By Archana Rai
HE IS among the most active risk capital investors in the Indian market with a track record of having backed companies such as Mindtree Technologies during an earlier stint as head of global fund, Walden International India. Currently, Sudhir Sethi is the founder, chairman & managing director of IDG Ventures India, a $150-million early-stage technology venture capital firm that has invested in a clutch of technology product firms such as Perfint Healthcare, Apalya Television, Manthan Systems and 3D Solid Compression. Mr Sethi’s firm worked on collating proprietary data on the private equity and venture capital industry, in a bid to document the emergence of India as a significant player in the global risk capital space. In an exclusive interview with Archana Rai, prior to the formal release of the report, Mr Sethi discussed why technology companies will account for over a tenth of all risk capital that will come into India between 2010-2015. Excerpts:
What are the factors that will contribute to India attracting $100 billion of private equity and venture capital funding in the next five years?
We are projecting capital flows above $75 billion in this period provided there is a comprehensive government policy to encourage PE/VC investments and that the government opens up key sectors like retail, education and energy to foreign investment, this can go up to $100 billion. We also need to have more risk capital generated from Indian limited partners, that is capital from India-based high network investors and institutional risk capital. Finally, for there to be a supply chain that venture and private equity investors can tap into, we need more angel investors who will provide seed funding at very early stage of company formation.
As a tenth of these investments are expected to be in the venture capital space, what is the average deal size you expect?
We expect deal sizes to remain in the $5-million range as VCs operate at the smaller end of the deal spectrum, where early stage companies cannot absorb much more capital than this. Most VC investments, over 70% almost are in technology, which is a highly capital-efficient sector. The cost of setting up and running a technology business is low in India compared to the US. Even in the US, where the cost of running a start up is much higher, the average VC deal size last year was $6.3 million.
What will be the favourite sectors for venture capital investments?
We have picked three sectors, this includes software products where data shows high returns and high capital efficiency specifically in areas such as business analytics and security. Also, the large mobile user base and falling voice ARPUs, (average revenue per user) and the adoption of 3G will drive more mobile value added services companies.
The third big bet is the energy sector, this will be driven by power requirement of 150,000 MW in five years as well as the need to meet energy efficiency and emission reduction requirements set by the government and customers.
Which areas do you expect Indian start-ups to provide breakthrough technology in?
Through the 20 years’ success of the Indian services industry, management and technical skills will enable Indian companies to create world class software products.
Within the software product universe, Indian companies are likely to excel in areas where there is a large Indian market, such as mobile technology products, or where enough domain knowledge has been built through services, such as business intelligence products or security.
There is a significant opportunity in hardware technology products from India as well, where the low-cost engineering approach will be the differentiators for Indian companies. For example, our portfolio company Perfint makes an artificial intelligence-based robotic arm for cancer biopsies, a complex medical device requiring precision engineering, at a fraction of the international cost.