Is the much touted transformation finally happening?
The Ernst and Young VC Insights Report 2006 ranked India at number 5 amongst the top destinations of Venture Capital. India has attracted VC investments worth $ 1.1 bn in 2005 and have just followed up with another very successful 2006. Most of the very successful technology VC’s like Sequoia, NEA and USVP have already raised or are planning to raise India based funds. Organizations like the TiE are providing adequate platforms for the young entrepreneurs to network with VC’s and snag big ticket investments. There are signs of success already doing the rounds mostly in the hot Web 2.0 space. Are we looking at a base transformation here?
Before I start putting together this paean, let us do a reality check. The fact is that bulk of the $ 1.1 bn figure was utilized for buy-outs and mid-stage funding of IT Services firms. This is the low hanging fruit. The IT services market has matured and despite persistent threats of the market over-heating and bubbling over, the players have been able to stay ahead of the curve. Some of them, like GlobalLogic and Symphony have established themselves in their own niches (offshore product development services) and have grown dramatically in the past. Still others, have re-invented themselves, got acquired or have pursued strategic acquisitions in foreign stores. As dynamic as this sector may appear, the VC community don’t seem too excited. The reason being that consolidation is already overdue in the industry with mature players looking to either grow through acquisitions or simply capitalize. The critical “Exit Strategy” that most VC funds seek seems to be absent with most players in the segment. We are not going to see a large number of players rushing to NASDAQ for a listing in the short while. Nor are we likely to see a bright and “green in the head” start-up grow and get acquired in the next 5-6 years. The fact is that the VC community was not a very pro-active participant in funding the IT Services off shoring boom, and at this stage, when the industry is pretty much on its own feet, it is not likely to meddle too much with the dynamics of the sector. Examples like Global Logic, Virtusa, Symphony Services, Persistent Systems will abound, where VC’s have opened their purse strings to do aggressive funding, but these set of companies really belong to another planet, the OPD planet.
The story on OPD started, when VC’s stated asking their portfolio companies to look offshore for specialized product development services. In most of the cases the firms needed the required run-way in the seed stage, when burn-rate of cash was high. So they start talking to this “peculiar” breed of service providers who apparently started with the motto of serving ISV’s. I use the word “peculiar’ because, some of these companies were talking about taking complete ownership of product development. Symphony for one, had the courage to tell the ISV’s in America, “Product IP and Marketing are core, Product Engineering, Innovation support and sustenance is context”. IT services had never seen such an interpretation of offshoring. The Implications of this pitch rang heavy in terms of the sheer scale of delivery and specialization in that the client expected out of OPD partnerships. Buoyed by this trend, VC’s started asking their portfolio companies to seek partners in India, then, as if to get a “double-bang” for the buck, they also started adding these OPD firms to their portfolio. Most of the funding that happened in the OPD space was early to mid-stage. The players in this segment already had ISV clients and had longer term contracts that provided them with flexibility on what they could do with the freshly induced funding rounds. So you had, VC’s prompting their portfolio technology companies to partner with OPD firms within their portfolio. This was not a very obvious trend at first, but is increasingly evident as time goes by.
Now, the Million Dollar question? If one can develop products in India for one’s own portfolio companies, what should stop the VC’s from catching a flight evaluating proposals of home grown firms having a global product delivery plan? The success of the OPD firms was significant in the sense that, the industry understood that contextual IT services is not the only thing you could outsource to India. One could actually have products developed from white-board to market in India. Expatriate techies out of the Silicon Valley who had worked in Networking, Storage and Telecommunications space took up the mantle first. They approached VC’s with seed funding proposals based on an idea, 100% of the execution go which would be driven from India. Pune is dotted with such firms that have extremely successful products out in the market today. Much in the model that Israel grew as a destination for Storage and High tech funding, I will not be surprised if product innovation and leadership in certain niche high tech segments is lead by India, fuelled by the new investment interest from the Silicon valley in particular.
The Web 2.0 boom did not leave India untouched. Norvest, Kleiner Perkins and a few others have got their exalted hands wet in the India Web.2.0 race. Leading the pack are travel portals like Cleartrip.com, Travelguru.com, Naukri.com and the real estate portal 99acres.com. There are others who are catching up as I write. Suddenly the leading VC firms are getting enamored with 38.5 million internet penetration number and the broadband adoption that has been growing steadily over the past couple of years. My feeling is that, one cannot go wrong with the investments that have thus far happened. The only worry is, as usual, of overdoing it. Although the buzz thus far is that most of the investments are happening because of the lack of more qualified “mainstream” opportunities, purely from the risk/returns perspective the investments made till now are on the right track.
So, with all the new product development for global markets and the investment in the indigenous Web.2.0 space, is India finally likely to break the mould of a back-office destination for the US? Time will tell.
