Tuesday, November 22, 2005

Launch of The Indus View Publication

Welcome to the inaugural edition of The Indus View. This publication is a product of IndusView Ltd, an investment and advisory firm focused exclusively on opportunities in the Indian marketplace.

The Indian economy is set to grow at the rate of about 7% over the next few years. It is now the world’s second-fastest growing one after China. In terms of purchasing power parity, it is the world’s fourth largest economy with a 300 million strong middle class. With two-thirds of its population still under 35 years of age, it offers unprecedented opportunities for investment returns in the near future.

Historically, India and China have contributed a quarter and a third of world economic output respectively. India’s Prime Minister Manmohan Singh presented this historic context in a speech this July at England’s Oxford University, where he earned his doctorate in economics in 1962:

“In 1700, India’s share of world economic output was 23.6 percent, larger than the combined economic output (23.3 percent) of the whole of Europe. By Independence (in 1947), after nearly 200 years of British rule, India’s share of the world's economy had shrunk to just 3.8 percent while Britain's alone had risen to nearly 25 percent.”

Colonialism resulted in a historic anomaly; a correction of which we are witnessing in our lifetime.

Goldman Sachs claims that India could be the world’s third largest economy by 2032. Deutsche Bank states this could happen by 2020 if economic reforms were pursued more aggressively.

Regardless of the actual date, one thing is for sure. India will become a powerhouse during our lifetime making strides each year toward become a fully developed economy. What happened over many decades in the West will happen within the next two decades in India.

Not surprisingly, we’re seeing growth in various sectors in India. While the well-publicized Information Technology and IT-enabled services industries will grow 34 percent this year, less known is that the automotive components industry will grow 29 percent, telecoms 22 percent, retail financial services 21 percent and media 18 percent.

The Indus View publication is designed to help you put a finger on the pulse of economic change and corporate activity in India. We’ve been at the forefront of this change for many years. We wish to share that excitement with you.

Yours sincerely,

Bundeep Singh Rangar

Manish Gupta

Rishi Sahai

Saurabh Srivastava

Founding Members of IndusView Ltd

Wednesday, October 12, 2005

Skype: Reflections for European Venture Capital

In a few days time, most of Europe’s technology-oriented venture capital leaders will be gathered in Athens along with their U.S. and Asian counterparts and the heads of top global technology companies at the European Technology Roundtable Exhibition (ETRE).

The year’s most successful European venture-backed exit, Skype, will be high on the agenda with its co-founder and CEO Niklas Zennstrom making a keynote.

Stop Press. European VCs will be discussing Europe’s most successful exit? Correction – European VCs will be discussing Silicon Valley’s most successful exit.

The reason for the rectification is quite simple. It was the Draper juggernaut under Tim Draper and Howard Hartenbaum that made Skype a phenomenal VC investment. This was classic venture investing that’s made Silicon Valley the mecca of venture capital today.

This is not to take away the critical participation of European VC firms like Danny Rimer’s Index Ventures and Mark Tluszcz’s Mangrove Capital Partners or a pivotal role we played at Ariadne Capital in its early days. But I also give credit where it’s due – if it weren’t for all-singing and dancing Tim Draper who put Skype’s intrinsic disruptive technology on steroids, Skype would have been a “nice, interesting – and small - European company proving that it make early, if only small, profit.”

When I first met Niklas Zennstrom on Day 2 of his arrival in London in the fall of 2003 following an introduction by Howard, we discussed the self-defeating process of most European VC analysis.

The calculation they made followed a method similar to the two highlighted below:

1. Calculate a value for the company today based on a 5-year discounted cash flow analysis with a 25% discount rate. Do a Net Present Value and Terminal Value calculation and see if you can get the IRR on an investment our Fund promised to our LPs ; or
2. Rate the company from 1-5 for each of the following: management team, market opportunity, technology robustness, defensibility and intellectual property, sales and growth strategy, profit horizon, etc. If it gets a median score above 3.5, take another look at it.

There’s nothing inherently wrong with either analysis – but they remain a sub-set of what’s required to evaluate an early stage deal for its true future value. If early-stage technology investments were so predictable for their returns, they would be an asset class indeed.

In “Beyond the J-Curve,” Thomas Meyer and Pierre-Yves Mathonet state that an asset class is a group of investments where they have similar risk and return but are different from those of other asset classes. Skype failed the narrow tests indicated above used by most European VCs. Its P2P technology was deemed not robust enough and the founders’ Kazaa past was seen negatively. And they questioned whether it would ever make money. Yet, Niklas’s (and co-founder Janus Friis’s) return to investors has been way out of the league of all early stage 2003 investments worldwide.

