Angel investors, as a first source of capital for entrepreneurs are a must for potentially successful companies, as they bring the entrepreneurs” ideation to a deliverable and substantially de-risk the venture investor.
By Sudhir Sethi
One of my first investments just over 10 years ago as a venture capital investor was seed funding Mindtree Consulting, a software services firm based out of Bengaluru. Led by a stellar team comprising Ashok Soota, Subroto Bagchi, Krishna Kumar, Rostow Ravanan and Jankiraman amongst others, Mindtree Consulting has been successful and given its investors good returns.
In 2007 IDG Ventures funded Manthan, a Bengaluru-based software product leader in business intelligence and analytics for the retail sector. Manthan, led by serial entrepreneur Atul Jalan, has in many ways set the trend for many more software product companies to be funded and be successful.
With customers in 14 countries it has broken the myth that a product company from India is an unlikely phenomenon. Manthan has also broken the myth that venture investors do not have the patience or risk appetite for investing in a product company. Manthan has also broken the myth that people in India are not available to build product companies.
Many more examples of potential success are in the pipeline from India: Attero, a Delhi-based electronic waste management company literally turning electronic waste from throwaway cell phones, PCs and consumer electronics into gold, platinum, silver and many more valuable metals, shows alchemy at its best. From Chennai comes Perfint, an image guided minimally-invasive robotic for cancer biopsies, it has patents to its credit and has global ambitions with a dominant market share in India. Robotah is a Bengaluru-based consumer robotics venture with a strong string of patents to its credit; IViz, which originated from Kolkata and is now headquartered in Bengaluru, deals with security with patents and distributors / customers worldwide, it has over 70 percent market share in India; Aplaya is a leader in providing Mobile TV in India. The list goes on and on…Tejas, Icreate, 3D Soc etc. All these companies are well-funded, generating revenues, have global customer footprint, patents to their credit and majority are less than five-years-old; all originated from India.
Most of the founding team members are less than 40 years old with newer companies having younger founders. With a few expectations, angel investors have supported most of these companies before receiving funding from venture capital investors. Last but not the least all are product companies. Very different from Mindtree but very similar to Manthan. The journey, Mindtree to Manthan, is a journey of the venture capital industry as well as entrepreneurs from software services to products.
The journey is symbolic of the maturity of the venture capital industry as well as entrepreneurs in India, which have now upped investments in product companies from India.
From 2004 to 2009 technology venture capital firms with investment of $2.5 billion funded over 600 companies. Between 2010 to 2015 technology investments in India by venture firms is expected to cross $7.5 billion in over 2,000 firms. I expect over half of these to be product companies. Of this $3 billion (40 percent) is expected to be invested in Bengaluru followed by Delhi, Mumbai, Hyderabad, Chennai and Pune. Investments will be spread across seed, early stage as well as the early expansion stage of the companies.
The sectors of interest to technology ventures investors include the internet, mobile, software products, energy, medical devices, waste management, robotics, business intelligence and analytics, technology-enabled consumer and financial services, micro payments as well as education.
The above is, of course, very different from the predominately services-oriented investments in software and KPO/BPO which dominated the past five to six years. The next five years of investments are likely to be in product companies, with strong IP and patents, led by serial entrepreneurs who have a product background and know how to build global companies from India.
On the other hand, many new technology companies are being led by young entrepreneurs who are around 30 years old and have spotted an opportunity and have a unique offering to address that market gap in a price effective and global manner. The trend in technology and product investments is supported actively by a number of factors, all catalytic in nature.
The sectors of interest to technology venture investors include the internet, mobile, software products, energy as well as medial devices.
The emergence of an angel community that supports technology investments is a key catalyst. The angel community active in India is over 1,000 strong and a vast number are looking at new innovative disruptive companies through the Indian Angel Network or the Mumbai Angel Network. An equally large number operate as individuals.
The second catalyst is the emergence of a number of product-oriented serial entrepreneurs or founders who have worked with global and Indian product companies. The product mindset is a unique DNA and has the potential to create tremendous value but does have associated risks. The biggest risk is of the first few years during which neither the investor nor the founder see any revenue; in addition, the outcome in a product company is typically binary in terms of returns which is not the case with a services company.
The value chain in effect is now supported amply with the emergence of the venture capital technology investors who understand products and have the risk appetite to fund such potential binary returns.
The emergence of the new age venture investor with deep operating experience in Indian and a global company in the product space is a catalytic factor in increased technology investments and interest in India.
Funding of product companies is also accelerated by the interest shown by acquirers in both Indian and a global firm, thus giving strong exists to angel and venture investors. In the 2004-2009 period, product companies gave a 7.2x average return on invested capital compared to 4.1 x returns to investors in services companies. With product companies now growing larger, potential returns are expected to be higher.
In the past two years at IDG Ventures alone, we have studied over 150 technology plans every quarter, over 400 in software products. Over 60 of these have been in medical devices, over 30 in business intelligence and over 70 in security etc. The pace at which we see new companies is increasing and so is the quality of such firms. One would not be surprised if the pace of technology companies being invested increases from the projected $7.5 billion to over $10 billion by 2015.
SUDHIR SETHI is the Founder and Managing General Partner at IDG Ventures India, a $150 million early stage technology VC fund. He serves on the executive committee of the Indian Venture Capital Association and on the Board of Emploi Globale.