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BT DOTCOM: COVER STORY
The Second Coming
By Roshni
Jayakar
Angels, incubators, venture capitalists,
private equity funds...call them what you will, they're still being mobbed
by would-be entrepreneurs with killer ideas. If they got 100 plans a day
last April, it's down to 50 now. But, as evinced at the VC clinics in
NASSCOM 2001, the rush continues. No sir, work hasn't stopped or even
slowed down for the financiers of dreams. How can it, when the VCs are
themselves in the market for the second-round of funding? Since October
2000, the 14 India dedicated venture funds have been hard at work, raising
money in the US. And let me tell you, it's far from easy going.
It's tough
being a VC in today's market, engulfed by despair that is irrational, but
in keeping with the extreme emotions generated just a year ago. ''It's
ironical. When the going is good, everybody gives money. Then the VCs ride
the momentum, flip investments short, and get stuck with the flavours of
the month. When the markets become sober, it's a good time to invest, but
a bad time for VCs to raise money,'' says Hetal Gandhi, Managing Director,
IL&Fs Venture Corporation (IVC), which along with Inveso Private
Capital of the US, has been raising funds for four months now. In
commitments, IVC has raised $33 million, one-third of the target. By the
way, it has no dotcoms in its portfolio.
Sure, money is still making its way into a
few top funds, albeit at a slower pace. Says Pravin Gandhi, Director,
Infinity Venture Fund: ''Last year, we would have raised the fund in a
couple of months; but now we could take as many as six months.'' Chrysalis
Capital, one of the kingpins of the investment frenzy of 2000, has been
raising a second fund in the US for five months now. With the first
closing in December, Chrysalis' Ashish Dhawan expects another closing for
the new fund by early March 2001.
It's obvious that the newer funds are
finding it tough to get cash. That said, the signals aren't clear: US
pension funds could well decrease the venture capital allocations in their
portfolios...Even a small shift in allocation here could make a big
difference. Says an optimistic Subbu Subramanian, Partner, Barings India
Investments: ''The timing to approach the US investors is perhaps just
right now because most asset allocation agents work overtime in Q1.''
Perhaps.
At The Receiving End
![](grfx/47.jpg) |
Pravin Gandhi,
Infinity
The Second fund will take more time |
Dotcoms
better not count on getting the second round of financing easily. With the
VC canon being caution, just a handful of pure dotcoms have got past the
second round. Says Alok Kejriwal, CEO of Contest2win, a member of that
club: ''It's the litmus test for dotcoms.'' Going by market trends, pure
dotcoms are out; technology and software services are in. At the same
time, points out Mahesh Murthy, Partner, passionfund.com, an angel
investor: ''Today we see an improvement in the quality of plans. They are
more viable and they are much more realistic.''
Remember, most VCs raise their second fund
after having committed or invested 50-70 per cent of the first fund. So,
there's still venture capital floating around. But it's getting spent on
fewer new deals. The problem is, most VCs' first fundx have not started
generating returns. This lack of a healthy track record is taking its
toll. Says Ashish Dhawan of Chrysalis Capital: ''Since it's too early,
investors would like to gauge the quality of portfolio.''
Funny thing is, it's tough to find a VC who
accepts that the investments in his first fund are failing. The critics
are unsparing, pointing out that VCs broke the No. 1 rule of investing by
backing entrepreneurs with unproven concepts and no real markets. Scoffs
Renuka Ramanathan, Managing Director, Econet and ICICI Ventures: ''No
business can be constructed in six-to-eight months. For a proven business
model you need six-to-seven years.'' While ICICI's city sites are not
doing well, strategic sales of equity in billjunction and traveljini have
added Rs 51 crore to its war chest.
In particular, portfolios with a heavy
leaning towards pure dotcoms have taken a hit. Consider Chrysalis Capital,
which has funded dotcoms like egurucool, baazee, jobsahead, zipahead,
broadcastindia and ties2family. Dhawan admits that two investments (he
won't name them though) have turned bad, involving an investment of $1.5
million. But he goes to say that pure internet or local market portfolio
is about 20 per cent of the $65-million first fund, while the rest of it
is in export-oriented ventures where the cash flow is positive and risks
are low.
