When Intel chairman Craig Barrett last week announced a series of investments in India that pointedly did not include a much-anticipated chip-manufacturing plant, not everyone was disappointed.
Of the $1bn Intel plans to invest in the country in the next five years, a quarter will go to setting up a venture capital fund devoted to Indian technology, heralding a new era for the country’s burgeoning VC industry. The Intel Capital India Technology Fund is the biggest fund exclusively looking at the country’s early-stage companies.
“If Intel chooses to up the ante with $250m, then they are seeing good prospects and feel they can deploy their money or else they wouldn’t do it,” said Saurabh Srivastava, chairman of the India Venture Capital Association. He also runs a $35m seed-stage fund in India called Infinity.
An economy growing at 8 per cent a year, growing consumer confidence, and a rising entrepreneurial culture, are helping to fuel the development of a fledgling VC industry.
Separate data for venture capital is not available but some estimates put VC funds at 20 per cent of the total private equity investment. Private equity funds active in India grew from $20m in 1996 to $1.75bn in 2004. This year, funds are expected to hit $2bn, according to a report on private equity and venture capital released last week by Ernst & Young.
Ernst & Young concluded the private equity industry would continue to mature as the Indian government pursued deregulation. Private equity accounts for as much as 25 per cent of foreign direct investment.
Venture capital funds, which provide capital to start-ups from inception through their first few years, began entering India less than a decade ago. They boomed in the internet’s heyday and then began leaving when the dot-com bubble burst in 2000. Now they are coming back.
While Intel Capital has invested $100m in 40 start-ups in India over the past seven years, launching a large onshore fund represents a step change in its participation.
“With our brand and our technology leadership, you will see the arrival of VCs from other parts of the world in India, especially from Silicon Valley,” said Arvind Sodhani, president of Intel Capital.
In other deals last week, venture firm Westbridge Capital Partners, led a $13.5m investment in Bharti Telesoft, a company that develops mobile phone technologies. Westbridge contributed $8m and was joined by global VC firm Sequoia Capital and Cisco Systems.
Westbridge also said it would invest $7m in Times Internet, the online platform of leading newspaper Times of India. “People are clearly becoming more interested in early-stage deals,” said Westbridge managing director SK Jain. “The returns are much better.”
In September, Westbridge raised US$200m for a fund aimed at start-ups that created technologies or provided services related to India’s booming domestic consumer market. It was the group’s second fund in India following the launch five years ago of a US$140m fund targeted at outsourcing companies.
The VC industry is also maturing in tandem with greater exit opportunities in India. The benchmark Sensex has grown 35 per cent this year, and mergers and acquisitions activity in India’s corporate sector has been increasing.
Estimating there were some 250 M&A transactions in India last year totalling $13bn, Mr Srivastava of the India Venture Capital Association noted a “symbiotic relationship” between exit opportunities and the availability of risk capital.
India’s galloping stock market has contributed to the development of a VC industry for another reason as well. The steep rise in share prices and an almost fully-valued private equity market geared at buy-outs have led investors to scout out better returns elsewhere.
“New money is starting to flow into early-stage deals because investors don’t find value in public markets anymore,” said Puneet Bhatia, managing director of Newbridge Capital.
For now, observers say VC firms entering the country will not have a difficult time finding places to park their funds. “There’s a lot of talent available in the technology area,” said Rajiv Memani, country manager for Ernst & Young.