Skype is a thunderous reminder to European VCs of the beta value of VC returns when compared with a basket of European VC investments. The historic share price of UK VC firm 3i’s public stock perhaps serves as the best benchmark against which to measure a European venture investment return. Be my guest, go ahead and do a calculation!

The reminder here -- it’s time for us to be in the Venture business, not just the Fund management business.

European VCs might want to sit down and analyse why it took a Silicon Valley VC to spot and deliver on that opportunity in their own backyard.

A few European VCs did have a chance to see Skype in its embryonic form. Their decision not to invest came down to a fundamentally different approach to investing. In contrast to Niklas’s experience in Europe, his dealings with Silicon Valley VCs (and those with offices in Europe such as Accel and Benchmark) were remarkably different.

They generally follow three logically inductive phases of thinking:

Phase I of Thinking

Does the company have a simple, easy-to-use product that can be easily adopted by consumers? Can this product be marketed directly to consumers so that its channel to market is not dependent on clunky corporates? Does the product fulfil a basic modern human need that users get excited about and tell others about and therefore, create a “viral” effect? If the technical, product development and market strategy are executed well such that it achieves scale and mass adoption, can it make lots of money through “economies of scale” once a “purchase price/revenue-profit model” switch is flicked on?

An introduction by me between Niklas and Sabeer Bhatia, an investor in Ariadne Capital and another example of an entrepreneur backed by the Draper juggernaut and vision of “viral marketing” leading to its Hotmail success, led to a fascinating meeting between Sabeer, Niklas and myself in the spring of 2004. While the contents of that conversation remain confidential, it confirmed that Niklas had gotten the right investor DNA on board.

Phase II of Thinking

What’s the cost of carrying the company until the point that the “switch is flicked on?” Do we, i.e. the VC, have the pockets to support it, the vision to encourage it and the networks to propagate it? Will the company’s product be so disruptive that its true value might be a calculation of money saved at the bottom line for doing the same utility using today’s technology rather than just money made at the top line at some point in the future?

I can hear Niklas’s voice telling me how Tim pushed them toward viral adoption and minutes of voice traffic rather than a false economy of early profit.

Phase III of Thinking

Do we, i.e. the VC, have the networks among decision makers in large acquisitive corporations that will value the company by calculating how its own cost of building the start-up’s new product, acquiring its customer base, scale, reach (particularly in new markets and demographs), traffic and brand will vastly outweigh the price of purchasing the start-up today. And that upon acquiring the start-up, can it flick on its own “much bigger switch” (i.e. revenue model) and see a much greater generation of revenue and profit? That’s the trade-sale argument to be made and won. And that will give a start-up today a multi-billion valuation tomorrow rather than just one worth tens of millions.

The proof of that lies in the spectacular $2.5 billion-$4.1 billion exit of Skype to eBay.

Many European VCs like to believe that they do operate and “think” this way. Evidence suggests otherwise. Not counting U.S. VC firms in Europe, very few actually do. Maisy Ng of Add Partners, Ajay Chowdhury of IDG Ventures and Richard Irving of Pond Ventures come to mind, among others such as Index and Mangrove.

In Skype’s case, European VCs did bring value. Index brought in a critical Cisco relationship and Mangrove did critical early due diligence that led to an investment. Working with Skype from its early days, we at Ariadne Capital did some of its critical early business development deals that led to its software being bundled with headsets and carrier agreements with PSTN operators that allowed for Skype In and Skype Out to materialise. We also placed four key individuals in an early team.

But we followed the Silicon Valley VC lead. By the time Draper invested, almost every European VC wanted to put their money in too. Why did Europe’s VC’s not take the lead in the first place? This was after all, Europe’s biggest venture-backed exit, right?

Perhaps that question ought to be pondered at this year’s ETRE. We might even get an honest answer.

Sunday, October 09, 2005

Indian VC Investments Total Record $528 Mln in Q3 2005

India’s venture capital and private equity market hit a record high in the third quarter this year with more than half a billion dollars in new investments, according to information provider Venture Intelligence India. The six times increase over the same quarter last year indicates growing investor interest in the world’s second fastest growing economy.

A total of $528 million was invested in 28 companies during July to Sept. 2005 compared with $90 million in eight companies during the same period last year. Late stage investments dominated, including 15 Private Investments in Public Enterprises (PIPEs). IT and IT-enabled service (ITES) companies won new favor with six investments totaling $55 million. Eighteen companies raised $10 million or more.