HOW
THE VCS STACK UP |
VC |
Target |
First
Fund |
Status
of portfolio |
Chrysalis
Capital |
$70million* |
$65
million |
Has
officially written off two dotcom investments; is restructuring six
ventures in the consumer internet space; has shifted focus to
mid-stage companies and is investing larger sums in each venture |
IVC-Invesco |
$100
million+ |
N.A. |
About
75 % of the first fund invested in 21 companies, none of which are
dotcoms. Two bad apples: Supreme Vinyl Films and Deldot Systems |
Infinity
Venture |
$
75 million- 100 million |
$30
million |
Out
of 15 investments involving a commitment of Rs 60 crore, 10 have
potential for second-round funding. The bad apples in the portfolio
include broadcastindia.com, a broadband portal |
eVentures |
$150
million |
$40
million |
Chaitime.com
was one of eVentures' bad bets.However, its investments in services
companies are in good shape. And in the B2B space, contest2win and
netpilgrim are seen as positive investments |
ICICI
Ventures |
$150
million |
$90
million |
Of
the 18 investments made so far, ICICI has exited from two-billjunction
and traveljini. Moreover, some of its city portals are yet to
register any semblance of returns |
2iCapital |
$125
million |
N.A. |
This
open-ended VC fund is yet to open an account in terms of investment
ventures; is exploring technology-related investments |
ElectraPartners
Asia |
$100
million* |
$65
million |
ElectraPartners
has partly realised returns on investments like Moser Baer, a data
storage media company, but is by and large a private equity investor
with no pure internet investments |
ING-Barings
Pvt Equity |
N.A. |
$
30 million |
Comparatively
a small fund, Barings India Investments has made one exit, from SRA
Systems last year. Most of its investments are in technology and
software services. |
eTec
Ventures (IDEA) |
$27
million* |
$34
million# |
The
earlier fund, India Direct Fund, has walked out of Alok Textiles and
Sunearth Ceramics. It has no dotcom investments. The new fund will
invest in technology, entertainment and
communications companies. |
#
India Direct Fund *First closure N.A.: Not Available |
Fattening for the kill?
![](grfx/48.jpg) |
Raj Kondur &
Ashish Dhawan, Chrysalis Capital
"We would prefer mid-to late-stage
companies" |
In order to protect their investments, many
VCs are now playing God, taking a more active interest in their
portfolios, converting or restructuring the business models of their
investments. Others are looking at mergers and alliances, particularly
among the remaining dotcoms in their portfolio. Especially when there is a
room for only one or two players in a space filled up with 20. Says Neeraj
Bhargava, Partner, eVentures: ''Our ventures are active seekers of
alliances and opportunities.'' For instance, Mentorix got created from a
collaborative arrangement between one of eVentures investment called
Turgorad and Aptech. Adds Gaurav Deepak, Veep, Avendis Advisors: ''In the
future, more M&As will happen in services and IT-enabled businesses.''
Now, most VCs are suggesting online-offline
models for the start-ups to jumpstart the movement to profits. This trend
has already begun taking shape. For instance, egurucool has implemented
its offline plan six months ahead of schedule; the education portal now
has a correspondence product and tuition centres. Another example: Fabmart,
a pure e-tailing play, now has also added a channel of cataloguer or
direct seller, by taking orders on phone.
And as far as the VCs go, they claim to
have completed (or are at an advanced stage) the second round funding for
ventures in their portfolio. Says Rashesh Shah, Edelweiss Capital, which
has put its plan to raise an incubation fund on hold for a couple of
months: ''If there is a strong business model and a good plan, the
ventures should face no problems.'' At the same time, there's no denying
VCs are lot more discerning. Says Dhawan of Chrysalis: ''We are now
selectively looking at early-stage companies with senior management teams
that have proven track records. But typically, we would prefer mid- to
late-stage companies and effect larger deals of $5-$30 million, as opposed
to $2 million earlier.''
With the collapse of the IPO market, that
is indeed possible. But make no mistake: for the rest of 2001, almost all
venture capitalists and entrepreneurs are going to have to work for their
money.
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