Keeping the faith: Chadha (left) and Balaraj

Like Samuel Taylor Coleridge's ancient Mariner, the small entrepreneur in India faces a tantalising situation. There's a flood of money coming in by way of private equity, or what is called alternate asset class in the world of high finance, and yet there's very little going around for people who've got great business ideas, but no money to start up. It is estimated that just about 10 per cent of all money coming in this category will go to new firms. That shouldn't surprise anyone. Ever since global venture firms burnt billions of dollars stoking the dotcom mania of 2000, they've steered cleared of anything that smells like a start-up. Result: less than a dozen new businesses got funded this year.

Yet, there's one Bangalore- and us-based venture firm, WestBridge Capital Partners, that has kept the faith. Unlike others such as the Delhi-based ChrysCapital or ICICI Venture, which started off as venture firms, but quickly switched to investing in medium to big companies, both listed and unlisted, WestBridge has stuck to start-ups. Over the last five years, it has invested in 19 of them, with six joining its portfolio this year alone. If that doesn't sound impressive enough, consider that of the 10 start-ups funded this year, WestBridge backed half of them at a total investment of $34 million.

Is WestBridge being brave or foolish? Neither but smart, their investors seem to be saying. In August this year, the venture firm announced the closing of its second fund, mopping up $200 million from investors (or limited partners) such as Princeton Endowment Foundation, Duke University Foundation and Hewlett Foundation. For a firm that hasn't made a single exit from investments in its Fund-I portfolio (which means investors have no way of knowing how good an investor WestBridge is), it's nothing short of a miracle. Says Sumir Chadha, Senior Managing Director and co-founder based in Silicon Valley: "It might seem unbelievable, but we closed our second fund in a record two months." To be sure, the red hot India story is part of the reason. Even so, VCs typically take anywhere between six months and one year to wrap up a fund.

Team WestBridge Besides the co-founders, Sumir Chadha and K.P. Balaraj, the firm has three partners, all of whom are of 2001 vintage and based in the Bangalore office.

Sandeep Singhal/Managing Director Singhal, a graduate from IIT Delhi and an MBA from the Indian Institute of Management, Ahmedabad, serves on the board of four portfolio companies-AppLabs, Strand Genomics, ReaMetrix and Dr Lal PathLabs. Prior to WestBridge, he was an engagement manager with The Boston Consulting Group, where he evaluated new business opportunities and advised clients in pharmaceuticals, financial services and the technology sector. Singhal started his career as a management trainee with Hindustan Lever Limited, where he was involved in 11 product launches targeted across different customer segments. Surendra K. Jain/Managing Director A gold medalist from IIM, Ahmedabad, Jain had co-founded MeraNet, an application service provider offering contact management solutions to wireless service providers and portals, when he was on the campus. It later shut down. "It was a Web 2.0 company way ahead of its time," says the IIT Delhi engineer. Previously, Jain had worked with the Pentium II design group at Intel in the US and the semiconductor product group at Motorola. He led the firm's deal with Times Internet Ltd. Rishi Navani/Managing Director Wharton-grad Navani serves on the board of Integreo, a portfolio company. He was a member of the IT/Communications investment team at Patricof & Co. Ventures Inc., part of Apax Partners, a venture capital fund with $12 billion under management. While there, he was responsible for early stage investments in software and wireless companies such as Jamdat Mobile. Navani, who had earlier worked at IndOcean Ventures, an affiliate of Soros Fund Management and Chase Capital, and also at A.T. Kearney and McKinsey & Co., led WestBridge's recent investment in Nazara Technologies, a wireless content company.

There's little doubt that 2005 has been a year when WestBridge went into overdrive. In January, it invested $1.5 million in Silicon Valley based serial entrepreneur Bala S. Manian's ReaMetrix, a biotech contract research firm. That was followed by investments in Brainvisa Technologies (an hr BPO firm) and Dr Lal PathLabs (healthcare diagnostics). Last two months alone, WestBridge struck three deals: It put $5.7 million in Royal Orchid Hotels (a hotel management company), $7 million in Times Internet (India's largest consumer internet play) and $1.5 million in Nazara Technologies, which is an early stage wireless content company that holds mobile content rights for cricketer Sachin Tendulkar. Before 2005 is rung out, the firm hopes to announce another three deals in the Internet and software services space, and next year plans to rack up at least a dozen venture capital deals. Says K.P. Balaraj, co-founder and Managing Director, who heads India operations: "If you look at it, we are the only firm in the venture funding space. We don't have much competition."

