Kickstartup Once More

Intel Capital, the VC arm of Intel Corporation, has picked up stakes in four firms via its $250 million India-dedicated fund. In June ’06, Siemens Venture will launch India operations and hopes to invest , 1-5 million each in dozens of start-ups. Others like Nokia, Microsoft, HP and Cisco are shifting into top gear as the race for a sizeable share in India’s booming VC market heats up. In the first three months of this calendar, private equity and VC firms invested $1.4 billion, a third of which targeted the IT/ITES sector. In the sizzling VC space, tech still rules the roost.

Says Promod Haque, managing partner, Norwest Venture Partners, "Due to India’s key strengths, emerging start-ups have the potential to become multi-billion dollar businesses. Technology majors want to make sure they are a part of the action." Adds Rajiv Mody, CEO, Sasken, a company that’s received money from Intel and Nokia, "The reason corporates make venture investments is because they get a broader view of technology development (in India), get a chance to take a financial gamble on new technologies and, if strategically aligned with their platform, can even influence them to be a part of their product portfolio."

Tech majors, in fact, have specific business models to achieve the twin objectives of earning profits and achieving an edge over competitors. Parent-owned Intel Capital and Siemens Ventures are direct investors. "We operate as a classic VC firm, focused on financial returns. We are in it to make money," says Kumar T. Shiralagi, director, Intel Capital India. He’s on the right track. An Ernst & Young report states that VC and private equity firms pocketed close to $2.2 billion by exiting from start-ups in 2005. Intel Capital itself made money by partially exiting from Sasken Communication.

However, in the case of Intel Capital, strategic interests run parallel to bottomline concerns. For instance, Persistent Systems, which received its first round funding from Intel Capital in 2000, helped the Indian software firm to develop Konark, a product that helped Intel Corp to deploy its IA-64 platform in the Asia-Pacific markets. In February, Persistent got an expansion stage funding of $250 million from Intel. Warns Sanjay Anandaram, MD, Jumpstartup, a VC firm, "With a strategic corporate investor, entrepreneurs should take care to include pure-play VCs as the latter function as a counterpoint."

It’s probably the reason why MNCs like Nokia and Cisco are partnering with other institutional investors to launch VC arms. Explains Sujit Banerjee, principal, BlueRun Ventures (BRV), a $1 billion global fund that lists Nokia as a limited partner, "From the entrepreneur’s perspective, co-investors provide a healthy diversity on board, and that matters to us as well." While BRV focuses on financing early-stage start-ups, Nokia Growth Partners, a $100 million fund, finances expansion capital required by late-stage start-ups.

If broadbasing the partners in its funds helped Nokia address the needs in a start-up’s specific stages, Cisco’s association with Japan’s Softbank to launchSAIF Partners broadened the sectoral sweep of its fund. Explains Ravi C. Adusumalli, general partner (India head),SAIF Partners, "In the first fund, where Cisco was the sole investor, the focus was on technology, media and telecom. Today,SAIF has a more opportunistic focus in sectors ranging from technology, financial services and manufacturing."

Yet another model, which has thrown up new opportunities for Microsoft in India, is one where the MNC VC provides an umbrella of services to start-ups. Under its India-specific programme—Local Software Eco System Initiative, start-ups building solutions on the Microsoft platform get access to design guidance and VCs. In some cases, Microsoft does direct pitches to VCs on behalf of the Indian firms. Sheila Gulati, director, developer and platform evangelism, says Microsoft earlier invested through a VC firm, Chrysalis, but has now developed a model that "works ground-up with the entrepreneur". It’s a bouquet of mentoring, marketing and product development consultancy that’s as essential as money for any start-up.

For majors like IBM and HP, engagement with Indian entrepreneurs is through the traditional asset-financing route. The annual IT-related leasing and financing business is valued at $100 billion with estimated growth at 40 per cent per annum. Therefore, it offers huge potential to the financing arms of the tech MNCs to help sell their products to budding firms. IBM finances purchase of hardware, software or services (provided the minimum IBM content requirement is met). HP does the same for its products or non-HP "complimentary" products and services.

For promoters who can easily access banks, the advantage of borrowing from an IT major is that the latter understands the business better than anyone else. Admits an industry analyst, "The IBMs and HPs understand when technology has to be refreshed and they offer end-of-term solutions, under which they take responsibility to replace outdated equipment." The corporate financing arms of tech majors also take responsibility for the residual value of the risks involved, typically 10-25 per cent of the total contract value.

These are ideal days for new promoters as the Indian market is flush with funds and the financial balance is tilting in favour of the entrepreneur, who can get cash from VCs, private equity players or foreign borrowings. But for an early-stage start-up, going to a corporate VC may be better as the former needs both money and mentoring. Agrees Sasken’s Mody, "Corporate VC arms, with their global brand, can open many more doors for a start-up. And it’s the promoter/founder’s call to ensure that a firewall protects his company’s long-term financial interests." Are all those who think they have the next big idea listening?

By Archana Rai in Bangalore and Nandita Datta in Chennai