NEWS-INDIA: Shakeout in Indian dotcoms forces VCs to change track
India-IT-Capital
Shakeout in Indian dotcoms forces VCs to change track
by Sumeet Chatterjee, India Abroad News Service
New Delhi, Dec 3 - In the wake of a shakeout in the dotcom space, focused on
eyeballs and advertising revenue, a host of venture capital (VC) firms are
changing strategy in India and focusing on core technology-based start-ups,
say analysts.
"Venture capitalists have become much more cautious in the last six to seven
months in the wake of a high rate of failure in the dotcom business both in
India and abroad," Amul Gogna, executive director of the Investment
Information and Credit Rating Agency (ICRA), told India Abroad News Service.
In the changed scenario, VCs are now looking at new areas such as software
development, telecommunications, biotechnology and media and entertainment,
he added.
The emergence of venture capital funding in the country has helped in the
evolution of Internet-based ventures. Risk capital investment in the
domestic information technology (IT) sector increased from $20 million in
1996 to $320 million in 1999 and most of the venture funding has been in the
areas of Web site and portal creation.
Analysts say dotcom companies, mainly in the business-to-consumer (B2C)
segment, which were cash-starved, were spending more money than required or
had no revenue model, have started wilting under pressure.
"Most of the venture capitalists in India were looking at valuation game and
nobody took a close look at the revenue model of the dotcom companies. It
was only after the so-called reputed dotcom brands in the U.S. started going
bust that the investors here became much more cautious," Brijinder Ahuja,
vice president of the Delhi-based venture capital consultancy firm First
Capital India, said.
Ahuja said investments were now moving into IT-enabled services such as call
centers as many global blue-chip companies were planning to make India the
hub of their back office operations.
Although investments will continue to flow in for the right companies, there
will be a lot more reality checks, Ahuja said, adding that the venture
capitalists have become aware of the fact that low Internet and personal
computer penetration and lack of proper infrastructure in the country will
not ensure the growth of dotcom companies as envisaged earlier.
According to ICRA's India Internet Business Report, there are around 50,000
dotcoms that are of Indian origin or are India oriented. In view of the high
initial promotional expenditure, which is Rs. 100 million to 150 million on
an average, it is assumed that the average turnover of a dotcom venture
would be in the range of Rs. 100 million-120 million, says the report.
When this figure is reconciled with Rs. 253 billion, which is the expected
aggregate worth of e-commerce activities in India in 2005, the inevitable
conclusion is that only five to 10 percent of the existing Internet ventures
would eventually survive, it added.
eVentures, a venture fund floated by Softbank in partnership with ePartners,
an affiliate of media baron Rupert Murdoch's News Corp, recently said it
would invest a further $150 million in India's expanding media and core
technology sectors. The firm has already committed $65 million in 14 Indian
companies.
Gurcharan Das, a business economist, said investment from venture
capitalists was still flowing in the business-to-business (B2B) segment and
Internet companies with strong fundamentals or those creating new
technologies to scale up the operations of brick-and-mortar companies.
"Overall venture capital activity in the country has not declined but there
has been a shift towards new areas such as software development, remote
services, convergence and technology of various kinds where India has proven
its skills in the global market," Das said.
According to the National Association of Software and Service Companies
(NASSCOM), an IT industry think-tank, venture capital and private equity
inflows and commitments into India are expected to double from the previous
year to reach Rs. 32 billion in 2000-01. These inflows are likely to further
increase by over 100 percent and touch Rs. 65 billion by the end of the
financial year 2001-02.
In recent times, some of the successful Indian-run companies in the Silicon
Valley have decided to invest in India.
Igate Capital, a U.S.-based software services company promoted by two Indian
Americans, has decided to float a $200 million global venture fund and out
of the total amount, the company proposes to invest 15 to 20 percent in
India.
-- India Abroad News Service