Bucking The Trend

Not following the VC herd into private equity wasn't easy for WestBridge. The first two years after it opened shop were painfully slow. It managed to invest just a quarter of the $135 million it had raised in Fund-I. "We were very cautious and we stayed away from dotcoms," recalls Chadha. Ironically, it was a risky strategy too, because once a firm has raised money, investors expect it to start investing. The longer a firm sits on the fund without investing it, the greater the pressure on it to find an investment that will pay off in, say, three years instead of seven to eight years, which is the typical life of an investment. Picking their way gingerly through littered dotcom carcasses, Chadha and Balaraj turned their focus on it products and outsourced services. Their first investment, in 2001, was in a company called Tarang Software, a niche software services firm in financial services and content management verticals, where they put $1.9 million. It took 15 months to make the next investment, which happened in April 2002, when WestBridge backed July Systems (it invested $5.6 million in two rounds), followed by Zenasis Technologies ($0.7 million) and Strand Genomics ($1.9 million). "That was a time when venture capital as an asset class was being questioned in India," recalls Balaraj. "We debated if we should remain venture-focussed."

Yes was the eventual answer, for a couple of reasons. One, WestBridge's investors themselves were people who strongly believed in venture capital and, two, so did its managing partners. All that was required was to pick investments selectively. The idea was to build a quality portfolio, and wait and watch. Sacrificing the number of deals for quality, WestBridge went about finding winning horses such as icici OneSource and Indecomm Global Services. Today, the former, where the firm invested $12.8 million, is the third biggest BPO firm in India after GenPact and WNS, and planning an IPO next year. According to industry estimates, WestBridge could end up raking in between $36 million and $48 million, should it decide to fully exit. Indecomm Global Services may prove to be another good bet, although its founder and former Hindustan Lever Ltd's lister (Lever jargon for a fast-tracker) Naresh Ponnapa didn't even have a business plan together when WestBridge came knocking on his door. "I wasn't even sure which business to start when we teamed up," laughs the 48-year-old Ponnapa.

VCs: A Dying Breed In India There aren't many pure venture firms left in the fray. Most have either turned to investing in medium to big companies (listed and unlisted), or have simply shut shop like eVentures and Antfactory. Here's a look at some still around.

JumpStartUp Founded in 2000 by Sanjay Anandram, Kiran Nadkarni and K. Ganapathy Subramaniam, the firm was one of the early stage cross-border technology funds focussed on investing in both the US and India. The fund has 11 companies in its portfolio, prominent being July Systems and Hellosoft, both wireless technology companies. A key exit has been CustomerAsset. Its first fund ($45 million) was raised in 2000, and it is currently in the process of raising a $75-million fund. Intel Capital Part of Intel, it's a corporate venture group and invests out of the company's balance sheet. The fund in India, headed by Kumar Shiralagi, has invested in companies such as Tejas Networks, Persistent Systems and Nipuna. ICICI Venture It's the largest and the oldest venture capital/private equity fund in India with a corpus of $650 million. It's largely a private equity fund currently, although it makes investments in ventures selectively. For instance, Avesthagen and Billjunction. UTI Venture Funds Management Company The venture capital and private equity arm of the Unit Trust of India (UTI) Group started off as a pure venture capital company. Its ITVUS, a venture capital fund with interests in technology, life sciences and outsourcing sectors, has investments in Glenmark Labs, Subex Systems and FourSoft. Of late, the focus has shifted to private equity, with its Ascent India Fund raising Rs 700 crore for investing in mid-market companies from sectors like auto ancillary, pharma, textiles, business process outsourcing, and infotech and convergence technology. SIDBI Venture Capital SIDBI Venture Capital, a wholly-owned subsidiary of the Small Industries Development Bank of India, has two funds. One is the Rs 100-crore National Venture Fund for Software and Information Technology Industry (NFSIT), which has invested in companies like Apnaloan.com and Compulink Software (it's making a partial exit in the forthcoming IPO). The other is the SME Growth Fund, which has a targeted corpus of Rs 500 crore with a life of eight years, and invested in companies like Bravo Healthcare and Carzonrent India, a licencee of Hertz India. CanBank Venture Capital Fund It recently launched Bharat Nirman Fund, which has a corpus of Rs 55 crore, aiming to fund start-ups in manufacturing and services sectors. It also has three other funds that were launched in 1989 (Rs 16.42 crore), 1998 (Rs 10.5 crore) and 2001 (Rs 30 crore). It's in the process of exiting the first fund, while the other two are operational with the corpus almost tied up for investment in start-ups.

