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September 28, 2005

Businessworld interview with Blackstone's Akhil Gupta

Businessworld has published an interview with the Akhil Gupta, head of the Blackstone Group's Indian operations:

Which sectors do you find most attractive in India now?
We are looking at companies across all sectors. As big-ticket players, we will not look at any deal below $25 million. The BPO space for private equity participation is saturated. Thus, going ahead, one might see a lot of private equity participation in pharmaceuticals, real estate, export and infrastructure.

What is Blackstone's USP vis-a-vis other private equity players in India?
A clear differentiator is that we will only do the big-ticket deals. Second, we have the largest portfolio companies as compared to our colleagues in the private equity space. So we position ourselves as catalysts for cross-border activities and as partners for growth over a long term. Even for a sector like telecom, which is essentially local in nature, we bring in our global expertise about process knowhow, etc., to enhance performance. We will be performance-driven at any stage of our partnership.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

September 18, 2005

InfoTalk's Podcast with Sequoia's Mark Kvamme

InfoTalk has a great podcast with Sequoia Capital's Mark Kvamme. Some sound bytes (some of which might be paraphrased):

It's a myth that we invest only in companies who are referred by someone known to us. We've recently invested in a company that cold-called us.

If we can build a world-class business, the liquidity (exits) will take care of themselves. In fact, in today's crazy world of Sarbanex-Oxley, it makes sense to stay private for as long as possible.

We want people to know that we can make $100,000 investments, that we invest in 18-19 year-olds and we invest in ideas that are not yet fully-developed.

My phone number is 650-854-3927 and email address is We love to hear new ideas and new entrepreneurs. !!!

How about that for an accessible VC?

Arun Natarajan is the Editor of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

September 17, 2005

MIT's Deshpande Center wins praise

Brad Feld has high praise for the Deshpande Center for Technological Innovation at MIT. He feels "it’s an awesome example of a university program that funds novel, early-stage research, connects innovators with the business creation infrastructure – including VCs and entrepreneurs – and actively helps new startups to be created out of fundamental early stage research".
As the Deshpande Center enters their fourth grant cycle, they just released the data on what happened with research teams that they have funded to date.

* 44 teams have been funded since 2002
* $4.9m of grant money has been awarded
* 9 companies have been formed
* $23m of angel and first round VC funding has occurred
* 7 other teams are forming new companies and actively raising money

This is an incredible hit rate – 20% of the teams have already started companies and 36% of the teams that received grants have either started or are starting companies. Congrats to all these teams, Charles Cooney (MIT Professor) and Krisztina Holly (Deshpande Center Executive Director), and Desh and Jaishree Deshpande who underwrote the program.

Arun Natarajan is the Editor of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

India's Web 2.0 companies?

Business Today has featured a list of "dotcom" survivors - from to - as part of its recent Cover Story.

Arun Natarajan is the Editor of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

How much will CIFC and ChrysCapital make from the Suzlon Energy IPO?

Business Standard calculates how much the two late-stage PE investors stand to gain from the wind energy turbine maker’s forthcoming IPO:

Citicorp, which had invested in Suzlon in April last year, effectively paid Rs 21.6 per share, and will now get at least Rs 425 per share, since the price band for the IPO has been set at Rs 425-510.

That is a huge 1872 per cent return on investment in a period of less than 18 months. If the issue gets priced at Rs 510, Citicorp's return will jump to 2266 per cent.

Of course, Citicorp will not realise this return entirely, since it is selling only a small portion of its investment in the company through the IPO.

Suzlon's initial public issue of 29.34 million shares includes an offer for sale of 2.58 million shares by Citicorp. That will still leave Citicorp with 20.6 million shares.

In fact, Citicorp is not the only player that has benefited in a big way. ChrysCapital, another private equity investor, bought shares in August last year at an effective price of Rs 27.1 per share.

Unlike Citicorp, which is offloading shares through the IPO, ChrysCapital has already sold about 60 per cent of what it held in Suzlon to other foreign investors at an average price of Rs 385.6 per share.

ChrysCapital continues to hold 7.5 million shares in the company, which makes its total return on Suzlon investment from 1380 to 1509 per cent, based on the price band of Rs 425-510.

Both Citicorp and ChrysCapital have invested Rs 50 crore (Rs 500 million) in Suzlon for a 9.6 and 7.1 per cent stake, respectively.

Arun Natarajan is the Editor of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

September 11, 2005

While IT services cos. are acquiring overseas, product firms are getting acquired by foreign firms

This week, I contributed to an article on M&A in India's IT services sector in the The 451 techDEALMAKER. I'm posting below some of my responses to a well compiled list of questions from The 451 Group's Fred Linden.