The Ernst and Young VC Insights Report 2006 ranked India at number 5 amongst the top destinations of Venture Capital. India has attracted VC investments worth $ 1.1 bn in 2005 and have just followed up with another very successful 2006. Most of the very successful technology VC’s like Sequoia, NEA and USVP have already raised or are planning to raise India based funds. Organizations like the TiE are providing adequate platforms for the young entrepreneurs to network with VC’s and snag big ticket investments. There are signs of success already doing the rounds mostly in the hot Web 2.0 space. Are we looking at a base transformation here?
Before I start putting together this paean, let us do a reality check. The fact is that bulk of the $ 1.1 bn figure was utilized for buy-outs and mid-stage funding of IT Services firms. This is the low hanging fruit. The IT services market has matured and despite persistent threats of the market over-heating and bubbling over, the players have been able to stay ahead of the curve. Some of them, like GlobalLogic and Symphony have established themselves in their own niches (offshore product development services) and have grown dramatically in the past. Still others, have re-invented themselves, got acquired or have pursued strategic acquisitions in foreign stores. As dynamic as this sector may appear, the VC community don’t seem too excited. The reason being that consolidation is already overdue in the industry with mature players looking to either grow through acquisitions or simply capitalize. The critical “Exit Strategy” that most VC funds seek seems to be absent with most players in the segment. We are not going to see a large number of players rushing to NASDAQ for a listing in the short while. Nor are we likely to see a bright and “green in the head” start-up grow and get acquired in the next 5-6 years. The fact is that the VC community was not a very pro-active participant in funding the IT Services off shoring boom, and at this stage, when the industry is pretty much on its own feet, it is not likely to meddle too much with the dynamics of the sector. Examples like Global Logic, Virtusa, Symphony Services, Persistent Systems will abound, where VC’s have opened their purse strings to do aggressive funding, but these set of companies really belong to another planet, the OPD planet.
The story on OPD started, when VC’s stated asking their portfolio companies to look offshore for specialized product development services. In most of the cases the firms needed the required run-way in the seed stage, when burn-rate of cash was high. So they start talking to this “peculiar” breed of service providers who apparently started with the motto of serving ISV’s. I use the word “peculiar’ because, some of these companies were talking about taking complete ownership of product development. Symphony for one, had the courage to tell the ISV’s in America, “Product IP and Marketing are core, Product Engineering, Innovation support and sustenance is context”. IT services had never seen such an interpretation of offshoring. The Implications of this pitch rang heavy in terms of the sheer scale of delivery and specialization in that the client expected out of OPD partnerships. Buoyed by this trend, VC’s started asking their portfolio companies to seek partners in India, then, as if to get a “double-bang” for the buck, they also started adding these OPD firms to their portfolio. Most of the funding that happened in the OPD space was early to mid-stage. The players in this segment already had ISV clients and had longer term contracts that provided them with flexibility on what they could do with the freshly induced funding rounds. So you had, VC’s prompting their portfolio technology companies to partner with OPD firms within their portfolio. This was not a very obvious trend at first, but is increasingly evident as time goes by.
Now, the Million Dollar question? If one can develop products in India for one’s own portfolio companies, what should stop the VC’s from catching a flight evaluating proposals of home grown firms having a global product delivery plan? The success of the OPD firms was significant in the sense that, the industry understood that contextual IT services is not the only thing you could outsource to India. One could actually have products developed from white-board to market in India. Expatriate techies out of the Silicon Valley who had worked in Networking, Storage and Telecommunications space took up the mantle first. They approached VC’s with seed funding proposals based on an idea, 100% of the execution go which would be driven from India. Pune is dotted with such firms that have extremely successful products out in the market today. Much in the model that Israel grew as a destination for Storage and High tech funding, I will not be surprised if product innovation and leadership in certain niche high tech segments is lead by India, fuelled by the new investment interest from the Silicon valley in particular.
The Web 2.0 boom did not leave India untouched. Norvest, Kleiner Perkins and a few others have got their exalted hands wet in the India Web.2.0 race. Leading the pack are travel portals like Cleartrip.com, Travelguru.com, Naukri.com and the real estate portal 99acres.com. There are others who are catching up as I write. Suddenly the leading VC firms are getting enamored with 38.5 million internet penetration number and the broadband adoption that has been growing steadily over the past couple of years. My feeling is that, one cannot go wrong with the investments that have thus far happened. The only worry is, as usual, of overdoing it. Although the buzz thus far is that most of the investments are happening because of the lack of more qualified “mainstream” opportunities, purely from the risk/returns perspective the investments made till now are on the right track.
So, with all the new product development for global markets and the investment in the indigenous Web.2.0 space, is India finally likely to break the mould of a back-office destination for the US? Time will tell.
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