India - a fight between VC and PE; maybe not....

It’s interesting to see the VC strategies being followed in the Indian market. Till last year, I used to find the distinction between VC and PE in India a little arbitrary because of the kind of sums involved but it’s now beginning to make some sense. There is an area of overlap in terms of the amount of money invested and the stake taken, but in such cases the markets which are being targeted by the investee will vary.

Basic definitions:

A venture capitalist invests in early stage start-up or formative companies which have either not launched or have just launched their product; revenues would not be anything to write home about.

Private equity, on the other hand, invests in firms with well-established business models and significant revenues. This could be just pre-IPO. It could also be to take a publicly listed company private or perhaps just one of their divisions. (PIPE as its called – private investment in public entities)

The general expectation is that as one moves from PE to VC, returns would be higher as would the risk component.

And now we come to the VCs and the PEs entering the Indian market. And that is the quirky element. VCs don’t necessarily seem to have a focus on technology growth – as in the US or more relevantly, Israeli markets. The risk component they are incorporating seems to be associated with geography i.e. emerging countries, and the evolutionary nature of the markets as a whole.

One interesting example from yesterday; Norwest Venture Partners, a VC firm from the US has picked up a less than 5% equity stake in On Mobile from the open market. So, now you have

- A very active early stage VC

- picking up a minority stake

- in a publicly listed,

- mid-market company

None of these are the tenets of a western venture capitalist. On Mobile’s current investors include the likes of Infosys, Deutsche Bank, Goldman Sachs and Polygon Investment Partners – none of them being the VC space players. But then Norwest themselves elaborated on their strategy for the Indian markets – growth and late stage investing as well as PIPEs i.e. minority investments in large companies who are leaders in their space. Some of their other investments – Adventity, the KPO, Suvidhaa (that’s an old name – service commerce), Yatra etc.

But then at the other end of the spectrum you have VCs like Accel Partners – their website talks of seed and early stage investing. They are investing with an already active group of people – Erasmic Venture Fund – which should certainly give then a better idea of the market. Another interesting one is Helion Ventures. A lovely aspect of all these VCs is that it gives a whole new set of entrepreneurs a chance. In India you never had a chance to think of starting a ‘business’ unless your dad had the money. But it’s now completely about what you have done with your life – not where you are coming from.

So, where does that leave the poor PE guys? It will take them a while to recoup the losses they will end up making on their investments made at the peak of the market. After all, at that point in time the fight was for the Escorts, Ranbaxys and DLFs. Those were interesting times – for the family entrepreneur, it was far cheaper to raise money from the public markets. But then you had these PE firms, strong believers in the Indian growth story and huge piles of money waiting to be invested. End result – sky high valuations. It remains to be seen the kind of IRRs the funds raised in 2007 will earn on their investments. The clear winners will be the new funds investing today.