What trends do you see in M&A involving India-based technology and communications companies?
While product/IP-driven companies based in India are finding willing buyers and investors among foreign companies (examples include the recent Oracle-I-flex deal and Flextronics’ string of acquisitions in 2004), services-focused firms are capitalizing on the booming capital market to acquire overseas companies.

Based on the successful exits, technology-focused VC firms are now more bullish on backing product/IP-driven firms rather than IT services firms (except for niche/specialized players).

Within services, it has been quite fascinating to witness how much more rapidly the Indian BPO services sector grew and matured – including in terms of attracting M&A interest from overseas firms - compared to the IT Services sector.

Are there factors besides the ample supply of competitively priced and well-educated knowledge workers driving the tech sector growth in India?
The sheer numbers in terms of trained manpower is a factor that no other country - except probably China - can match. The strong Indian diaspora in the US - common to Israel and China as well – is another source of strength. With salary levels on the rise year-on-year, the availability of sufficient “been there, done that” management experience and the comfort with English of even the entry-level programmer are what will keep India ahead of China in the IT services space.

What's driving India-based IT companies to look abroad for investment opportunities?
An extremely conducive capital market – both domestic and global for Indian companies - is making the financing of acquisitions much easier. Whether it is a local IPO, overseas equity issues (like GDR and ADRs), convertible debt (like Foreign Currency Convertible Bonds) or Private Equity funding, Indian companies are spoilt for choice in terms of options to finance their overseas acquisitions. The Indian government too has liberalized the rules for companies making overseas acquisitions and recently also relaxed limits placed on Indian banks to finance these acquisitions.

What's driving foreign-based companies to buy India-based IT operations (besides the obvious - the low cost of highly qualified labor)? How do other forms of direct foreign investment in the Indian IT sector (JVs, local branch offices, etc.) compare?

Recent deals seem to indicate a preference among foreign firms to acquire Indian firms with specialist/niche capabilities rather than generic service providers.

Would it be correct to say that the focus of India-based IT is shifting from IT business services/systems integration (2003 & 2002) to IT outsourcing and software development?

My understanding, as someone who tracks the IT Services industry mainly from a deal perspective, is that while the larger firms continue to play across the spectrum, mid-sized firms are choosing – if not forced - to specialize. Offshore software testing services has been a new area of growth for the mid-sized players and based on their success, the larger players – who earlier did not pay to much attention to this opportunity – are growing their practices in this area.

Our data suggests that India-based IT companies over the past four years have been increasing the size of their foreign acquistions rather than making more of them (although just in the past couple of months there have been an upswing in activity). Can you confirm this trend toward larger transactions, and what would explain it?

While I’m not sure there is a conscious move towards doing larger deals, given the challenges of integrating cross-border acquisitions – motivating and retaining the existing team, cultural issues, etc. – it makes sense for Indian IT vendors to go in for fewer deals - and consequently ones that are significant sized - so that management bandwidth is not spread too thin. Also, given the strong performance of the Indian stock markets, it makes sense to use the opportunity to do larger deals now.

Our data suggests that the size of IT acquisitions in India by foreign companies has not been growing over the past four years. Meanwhile, the activity level (number of deals) has been growing. Can you confirm this trend toward quantity over size, and what would explain it?

Each foreign firm entering India makes a “build versus buy” decision. Over the last few years, most Global IT Services firms have entered the country and opted to create their own delivery presence rather than acquire generic local IT services firms. The process for setting up an India Development Center (IDC) is relatively smooth (so there is no significant entrenched advantage that a local firm enjoys here). Plus the foreign firms have been able to hire local management talent – usually by hiking salaries significantly.

The acquisitions have been reserved for adding niche capabilities – like BPO (IBM-Daksh), vertical specialization (Flextronics-HSS), etc.

What recent international deal involving a tech company based in India do you find most interesting?

Apart from the recent Oracle-I-flex deal, which has received wide publicly, I found the way in which Singapore-based contract electronics manufacturer Flextronics has rapidly emerged an active acquirer of Indian technology companies to be quite fascinating. The company moved swiftly to invest in most of the leading communications software companies in India in 2004: it acquired FutureSoft and Deccanet Designs and invested $226 million to acquire the 55% stake held by News Corp. in publicly-listed Hughes Software Systems. As part of the company’s plans to make India its global center for technology products design, Flextronics has also led a $10 million investment in chip design firm inSilica and acquired multimedia technology firm Emuzed.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

September 03, 2005

Making merry until the IPO party lasts

In an article for the Financial Express, I highlight how late-stage companies are tapping Private Equity investments just a few months before filing for an IPO.
October 2004: HT Media raises private equity capital from Citicorp International Finance Corporation, following an earlier investment from Henderson.

August 2005: HT Media's IPO is oversubscribed.

