital is making a comeback in India after six years in the wilderness.

Meet India’s new angels. Helion’s Ashish Gupta, founder of Junglee (sold to Amazon in 1998 for $230 million), later seed funded Gurgaon-based BPO Daksh eServices. Sanjeev Aggarwal co-founded Daksh in 1999 (sold to IBM for $160 million in 2004). And Kanwaljit Singh, the odd man out, handled marketing operations at Unilever and Intel before turning VC.

Also in Bangalore, there’s Inventus, a $100-million US-India startup fund being raised by American-Indian entrepreneur and angel investor Kanwal Rekhi. In Delhi, Alok Mittal, co-founder of Jobsahead (sold to Monster for $9.6 million in 2004), has signed up with Menlo Park-based Canaan Partners’ India arm to lead early-stage technology investments.

In Mumbai, US-based Matrix Partners is setting up a $150-million India fund. Former eVentures India partner Sandeep Singhal is raising a $150 million-200 million startup fund called Nexus. And New Enterprise Associates (NEA) has roped in angel investor and Pentium chip pioneer Vinod Dham, and serial entrepreneur Vani Kola, founder of successful startups like RightWorks and NthOrbit to set up an India-based fund.

Most significantly, for the first time in India, venture capital will be driven by entrepreneurs who have hands-on experience in starting and shaping startups into money-spinners. If even four of them see a full investment and exit season, India’s venture capital market would have taken the first step towards building the ecosystem necessary for breeding startups.

Here we will qualify the ‘comeback’ bit. Venture capital investing has not been entirely absent from India in the last six years. Indian firms like WestBridge Capital Partners (now known as Sequoia Capital India) and JumpStartUp, and Silicon Valley VCs like Norwest Venture Partners, Battery Ventures and Bessemer Venture Partners have had a limited presence in the space. In its earlier avatar as WestBridge, Sequoia has in fact been a consistent early stage investor — 10 out of its 30-odd portfolio of companies are early stage investments.

Still, there were no pure VC funds. WestBridge’s $140-million Fund I alternated between early and late-stage, private equity type deals. And the Valley VCs were sporadic investors.

In the last three years, private equity (PE) has dominated the Indian market. Even traditional US VCs who entered the market around early 2005 have shown an inclination towards PE type deals (see ‘The India Opportunity’ on page 36). Out of the $2.3 billion that was invested in India by PE investors and VCs in 2005, venture capital accounted for just $482 million. Of this, early stage deals accounted for $150 million. Seed deals have been virtually non-existent.

So, why has venture capital decided to give India a second chance?

Two To Tango
Let’s take a leaf out of Silicon Valley’s experience. Its success at building pioneers out of garage startups lies in its ability to bridge the gap between the two main actors — VCs and entrepreneurs. Over the years, it has evolved an ecosystem that has helped build technology powerhouses like Hewlett-Packard, Cisco, Amazon, Google and Yahoo! “It took Silicon Valley nearly two decades to perfect the ecosystem,” says Ash Lilani, head, SVB Global, the overseas arm of Palo Alto-based Silicon Valley Bank, which played an important role in bringing Silicon Valley VCs to India through its Bangalore offices (see ‘The Second Coming’, BW, 21 February 2005).

Venture capital has its own ecosystem. At its heart lies the angel investor who seed funds a startup idea with that first $100,000. Then, there are lawyers, bankers, accounting firms and recruitment specialists. The final actor is the customer. The entrepreneur’s future depends on two leaps of faith — by the angel investor and the first customer.

In the Valley, most angel investors are successful entrepreneurs. So, they can bet on startups more easily. Often, the first customer of a startup’s product also comes through the angel investor. Says K.P. Balaraj, managing director, Sequoia India: “The Valley is all about relationships and networking. It takes just one or two out of 10 relationships to make the leap of faith.”

It is clear why startup investing has not worked in India yet. The most critical element — the angel investor — did not exist. Only in the last three years have startup entrepreneurs emerged — Baazee’s Avnish Bajaj and Suvir Sujan, Daksh’s Aggarwal and Spectramind’s Raman Roy to name a few. “The last couple of years have seen some big venture capital exits. That has opened up huge opportunities,” says Balaraj.

That is partly what is bringing American-Indian entrepreneurs from the Valley, as well as VC firms to India. But there is anotherbigger reason, too. After the US economic slowdown, exit valuations for companies dropped. During the boom years, average investment in startups was $100 million and exit valuations, $1 billion. Post-slowdown, the new benchmark for a good exit dropped to $100 million-200 million. “If you spent $100 million on a startup and made $150 million, that wasn’t good enough. VCs need to make six to seven times their money,” says Promod Haque, managing partner, Norwest. Investments were scaled down to $20 million-30 million. Entrepreneurs had to find a low-cost alternative. India offered the perfect solution, more so because the slowdown saw an estimated 50,000 IT workers returning to India from the US.

Today, more than 60 per cent of technology startups in the Valley have back-end operations in India. According to informal estimates, over $2 billion of VC money could have come in to India through these R&D outfits. VCs like Norwest, Bessemer, Mayfield and NEA hope that a new generation of entrepreneurs will emerge from the teams that are building next-generation products for Silicon Valley startups as well as the thousands of IT professionals doing cutting-edge research in R&D labs like those of IBM, SAP and Microsoft.

Build To Last
Clearly, the next three years will be defining ones for venture capital and entrepreneurship in India. Business models will keep changing both on the investor and the startup fronts.

Just a year ago, the most successful startup model in India was the US-India cross-border model. The company would be headquartered in the US and India would be the base for the back-end subsidiary. Today, that model has turned on its head. Take, for instance, Bangalore-based optical networking equipment maker Tejas Networks. In early 2000, American-Indian telecom serial entrepreneur Gururaj Deshpande put three people together — Sanjay Nayak, CEO, Synopsys India, Kumar Sivarajan, professor at the Indian Institute of Science in Bangalore, and Nayak’s colleague Arnab Roy — to set up the founding team for Tejas. Deshpande put in $5 million of his own money. His plan was to build and test Tejas’ products in the Indian market before going global. Today this model is being replicated by a host of telecom startups across the country.

VC models are also changing. There are at least five in the market. First, independent, India focused funds (Nexus falls in this category). Second, India-focused funds backed covertly by a Silicon Valley firm (Helion; sources say Sutter Hill Ventures is a strategic investor). Third, Silicon Valley fund subsidiaries (Matrix India, NEA India). Fourth, US funds with local teams in India (Battery, Bessemer). Fifth, US-India funds (Inventus). Over time, many of these funds will probably alternate across these models before they find their niche.

The development of India’s own VC ecosystem has begun in right earnest. It took Silicon Valley two decades to create the original version. How long India takes remains to be seen.