Narayan Vaghul, Chairman, ICICI Bank

If India wants to duplicate the silicon valley success, it not only needs knowledge as a resource, but the necessary enabling infrastructure. The most important element in this is a good Venture Capital (VC) funding system. The VC scene in India is not yet oriented towards seed capital funding. It is more tilted in favour of existing companies and exploiting established technologies. VC funds, by and large, provide mezzanine capital to companies already on a success path, and are keen on quick gains for investors. Seed capital funding requires considerable patience, and carries a much higher proportion of risks. But it also carries attractive rewards. Not many funds in India are willing to take such risks and are not attracted by rewards in the long run.

Way back in 1987, ICICI started India's first VC fund with the primary objective of providing seed capital for start-ups. The idea emerged from discussions I had with the then chairman of Indian Space Research Organisation (ISRO) and the faculty of Indian Institute of Science (IISC). They indicated that several technologies were waiting to be commercialised; all that was needed was financial support. Discussions with a variety of other individuals also convinced me that the country needed a funding mechanism to convert scientists into technologists. Bangalore, being the base for several institutes of learning, was the logical place for setting up the company. This decision was taken in 1987, well before it became the 'happening' city in India. The idea was also reflected in the company's name: Technology Development and Information Company of India Ltd (TDICI). As the years rolled by, I found to my dismay that not a single commercial idea came out of the city's academic institutions. Ultimately, the ideas did come, but from entirely different sources.

I recall the chief executive officer (CEO) of TDICI telling me that the idea of seed capital funding was far too premature in India. Barring a few ventures like Biocon, we hardly had any major success stories to our credit. The CEO was of the view that by positioning TDICI as a company for funding technology projects, we were shutting out the opportunities which other venture funds-that had by then come in- were exploiting. With a view to protecting our market share, I was obliged to change the name to TDICI to de-emphasise the 'technology' and change the business model to what was then regarded as a more conventional form of VC funding. Interestingly, the name of the company has since been changed to ICICI Venture.

Nevertheless, seed capital funding continued to an extent, but on a significantly reduced scale. The effort involved in making a judgement on a VC proposal involving start-ups is far more rigorous than dealing with a company that has some sort of track record. If the technology involved is untested, evaluation is all the more complex. We were new to the game. We did not have any expertise in technology. But we did have knowledge of financial appraisals and could use commercial knowledge to judge whether a proposal would ultimately make commercial sense.

We decided to rely on advisors to evaluate the technological aspect of the proposals, and this proved to be a big shortcoming, as the advisors did not and were not expected to have any abiding interest in either the start-ups or in the venture fund. The idea of rewarding them for project success through such incentives as stock options was unknown in the country at that time.

There has been a sea change in the environment since the beginning of seed capital funding in 1987. In 2003, we are in the midst of a knowledge revolution and India, to our delight, is endeavouring to occupy a central space among developed nations. New ideas are emerging, and particularly in the last few months, the feel-good factor has generated a new crop of budding entrepreneurs eager to exploit these ideas.

New ideas are emerging in seed capital funding and a new crop of budding entrepreneurs are eager to exploit these ideas

But, unfortunately, some of the weaknesses of the bygone era remain. Entrepreneurship is often not backed by commercial skills, and we have not been able to create a supporting environment in which technology experts can join hands with these entrepreneurs to make a project commercially successful.

The entrepreneurs in India suffer from two types of problems. One is a time-honoured syndrome of seeking to retain control of the company at all cost. The idea of starting a company is not only to make money, but to provide for succeeding generations as well. The culture of professionalising the company, taking it to the market, and exiting to start new ventures is unknown and unpalatable to the Indian entrepreneur. Secondly, entrepreneurs as a class are resentful of 'advice'. They look to the VC company for funds, and would rather have it keep its suggestions to itself. This, combined with a reluctance to compensate for expertise, often results in the company's stagnation, which bogs it down.

Thankfully, some of these shortcomings are getting resolved. New funds that are being set up to support start-ups view such funding not as a 'banking proposition', but as a 'partnership' in which both the stakeholders have an equal and abiding interest.

The VC company, to ensure the success of the partnership, has to reinforce its financial support with expert skills-and towards this end, make a special effort to marshal the requisite resources. It is on this account that we now see the emergence of VC companies focused on specific sectors; it is nearly impossible to create a team of experts to cover several sectors at the same time.

In all, I am pleased at the way things are shaping up. As in other spheres, the time has come for us to shed anachronistic complexes, and join the global mainstream with hope and optimism. Instinctively, I feel the beginning of a major economic revolution in the country, and the numerous technology start-ups are an important subset of this revolution. If India's VC industry becomes conscious of the huge potential in this opportunity, it could succeed in creating the necessary infrastructure base for the benefit of everyone involved.