May 2005: ABG Shipyard raises funds from Merlion India Fund and IL&FS VC.

August 2005: ABG Shipyard files for IPO.

May 2005: Telecom R&D firm Sasken raises a reported $9 million from US-based VC firm, NEA, and files for an IPO almost simultaneously.

See a pattern here? Welcome to the world of pre-IPO Private Equity deals. As long as the IPO window in India is wide open we can expect the pre-IPO PE financing to gather momentum. (After all, right now, the only difference between one IPO and another is how many times each one is oversubscribed). Investing in mature companies just before their IPO – which sets a nice healthy valuation benchmark for the company - and exiting at a nice profit either at the IPO or over a couple of years, is a nice formula indeed. As long as the party lasts.

Investing in mature companies just before their IPO – which sets a nice healthy valuation benchmark for the company - and exiting at a nice profit either at the IPO or over a couple of years, is a nice formula indeed. As long as the party lasts.

I personally do not have too much of a problem with this phenomenon. Over the last 18 months, one of the most significant trends in the Private Equity world has been the emergence of a clear stratification within the industry - i.e., a clear demarcation of who specializes in what, in terms of stage and size of financing. This is good since it lends depth to the market and can be expected to have a “trickle-down” effect on start-up financing as well. Angel investors and early-stage Venture Capital firms (which are a sub-set of Private Equity firms) can now invest in the confidence that their investee companies have multiple players to go to for follow-on financing at various stages of their growth.

...To their credit, PE firms have kick-started investments across a range of industries. (Until mid-2003, companies outside the IT and BPO industry rarely got as much as a dekko from VCs.) And it is not just export-led industries like textiles, pharmaceuticals and auto-components that are attracting PE investments. Companies focused on the domestic economy - like Retail and Media firms - are getting a decent share of the money as well. This again augurs well for the long-term.

So, what’s next? As the IPO fever heats up and more and more PE firms rush in to make their first investments – keen to report an “early success” back to headquarters - we can expect a supply-demand mismatch. As more money chases fewer quality companies, the result is inevitable: Prices - that the promoters will demand from PE firms - will go up. As long as the markets head northwards, the deals will continue to get done at higher and higher valuations. But the IPO window will - inevitably - close at some point. And, when the music stops, some PE firms - who have just paid fancy premiums in their latest pre-IPO deal - will be left stranded.

...They will have to bide their time until the next IPO season. Or sell at a discount. After all, as the Americans say: No pain, no gain.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Why all this buzz around media?

The latest issue of Businessworld magazine has a cover story on the heightened deal-making in the media and entertainment sector in 2005.

Here's my take on the Private Equity action in the Media & Entertainment sector (some parts of which were featured in the Businessworld article):

For almost three years since the 2000 downturn, PE and VC firms focused whatever little investments they were making into the Information Technology and BPO services sectors. The media & entertainment sector, which was reeling under the impact of the sharp decline in advertising spends, never got a dekko.

September 2003 witnessed two major investment announcements in the media & entertainment sector: Henderson Global Investors' $27.8 million investment in HT Media for a 20% stake and ICICI Ventures' $22.2 million buyout of the Tatas 50% stake in Tata Infomedia. HT Media went on to raise a further $15.3 million from CIFC (a part of Citigroup) and Henderson in October 2004 - the only significant media investment by PE firms in that year.

A key factor in driving investments by PE firms is how successful they would be in finding profitable exit routes – either via an IPO or the acquisition of the investee company. 2004 was a great year in this respect with private equity firms exiting their investments in as many as 30 Indian companies across all sectors, six of them via IPOs. The biggest media sector exit during the year was New Delhi Television’s $24.5 million April IPO which provided an exit route for its PE investors including Goldman Sachs, Saffron Fund, JF India Fund, JP Morgan and SBI Capital Markets. Infinity Ventures and IL&FS VC exited their investment in gaming software firm Indiagames when China-based TOM Online acquired an 80% stake in the company for $17 million in December 2004.

Talking of exits, the August 2005 IPO of HT Media is likely to be a major milestone for PE investments in the sector. Henderson has already realized its original investment via the 5% stake it sold via the IPO. Any sales of its remainder shares (it is estimated to own about 10% stake post IPO) above the IPO price will be pure profit. Canadian PE firm CDPQ too obtained an successful exit for its investment in UTV Software Communications via the company's $20 million March 2005 IPO.

