Archive for April, 2009

Interview in ReadWriteWeb

Bernard did a very well-prepared interview with us recently, outlining some of our learnings in India, and how they have shaped our investment themes. His key takeaways are listed here.

Guide to MP3: as per timeline of questions on the audio file

  • 0:22 — How is early-stage financing doing during this downturn compared to the last one in 2001/2002?
  • 1:20 — How is the VC model changing, if at all, and how does the global financial crisis impact this change?
  • 3:30 — What percentage of your investments targets a local or regional market versus a global market?
  • 9:10 — What advantages or disadvantages does a venture starting from India have?
  • 13:00 — If costs are lower in India than in the US, how does this affect the amount of funding required?
  • 14:48 — What market segments are you excited about today?
  • 16:00 — What one or two of your ventures do you want to tell our readers about?

Comments welcome.

CEDT@Indian Institute of Science (IISc) Bangalore launches business incubator in partnership with HeadStart Foundation

My last post here on VentureWoods dwelt on the problems that early stage companies face in India and their requirements. One comment made on the post reminded me that all we are doing is analysis and seldom anything else (well, to be fair, HeadStart does quite a bit, it hosted 60 Startup Saturdays since last year and over 10k people have engaged in a variety of ways).

Well, here is something we also have done -I worked out a business incubator set up at the Centre for Electronics Development and Technology (CEDT) at the Indian Institute of Science (IISc) Bangalore in partnership with the HeadStart Foundation.

The focus is very much on application areas  where CEDT has expertise, applications where engineering and research requires investments in labs (that are provided free by CEDT) and expert project staff, and where we could engage prospective customers early on during incubation. The application areas are

1. Personal area networks: Multimedia delivery, Home security, Personal guidance systems, Authentication and Access control, Healthcare, Information synchronization

2. Automotive systems: Guidance and driving assistance, Entertainment, Traffic control and C2C (car to car) systems

3. Low cost embedded computing: Communications, Access control, Transactional systems (eg, ATMs)

4. Environmental monitoring: Energy management, Safety and Security, HVAC systems, Forestry and Farm management, Disaster management systems

5. Clean energy systems: Phantom power reduction, Distributed clean energy generation, Energy management and reduction

The incubator will admit its first batch of companies from June 2009 and it is hosted online on HeadStart’s collaboration portal here. Do pass on this information to people you know who can benefit from this initiative.

Prof Jamadagni, Chairman of CEDT, Jagannath Rao, advisor to CEDT and formerly Director of Motorola India’s mobile handsets business will help manage the incubator (I will be there as well) assisted by selected people from industry.

You can expect more such initiatives this year around establishing business incubators, industry linkages and investment support.

Inviting Early Stage Ventures/ University Startups

A close friend and mentor, a member of the Management Board of one of Europe’s largest media companies and my Chairman designate, is on a private visit to India between the 8th and 14th of May. This will be his first visit to the country and we are actively exploring the possibility of investing in early stage ventures in India, especially those at university and on the ‘edge’ during this summer (!) or graduated in the last one year.

We are meeting a few in Kolkata on the 9th and in some probability in Delhi subsequently.

If any teams are interested please drop me a line at:

sanjukt.saha@onebillionminds.com

Hans Rosling – Third world stats

Brilliant presentation on putting third world stats in perspective, and breaking through the myths.

Coming Unemployment Problem

With roughly 55 percent of India’s population of 1.2 billion made up of people aged 24 or younger, India was viewed as a country with a massive demographic advantage. Unfortunately, the global slump has turned the advantage into a big disadvantage.India’s economy will probably grow at the slowest pace since 2003 as a global recession cuts overseas orders and domestic demand wanes.It is is expected to expand at less than 6 percent in 2009-10, after recording average annual growth of more than 9 percent in the previous three years.

Here are few sectoral news snippets I read recently (and my translation pertaining to employment)

” Industrial production growth has already decelerated to -0.5%Y during the three months ended February 2009 from a peak of 13.6%Y in the quarter ended January 2007 “

TRANSLATION : Manufacturing jobs are in a disarray. Less additions (or no additions) are seen in 2009-10

“Banks were aggressive in disbursing credit at unusually low rates to marginal borrowers at cycle-peak GDP growth, they are now facing a rise in non-performing loans (NPLs). Expect banks to remain risk-averse, resulting in credit growth slowing to below 10% for 2009 -10″

TRANSLATION : Banking and Financial Services jobs are going to have lowered additions in 2009-10

“None of the IT services firms is hiring and Wipro is not an exception. We will not be hiring till demand picks up. While we will honour all offers that we have made to campus recruits in 2008-09, there can be some delay in bringing them on board,” said Pratik Kumar, EVP – HR , Wipro

TRANSLATION : IT sector is now a weakling. No new additions required for 2009-10

This academic year more than 1 million people are expected to graduate from colleges (in india).  Their employment opportunities are grim in the near future.

Criteria for Investment – Reid Hoffman

Interesting post by Reid Hoffman on his rule of three for investing in internet businesses. Does the business have a strong distribution plan, a unique value proposition, and is it capital efficient.