That was in 2003, but since then Indecomm (spotted by BT as one of the 20 Companies to Watch in 2004) has built a unique position for itself in the BPO space and Balaraj claims that in the last few months there have been at least five offers to acquire the company. Needless to say, all of them were turned down by the promoters. "We were tempted many times, we could have made four to five times our money," says Balaraj. "But the biggest mistake would be to sell your best investments too early," he adds. Indecomm doesn't do plain vanilla BPO job, but works for some of the world's largest mortgage and financial services firms, offering them proprietary data processing platforms. And apparently, most big BPO firms are on the lookout to acquire a company like Indecomm. WNS, for example, recently paid $70 million to acquire Trinity Partners, a firm in the same space as Indecomm, but much smaller in terms of revenues.

Indecomm Global Services' Ponnapa: WestBridge backed his BPO at the conception stage

Another potential money-spinner in the WestBridge portfolio could be marketRx, a New Jersey headquartered high-end pharmaceuticals BPO company, with a product development office in Gurgaon. Its clients include the top 10 pharma giants of the world, and the CEO and founder Jaswinder Chadha (no relation to Sumir Chadha) is considered a prized catch. The IIT Delhi alumnus is considered to be a pioneer in "building advanced analytical tools for designing pharma sales forces".

But like every venture capital firm, WestBridge has its share of poor performers, if not lemons yet. For instance, Emagia Corporation and July Systems haven't shown the kind of growth that some others like Indecomm or ICICI OneSource have. Emagia, a receivables management company, is going through a tough time in the us market, where large corporations only want to work with big firms such as sap, Oracle, or IBM. That's putting the squeeze on smaller firms like Emagia. July Systems, on the other hand, is said to be struggling because the revenue share model in wireless content space is yet to be established. Therefore, despite having a reputed management team (Ashok Narasimhan is its CEO), July Systems is stymied by the industry environment. Like any VC, WestBridge may be betting on the fact that the winning bets will pay off enough to make up for some losses.

India, Here We Come

Who are Chadha and Balaraj, and where do they come from? The co-founders' association goes all the way back to Harvard Business School (HBS), where they were in the Class of 1997. Thereafter, they ended up working at Goldman Sachs, but in different divisions. While Chadha was part of the venture group, Balaraj (better known to friends as KP) worked in the private equity group. "I was always interested in India," says Balaraj, who split time between Hong Kong and New York. Prior to joining HBS, Chadha, son of an ifs officer, had worked with McKinsey and was part of the team that set up the consultancy's operations in India in 1994. When Chadha and Balaraj set up shop in India back in 2000, they were barely 30 (yes, both are of the same age), and their idea was to set up a us-India venture capital firm with offices in Bangalore and Silicon Valley, the centres of tech innovation and start-ups. The duo raised their first fund in just three months, and even roped in Goldman as an investor. There was a third founding partner and a colleague from Goldman, Raj Dugar, but he left WestBridge in 2003, and is now a director at the Carlyle Buyout Group in Mumbai.

