The Hindu Business Line : Not easy to foresee in VC space

Technology will continue to anchor venture capital (VC) industry, says Vishnu Varshney in Venture Finance in India. And to those who uneasily remember the past fiascos of technology, the author explains that the past failures of Internet companies were because `the entrepreneurs failed to understand how the Internet affected organisation structures and market'.

Varshney, who is the President and CEO of Gujarat Venture Finance Ltd (GVFL), is confident that the Net will continue to impact the way business is carried out at least for the next two decades. "The networked company will drastically change and make organisation structures, market and business models more complex. This will make the job of venture capitalists more difficult and will require a deeper understanding of business."

Value Added Funds

As a consequence, specialisation will become the norm for VC firms, foresees the author. "Operational skills will be an important prerequisite. Value added funds which specialise in one or two industrial sectors may have more competitive advantage... Non-sector specific funds will probably be sought after only as a strategic co-investor."

Not easy to foresee in VC space, concedes Varshney. "It is hard even for pundits to predict what is going to happen to VC industry in the future." Yet, as the founder of Gujarat Venture Finance Ltd in 1990, which subsequently became GVFL, he has seen since then waves of fund raising-investing-nurturing-divesting cycles.

Started by Gujarat Industrial and Investment Corporation at the initiative of World Bank, with a target corpus of Rs 24 crore, GVFL attracted the participation of thirty private sector companies, such as Arvind Mills, Asian Paints, Hero Cycles, HDFC and so on.

One learns that GVFL has raised five funds, including one each for IT (information technology) and biotech. Corpus fund has grown beyond Rs 130 crore, and the company has invested `in 58 technology companies at seed, start up and early stage all over India'. Successful divesting has happened in 47 of the investee companies.

Exit Routes

Talking of exits, the book notes that for seed stage and start-up investment, it will be practically impossible to go for a public offering. "Mergers with strategic partners, management buyout or acquisitions by large established corporations will gradually become a more acceptable exit route for a VC firm."

Large investor bankers in India are not interested in brokering small start-ups, notes the author. "Therefore VC firms are directly approaching prospective buyers of their portfolio companies."

Varshney, an IIT-ian, with an MS and MBA from Louisiana State University, is on the Board of incubators in institutions of excellence such as IIT-K (Indian Institute of Technology, Kanpur), IIM-A (Indian Institute of Management, Ahmedabad), NID (National Institute of Design), and MICA (Mudra Institute of Communication and Arts). Interestingly, the Cornell University has chosen two investee companies of GVFL for case studies.

"The network of government laboratories will become proactive to license technologies that can be commercialised," predicts Varshney.

"Greater rate of intellectual innovation will provide fertile grounds for the VC industry to grow. R&D (research and development) expenditure by large corporations will grow." He also sees the possibility of India emerging as a hub of technology start-ups. "A large number of MNCs (multinational companies) have started development centres in India. As the economy picks up, outsourcing by large companies will continue to grow to meet the cost reduction pressure. Such Indian start-ups will attract investment from foreign funds."

A major source of entrepreneurship can be the reverse brain drain, with the return of NRIs (non-resident Indians), especially the experienced professionals who launch their ventures here. "Successful Indian entrepreneurs in Silicon Valley have started playing a proactive role in India by investing in India or by starting subsidiaries of their companies in India."

Meanwhile, "a large number of intermediaries such as firms of CAs (chartered accountants) and lawyers who are familiar with the VC investment process are emerging in cities like Bangalore, Mumbai and New Delhi... "

Highly informative!

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