By Archana Rai
HIS business interests span the gamut from media and research to venture capital and private equity investing. As founder and chairman, Patrick J McGovern heads the International Data Group (IDG), with annual revenues in 2009 of $3.05 billion. As one of the first overseas investors to enter China, McGovern now has close to $3 billion of capital under management in that country and holds a portfolio that includes highly successful internet companies such as search company Baidu and TenCents. It is a track record that McGovern hopes to duplicate in India where he has been investing since 2004, primarily through an early stage fund, IDG Ventures India that manages $150 million corpus. In an exclusive conversation with The Economic Times, he explains why foreign risk capital is now heading to India. Edited Excerpts.
Is India finally a serious destination for global risk capital? What are the factors driving such a development?
As I see it, the experience of LP’s (limited partners who invest in venture capital and private equity funds) is that they see the highest GDP growth rate in the world in China and India, and they see an extended period of economic growth rate in these two countries at a time of lower growth in the US. But the issue that LP’s are finding in China is that, in the last year for the first time, Chinese money managers raised more money from local investors than from international investors. From their point of view, with the local currency you can close deals in entrepreneurial companies very quickly as you do not have to set up offshore structures required to ensure exits through public listing in markets such as Nasdaq for dollar denominated investment. Chinese money managers are less interested in accepting foreign funds. As a consequence, international LPs will shift their priority to India, as they look for good avenues of investment here.
Is the Indian ecosystem ready to accept such a fund inflow in small unlisted companies?
We look at deal flow of about 80 to 100 companies we might want to invest in and we see entrepreneurs from the Bay area coming back to India for the lifestyle, to have children growing up here, so that people who have the experience of working in a high growth technology company are here. The number of companies that will give three or four times return on capital is rising dramatically in India.
So what is the capital inflow into India that you foresee as a result of these factors?
In the next five years, $80-$100 billion of capital (venture capital and private equity capital) will come into India which is 130% more than in the last five years.
There are calls to right-size the venture capital industry in the US? How will this impact the global risk capital industry?
In the US, risk capital comes from US pension funds and endowments and in the last year they have seen a near complete absence of exit routes from funds, as stock markets have also been down by 30-40%. So, a lot of investors have moved money to liquid assets reducing the pool of funds for venture capital and private equity.
Will this impact the network for innovation; will more such work happen in China and India?
As greater pools of money back innovation, more such work will come out of India. We will be doubling the pool of venture capital invested in India in the next five years and likewise in China, where there will be similar growth of 40-50%. The funding will go more towards innovation than in the US. We are finding the cost of innovation in internet services, social media less expensive here. While for clean energy and biotech you need substantial amount of capital. Less pools of money will be available for renewable energy and telecom innovations.
Is clean energy less attractive a sector than it was a year ago?
There is a mismatch between the length of the fund and the development period, which takes 10 to 15 years. While a VC fund has a ten-year fund life with investors staying with one company for six to seven years. So, to fund new drug development or new energy sources, you need a fund with a 20-year fund life.
You have been in China from 1992; do you see a similar growth for IDG in India?
We have been operating for 18 years and we have a $900 million fund, a growth fund of $1.2 billion and at a later stage $600 million mezzanine fund. In India we have invested for five years. By next year we will have another VC fund — 80% VC and 20% growth investments. We will do a growth fund sometime in 2013-2014. And by 2017 we will have a mezzanine growth fund, the same pattern as in China. As far as I can see, the opportunities are very similar.
Will you raise a new fund in India soon?
Yes, within the next year, we will be coming to the end of investment period for fund 1. We have LPs banging on the door asking to be put on the distribution list. We will take a decision on size of fund which will be larger than the current $150 million fund. We will take domestic investors as well if they come with value additions that will help recruit talent for our companies and influence in government and policy circles.
How do you rate the market for investors looking to exit risk capital investments in India?
More exits, more flexibility of returns with 60-70% will be acquisitions or trade sale. Typically the highest returns come from M&A when it is a well capitalized foreign company making the acquisition.
So what is an optimum return for an LP?
The higher the better. But looking at a market like India, 25% return on investment is a highly competitive return. In the 90’s in China, we were getting 10 to 12 times returns, but now we are probably getting 25 to 30% returns. India has the potential to give 25% on an average and for a better quality fund it can substantially be a higher value and get a 30-40% IRR (internal rate of return).
Which sectors worked well in China and what do you expect to see in India?
What worked well is internet-based service. As early investor in Baidu — the search engine at $2 a share, it is now valued at $650 a share. We put about $100 million for 20% stake in Ten Cents — another internet company — their share is now valued at $7 billion. In India — it is the mobile internet access and as number of subscribers and 3G offered to private telecom companies, mobile internet services will be a big sector. We also have a $100 million fund in Vietnam and $50 million fund in Korea just started. But India is the biggest opportunity in the next five years.
How similar or otherwise are Indian entrepreneurs from Chinese entrepreneurs?
Indian entrepreneurs tend to be more passionate about accomplishing a goal, come with a business plan and want to revolutionize education or be number one in global internet marketing. For Chinese entrepreneurs the underlying ambition is to get rich and they are more flexible. Indians are more like Americans and can be stubborn about their ideas.
So which areas will Indian start-ups deliver new innovation in?
In mobile internet, that will impact education, improving availability of energy, lower cost access to clean energy, stable electrical power, innovation in biotech to eradicate diseases, these are areas we will invest if they fit into the cycle of a 10 year fund.