VCS WAITING IN THE WINGS

Norwest Venture Partners' Haque: Stepping up India focus When most of the India VCs (except, of course, westbridge) have either closed down or tweaked their investing focus to private equity, many foreign VCs are training their guns on India. Draper Fisher Jurvetson recently set up an India fund of $200 million purely for early stage investments. Bessemer Venture Partners (BVP), which set up shop in India, recently invested in Rico Auto and in BA Systems, a telecom software company, which has operations in both California and India. Promod Haque's Norwest Venture Partners (NVP) is believed to have invested $20 million in Pune-based Persistent Systems, an outsourced software product development company. NVP focusses on early stage investments in information technology and manages more than $1.8 billion in venture capital out of its Palo Alto office. Then there are others like Battery Ventures, SoftBank Asia Fund, Charles River Ventures and Sequoia Capital, who are actively scouting for deals in India. Recently, July Systems secured $10 million in a third round of funding from a group of VCs led by Motorola Ventures, the venture capital arm of Motorola, along with existing investors like Charles River Ventures, NeoCarta Ventures, and WestBridge, JumpStartUp and SVB Financial Group. In April this year, Nokia Growth Partners, which invests in mid-to-late stage companies, put in $3 million in the telecom R&D outsourcing firm Sasken Communications. Last year, Nokia's early stage VC, Nokia Venture Partners, had taken stake in Pune-based Nevis Networks. Says Anand Sridharan, Associate, BVP, "There is an increasing interest among US VCs about India."

Between Balaraj and Chadha, it is the latter who is said to be the primary fund raiser. He is believed to have tremendous contacts within the us financial community, a reason why raising their Fund-II was a cakewalk. Says Chadha: "Our target was $200 million for Fund-II, but we had a demand for $300 million. We turned down the rest, since our focus was to improve returns and not grab higher management fee." WestBridge gets 2.5 per cent (per annum) of the fund as management fee, the highest for any VC in the country, plus 20 per cent of the profits. Balaraj, a national junior champion in tennis (1984) at the age of 13, is considered an active investor with greater boardroom involvement. Says Ponnapa of Indecomm: "What I like about these guys is that they are very financially savvy investors, but at the same time constructive and helpful."

That's actually the bigger role a VC is expected to play. Investing money is the easy part, but taking the investee company through the problematic initial phase is the hard one. Often, for instance, the original business plan may not work, or the company may need experienced executives that it can't woo on its own steam, or references may be required to open a few customer doors. This is where WestBridge's handpicked team of three non-promoter managing directors (see Team WestBridge) and its continued us presence help its investee firms. Take the case of Feroze Waheed of Astra Business Services, where WestBridge has invested $6.2 million. He came to them via Sierra Ventures, a US-based VC, looking to set up a base in India. "WestBridge not just put money in my venture, but also helped me rope in key executives and made some valuable introductions," says Waheed, 57, a Pakistani-American. For Bala Manian, the CEO of ReaMetrix, which received funding from WestBridge early this year, it was not money that mattered: "WestBridge is helping me relearn India," says Manian, who left the country in 1967.

Chadha's day-to-day presence in the US has helped WestBridge build relations with top VCs in the us such as Sequoia Capital and Charles River Ventures. There is an increased interest among US VCs to invest in India, but they are unfamiliar with the lay of the land. WestBridge comes in here with that perspective and leads co-investments. July Systems recently received series B funding of $10 million from a group of venture capital firms including Motorola Ventures, Charles River and NeoCarta, besides WestBridge. "We are usually the first investor, we take in the major risk, and then bring in the follow-on investors," says Chadha. In another co-investment deal (yet to be announced) WestBridge has put in $8 million in Bharti TeleSoft, a telecom software company owned by the Delhi-based Mittals, along with Sequoia Capital, which put in $6 million. There are more such deals in the offing.