Catalyzed by these successful exits, 2005 is turning out to be a blockbuster year for media sector investments: UK-based PE firm 3i's $45 million investment in Nimbus Communications in August 2005 follows BSMA and Arisaig Partners’ $12 million investment in Adlabs Films (April), New Vernon Bharat's $7 million investment in Jagran TV (May), Kerala Venture Capital Fund's investment (amount not disclosed) in Film and TV production firm Symphony Entertainment (June) and Americorp Ventures' acquisition of a 9.33% stake in TV broadcasting firm Asianet Communications for a undisclosed amount (March). Add to this Reliance Capital's $83.7 million strategic investment into Adlabs Films in July, and it is clear that a major party is on. So much so that some US VC investors are now actively looking for investments in Internet media companies – something considered a downright bad word just two years ago!

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Citigroup launches "venture lending" service in India

This week, Citigroup announced the first customer - Chennai-based Secova eServices - for its new "venture lending" service to Venture Capital-backed companies in India. Apart from providing a term loan, as part the Venture Lending transaction, Citigroup will also acquire a small pledge of stock warrants which would entitle it to invest and acquire equity shares in the customer company at a predetermined price.

The service is aimed at early- and growth-stage companies which have already raised a round of VC funding. Secova, for instance, raised its first round financing from the Tamil Nadu IT Fund (managed by IL&FS VC). By using debt financing from the Venture Lending service to finance fixed-asset purchases or working capital, entrepreneurs can employ their VC funding in areas such as accelerating product development or in making key hires. This way, entrepreneurs can achieve a better valuation for their companies before going in for the next round of equity dilution.

More from Citigroup's note about the service:

What is Venture Lending
Startup companies typically receive several rounds of equity investment prior to going public or being acquired. Each round is expected to provide sufficient capital to achieve predefined milestones. By reaching milestones, the company is able to (and typically needs to) raise a subsequent round of financing. These step-up rounds of financing serve two purposes: First, they enable entrepreneurs to minimize the amount of equity that is given up in the firm by linking further dilution with higher valuations. Second, they enable the venture capital investor to minimize investment risk by spreading the capital requirement over multiple rounds and usually a number of different investors.

There is a clear need for some amount of debt financing between VC rounds to help companies and investors ‘extend the cash runway’ of their investments. By using debt, the entrepreneur is able to have access to more capital without giving up as much equity. Put differently, venture debt enables the entrepreneur to run the company for a longer amount of time, increasing the enterprise value of the company, before raising more money. Venture Debt is an existing concept in the US accounting for over 25 years.

Benefits of Venture Lending
• Extends the “cash flow runway” for the company and makes it easier to achieve the next valuation milestone.
• Venture lending represents a less dilutive type of financing than venture capital financing since venture lenders generally require less of an ownership position.

Venture debt is typically useful for early stage and emerging venture-backed companies that are looking to build out their business through infrastructure expansion or growth capital. Venture debt is traditionally used for the purchase of hardware and infrastructure equipment, enabling emerging companies to reserve the venture capital investments for business critical activities such as research and development, marketing practices, and hiring. Additionally, venture debt can be used to finance accounts receivables, inventory, demonstration equipment and can be purely offered as growth capital.

For further details, contact Ajay Hattangdi, Vice President-Citigroup, Mumbai at or +91 22 5001 5039.

September 02, 2005

“Regulators need to watch out for Private Equity firms”

In the context of the launch of large buyout-focused PE funds like Blackstone and The Carlyle Group in India, Raghuvir Mukherji, a consultant with the Financial Securities Group of Infosys Technologies, stresses, in a Business Line column, the need for urgent regulation in three areas:
The level of gearing expected (including, if necessary, mandatory credit ratings for these firms) to prevent them from creating an asset bubble;

Publishing of data on activities of these firms and those they take-over, to prevent them from using the latter to do things that fall within the grey areas of the law;

Minimum lock-in period for these equity firms to prevent them from asset-stripping the companies they promise to turn around.

September 01, 2005

Does it pay to be an iconoclastic VC?

Extract from a recent The report:
(Tim Draper, Managing Director of Draper Fisher Jurvetson) is best known for self-promotional stunts such as singing at conferences, dressing up as Batman on the floor of the New York Stock Exchange and generally, just making really silly public statements that attract attention. While VC investing may require brains and native shrewdness, Draper's rebound may show that success can also come through a willingness to take risks on new geographies and sectors. And if self-promotion and buffoonery are an inseparable part of that risk-taking proposition, so be it…

For all this ridiculousness, Draper still sits on a significant stake in one of the world's more promising startups that happens to be located in Eastern Europe. Tallinn, Estonia-based Skype was founded by Niklas Zennström and Janus Friis, the engineering duo behind file sharing technology KaZaA. Skype offers PC-to-PC Internet telephony calling that is free for registered users and inexpensive for unregistered users.

But why Draper Fisher Jurvetson? First, it's one of the few venture firms willing to take a chance in a distant locale such as Estonia. Although the country is just two hours by hydrofoil from Finland, most VCs wouldn't even travel to London, let alone Tallinn.