With Goldman Sachs predicting India’s economy to become the world’s third largest by 2032 and Deutsche Bank stating that target might be achieved by 2020 if economic reforms were pursued more aggressively, it’s easy to see the attractiveness of the Indian market among venture capitalists. India’s GDP is expected to grow 7.2 percent this year, the second fastest after China that’s expected to grow 8.5 percent, according to the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).

India’s high growth sectors include the IT and ITES industries predicted to grow 34 percent this year, followed by the automotive industry at 29 percent, telecoms at 22 percent and media at 18 percent, according to New Delhi-based corporate finance advisory firm IndusView Advisors Private Ltd.

“The Indian VC industry is still in its infancy and a lot of growth still lies ahead,” said Saurabh Srivastava, Chairman of the Indian Venture Capital Association (IVCA). “We’re still just making baby noises on the global stage.”

Venture capital and private equity investments represent only 0.15 percent of India’s GDP, compared with 0.28 percent in Europe and 0.54 percent in North America, according to Pricewaterhouse Coopers.

The largest investment during the quarter was $100 million by Newbridge Capital in truck financing company Shriram Holdings based in Chennai. The second largest deal was ICICI Venture’s $59.8 million buyout of Mumbai-based Associated Cement Companies, the first buyout of a publicly-listed manufacturing firm. Two investments of $45 million tied for third place. This included U.K. venture firm 3i’s first Indian investment into Mumbai-based entertainment software firm Nimbus Communications.

VCs also enjoyed 11 exits during this period, including three public listings. Newspaper publisher HT Media’s sold $86 million worth of stock. Its Initial Public Offering, subscribed 18 times available shares, was the largest venture-backed IPO during the quarter. It had raised $45 million in two financing rounds from Henderson and CIFC (Citigroup) in 2003 and 2004. Other IPOs included financial services firm IL&FS Investsmart backed by Japanese VC Softbank and U.S. stock broking firm E*Trade, Inc. and telecom research and development services firm Sasken Communication Technologies that had been invested in by Intel Capital, Nokia Growth Partners, New Enterprise Associates and Nortel Networks.

Mergers and acquisitions were led by Essar Group’s $1.56 billion purchase of mobile phone services company BPL Communications and Oracle Corp.’s $593 million purchase of Citigroup Venture Capital’s (CVC) 41 percent stake in banking software firm i-flex Solutions. CVC had invested just $400,000 in the firm more than a decade ago.

Exits earlier this year of Indiabulls, Yes Bank, Suzlon Energy and Indiagames made Ashish Dhawan’s ChrysCap and Saurabh Srivastava’s Infinity Venture the top two performing vintage 1999-2000 Indian funds. Both have embarked on raising new funds, along with other survivors of the previous boom in venture investment in India in 2000 when almost $1.2 billion was invested.

The raising of new funds seems well timed as investment and exit activities have generated heightened interest in India among potential Limited Partners and VCs alike. Draper Fisher Jurvetson announced a $200 million Indian fund earlier this month joining other Silicon Valley VCs in India such as Sequoia Capital and Bessemer Venture Partners. More than $3 billion in new capital is expected to be committed to Indian venture capital firms this year, according to the IVCA.

Indian funds already closed this year include ILFS’s $125 million Leveraged India Fund, the $200 million Westbridge Capital II, $425 million Actis India II and $150 million GW Capital II funds. These do not include India-specific buyout funds such as Carlyle, Blackstone and KKR – each earmarking a $1 billion or more toward India.

Tuesday, May 24, 2005

India's Mobile Market Miracle

When the Chairman & MD of India’s top cellular phone company Bharti Tele-Ventures, said to me in his New Delhi office, “I want us to be 12-18 months behind the rest of the world mobile phone market,” that took me by surprise.

For those of us in the early stage technology business, this was anathema! No first mover advantage, no creation of barriers to entry?

But Sunil Mittal knows the dynamics of India’s telecoms industry. In 15 years, his $10 billion company has grabbed 20 percent of India’s booming cellular market.

India works differently, he said. India’s telecoms market is not about being innovative with technology. It’s about deploying technology at a low enough price point that makes it mass market and avoiding the premium associated with early adoption of technology products.

That formula's working.

India has the lowest national call rate in the world – 2 cents a minute anywhere, anytime, across any cellular network. That’s fuelling a market growing by 2 million new subscribers a month. It will have 75 million subscribers by the end of this year from nearly 60 million, according to the Telecom Regulatory Authority of India.