WHY VENTURE FUNDING WENT OUT OF FASHION

CVCI's Relan: Venture funding is not his cup of tea Circa 2000: it was all venture capital and private equity hadn't even entered the Indian investment lexicon. ChrysCapital was purely a venture capital firm then. It had invested in some 10 dotcom firms-many at the business plan stage, and several at the early stage. ChrysCap had to finally write off investments in at least five of them. Citigroup also had to write off losses in three or four firms. Circa 2005: both the VCs are now pure private equity firms. They don't invest in early stage deals, let alone at the concept stage. Now they are hungry for either public market companies or those who are going in for a pre-IPO private placement. Says Ashish Dhawan, Senior Managing Director, ChrysCapital, "Theoretically, early stage investments should generate more returns. But private equity firms have generated more returns in India." Dhawan says one needs to look at the phenomenon "from a 10-year cycle". For instance, in the US, everybody shunned private equity in 1996 and embraced venture funds that gave internal rate of returns of 60 per cent. But in 1999-2000, venture funds had the most pathetic performance, with the tech markets crashing and market cap worth billions of dollars going down the drain. Dhawan, who is said to be raising a massive $500-700-million private equity fund, is not running down venture funds yet, saying the risky asset class will have its day someday. But, Ajay Relan, Managing Director of Citigroup Venture Capital International (CVCI), says, "India still does not have the M&A environment for VCs to exit from their investments."

Now It Will Get Crowded

A cautious approach, while it has helped WestBridge, has also resulted in terrible misses. The firm dithered on investing in Daksh eServices when the BPO went in for a second-round funding because they thought the asking price was too high. Rivals Actis and Citigroup Venture Capital International (CVCI), however, went right ahead, and made a killing when IBM snapped up Daksh last year for $153 million. The other miss that Balaraj rues about is PortalPlayer, a Hyderabad-based company that makes software for Apple's iPod. Now listed on the NASDAQ, PortalPlayer boasts a market cap of $400-500 million. Admits Balaraj: "In hindsight, we think we should have been more aggressive."

THE HARVARD BATCH OF 1997

ChrysCapital's Dhawan: The Harvard connection The 1997 batch of the MBA programme at Harvard Business School (HBS) has a special position in the Indian venture capital and private equity world. Six Indian graduates of that batch are at various positions in some of the leading venture capital or private equity firms in the country. Sumir Chadha and K.P. Balaraj co-founded WestBridge Capital in 2001. Ashish Dhawan and Raj Kondur co-founded ChrysCapital in 1998. Kondur, however, parted ways with Dhawan and private equity in 2002 and started a BPO firm, Nirvana, in Bangalore. Meanwhile, Dhawan had roped in another HBS batchmate of his, Brahmal Vasudevan, to ChrysCap in 2000. Dhawan had also worked with his batchmate, Shujaat Khan, in the firm in the early days. Khan, however, moved on and has floated a private equity fund-Blue River-along with the founders of Edelweiss Capital. He is currently raising a $100-million fund. Then there is Javed Khan of the same batch who is now the #2 at Blackstone India. An addendum to this is that Chadha, Balaraj and Dhawan had worked together at Goldman Sachs in the US prior to their current roles-although in different departments-in venture, private equity and public market groups, respectively. Bajaj Auto's Executive Director (Finance) Sanjiv Bajaj also passed out of HBS in 1997, and he is currently a big player in the Indian public market, with the group's investments valued in the range of Rs 4,000 crore. Although not of the same batch, another HBS alumnus donning an important private equity role in India is Manish Kejriwal, MD of Temasek India Advisors.

Going ahead, competition will get stiffer still for WestBridge. An estimated $150 million is coming in from us VCs (see VCs Waiting In The Wings), besides which domestic players like JumpStartUp and Canbank Ventures are raising money to invest in start-ups. With more money chasing entrepreneurs, deals will get expensive and WestBridge won't have the luxury of taking its time over deals. That will necessarily impact the quality of its portfolio. Already, there are those who think WestBridge's model may not be practical in the long run. "India is not mature enough for venture investments. There aren't many exit options," says Ajay Relan, Managing Director, CVCI. Adds Ashish Dhawan, Senior Managing Director, ChrysCapital: "The positive is they (WestBridge) have world-class investors. The negative is they don't have exits yet. But it will happen over time."

Then, there are those who question WestBridge's focus of late. Recent deals like Orchid Hotels, Times Internet and Dr Lal PathLabs are as varied as chalk and cheese. Points out a competitor: "WestBridge's second fund seems to have a different charter altogether from their earlier fund (which focussed on early stage tech companies)." But Balaraj defends the investments, saying that the charter has only been broadened to capture the high growth domestic services business and the core of the firm as a venture investor will remain. "As far as venture investments are concerned, our investors have a long-term view of India," says Balaraj. For the sake of all men and women out there with business ideas, let's hope he's right.