I think the hardest part to assess for internet businesses is the uniqueness. For each business that is successful, there are many (with the same/similar proposition) that fail. Be it videos and youtube, or social bookmarking and digg. This is not to say entrepreneurs shouldn’t lay importance on this aspect, but my view is that how well the idea is executed matters far more. How well does it solve a problem, how easy is it to use, and so on – and you only get to know a lot of that once you’ve put the service in hands of customers. The good news is that its getting cheaper and cheaper to do that.

Great emphasis on engagement – mass messaging and “engineered” virality make it easy to get people onto the site – how well they stick is what creates value.

Capitalism 2.0

Indian entrepreneurs and readers, I’d love to hear from you on what you envision as Capitalism 2.0, give your somewhat different perspective than those of my American readers.

I started writing this series and am, one by one, tackling the various issues that constitute not only the economic framework, but also the philosophical framework. From Justice to Regulation, from Integrity to Credit, and meandering through the alleys of Character and Logic, we are discussing all the components of Capitalism, and brainstorming about a better system.

The US has taken a disturbingly European-style socialist turn, even as India and China are moving towards Capitalism. In doing so, however, it is critical, that the mistakes of America are not repeated, and most certainly, Europe cannot be the ideal, with all the entrepreneurs fleeing countries like France!

Also, one of the most disturbing elements of American capitalism has been that the system rewards Speculators over Value Creators, and does not penalize Value Destroyers.

I invite you to contribute to this debate, to engage, think, participate, research, study – and be a part of defining the new system as it emerges.

VC investments falling off cliff in the US

Alok asked earlier about what change in behaviour we’re seeing among VCs. My own sense is that VCs in India are much more cautious than VCs in, say, the US. “No” is always a safe answer. Of course, the “venture” or “risk” part of “Venture Capital” is then drastically downplayed. Nowhere is this more true than in times like these. I have not attempted to gather much data on this impression yet specifically for the Indian market, but I would be surprised to be proved wrong.

Meanwhile, in the US, investments have fallen off a cliff. A post in TechCrunch details just how bad it has been so far this year:

And make no mistake—it’s a steep drop. Venture funding fell by 50% nationally from the first quarter in 2008 to the first quarter of 2009, totaling to $3.9 billion, according to Dow Jones Venture Source. That’s the lowest total since 1998. PricewaterhouseCoopers and the National Venture Capital Association had it falling farther to $3 billion.

Information technology investments fell 53% year-over-year to $1.7 billion—the lowest since 1997, and the lowest volume of deals since 1995. And clean tech? Well so much for that being the future of the U.S. economy: It fell by 74% to a paltry $117 million.

VC investments in Q1 2009

The author also believes that this isn’t just about the recession, and that the VC industry was overdue for a shakeup.

Returns, on the other hand, did go down. And they never really got back up, given the amount invested. But the industry is graded on a ten-year time horizon so that didn’t matter much. Once returns from 1999 and 2000 fall off that scale, it will. Returns will look at or below the S&P 500 for what is supposed to be a niche, high-risk/high-reward asset class. It takes forever to correct because fund cylces are so long, and the asset class is so illiquid. But it won’t go uncorrected, and the witching hour is getting close.

What does this have to do with money going out to startups? VCs are scared for the first time in a long time. There’s no obvious high growth sector of the tech economy, and their investors are hit in nearly every nook and cranny of their portfolios. They’re not sure how to do their jobs anymore when nothing can go public and acquisitions are few and far between.

I suspect, even though the VC industry is so young in India, that the reverberations will be felt here as well.

What is your feel? Any pointers to up to date data for India?

What’s happening in the venture market?

This is the questions that journalists are asking us most often these days. Broadly, what are seeing is as follows:

  • Portfolio companies are still going strong, and have made the adjustments required to tide through the current environment. This applies both to potential business impact (in cases where there is slowdown in customers’ purchasing behavior), and to planning follow-on rounds of investment. Unless there are more major shocks in future, things should be under control here.
  • Deal flow is still strong – we haven’t seen any drop in deal flow, nor in new companies being started. If at all, we are seeing some more push amongst senior talent to do a startup now. Can that last? I dont know. If overall level of financing remains low, I think it may have impact on new businesses being started – especially those that seek venture financing.
  • Venture financings are clearly down – the bar is higher, some funds have run out of money, and other such causes. Later stage valuations are more reasonable, but not necessarily at a level where markets are clearing – perhaps may take a few more months to get there.

What is your sense on the above? Are you seeing people around you getting more aggressive or conservative regarding starting out? What change of behavior are you seeing amongst VCs?

Strategy Roundtables for Entrepreneurs

Friends, some of you have attended the strategy roundtables I have been doing for several months now. Here are some recordings. This morning’s roundtable, in particular, had some very good discussion on when to raise money and when not to, instead choosing the bootstrapping path. I encourage all of you who are toying with your options to listen to this recording.

Next week, we’re collaborating with TiE Chennai for another roundtable. Please join us.