India is, quite simply, all about volume. That’s why the mass market is all important.

When Reliance Infocomm sparked the “mobile phone revolution” in India, it had one simple premise. Make a phone call cheaper than the cost of mailing a postcard – a long-time favorite means of mass offline communication.

Overnight, India went from a slow-growing market to the world’s fastest growing mobile phone market of this magnitude. So much so that Nokia is undertaking a venture in India that it no longer does in the western world – the setting up a manufacturing plant.

The telecoms growth has spurned a host of ‘ecosystem’ businesses. You don’t hear a phone ringing when you call a third party. Instead, you might find yourself listening to a ring tone of a Cold Play song, a bhangra tune or Martin Luther King Jr.’s “I Have a Dream” speech. Phones have been given personalities by their owners and you experience it from the moment you ring it. Some clever entrepreneur supplies the carriers with the outsourced service – which has become another profit centre in India’s mobile value chain.

Telcos are happy to outsource everything except for their customer relationship, traffic and network management. If they want to add a voicemail feature, that’s supplied by Hotmail founder Sabeer Bhatia’s company, Navin Communications.

Even payment procedures are outsourced. This time to the subscribers themselves! If you’re looking to top up your mobile phone, pay cash to any other subscriber on your network and he or she can SMS you credits worth minutes and text and multi-media messages. That’s peer-to-peer payments with real value!

Add to this growth, a huge demand for content. That's easily met by Bollywood, which makes four times as many movies as Hollywood each year. Turbo-charged by the mobile market, the Indian media and entertainment market is growing at an annual rate of 20 percent according to Ernest & Young. The mobile content layer is growing rich in Bollywood-based ring tones, wallpapers, cartoons and games.

Investors are flocking to the market. Bharti Tele-Ventures gave its investor Warburg Pincus a near 6X return on its $300 million investment. That’s cash out of the business already and doesn’t include the stake it still holds in the now public company.

Other investors in the market range from Singapore Telecom, Hutchison and European VCs such as New Media SPARK and Argo Global Capital. Expect more to follow soon.

Wednesday, January 19, 2005

The Rise of the Softcom

The telecom company of the 21st Century is hereby dubbed the “Softcom.” Gone are expensive installations and maintenance of PSTN networks. Gone are service engineers putting in customer premise equipment. Gone are digital switches transmitting voice traffic across billions of lines of copper fibre in the ground.

Softcom’s hallmark is its use of software, soft-switches and the Internet Protocol to route data across millions of Internet routers across the world. Voice is just one of many data applications across its myriad of IP connections. Broadband connections to the home and office have opened up what was the privilege of those who owned the last mile. Customer service is courtesy of your best friend.

Even the most mundane industries change. And in that flux of change lie exciting and lucrative opportunities.

Don’t presume the future lies with a new kid on the block! Apple has proved time and again that it, not the start-up, is the custodian of innovation in the otherwise mundane and commoditized PC industry. Innovation and disruption can happen at any juncture – and by anyone. The Softcom may be the most likely agent of change; but it’s far from guaranteed to be the only agent or to succeed.

What does this new Softcom look like? What are its assets when it runs on an asset-light basis? What will be its revenue model? If it ultimately has to play the voice minutes’ game, will it end up being any different from the telecom it seeks to displace?

What does this mean for the telecom company as we know it? What does it mean to own legacy infrastructure? Does it fight the Softcom, partner with it, or indeed, become it? Will its deep technology, customer base and telecom operations experience ultimately make it a winner?

What does this mean for the mobile network operators? Will the Softcom challenge its ubiquity? And drive prices down to nothing. Will the fixed line telecom and the Softcom become best friends and take on the MNOs?

Is the triple play of voice, data and video is just the beginning of things to come? If that’s the case, why won’t that get ultimately commoditised making the Softcoms and telecoms companies just like other utility companies. Telecoms could look more like cable companies with data pipes being their business.

From the Internet world, we learn it’s not just content but transactional content that wins. WYSIWYG doesn’t make money, it’s What You See Represented Is What You Get, that does. Put simply, it’s not the feature on Slate magazine that makes money – it’s the deed of a house ownership sold on eBay that does.

Will that make money for Softcoms, telecoms and MNOs? Could the most valuable service be the enablement of transactions? From money transfers, payment systems, betting and online banking, the most valuable service might involve the trading of cash itself.

The future is unknown. That’s what makes it exciting. And that’s what we’re here to talk about.