"Compared to biofuels, one area of my current interest, I have found microfinance to be more viable" Vinod Khosla Khosla Ventures

"We are happy to deal with services, where the revenue is derived from the end consumer within India" Avnish Bajaj Matrix Partners

It's barely half-past-nine on a recent Saturday morning, but the second floor hall at India Corporate Centre at Mohan Cooperative Complex in Okhla near Faridabad is bursting at the seams. Packing the hall are 120-odd, starry-eyed entrepreneurs and professionals, almost all of them in their late 20s or early 30s, who've sacrificed their weekend morning to meet, listen to and woo people they hope to become one day: Successful professionals-turned-entrepreneurs, who have demonstrated that in New India anyone can hit the big times, as long as you have a good plan, lots of patience and perseverance and, of course, some venture capital. Speaking at the half-day, The Indus Enterprise (tie)-sponsored mentoring session are (mostly) poster boys of middle-class success: Former Spectramind founder and CEO, Raman Roy, who having made his millions, now runs Quattro BPO Solutions, which intends to buy and invest in firms in this space; Alok Mittal, an IIT Delhi-grad, who co-founded JobsAhead.com that was later bought by Monster.com, but now heads venture firm Canaan Partners in India; Saurabh Srivastava, a tech entrepreneur and eminence grise, who runs a seed-stage VC fund called Infinity, besides investing and mentoring personally as part of a "Band of Angels" group; and Ranjit Shastri, a former McKinsey and Bain consultant, who is a director at KPO, SmartAnalyst, which recently raised $3.75 million in a third-round funding from Edison Venture Funds and Milestone Venture Partners.

Fortunately, for the motley gaggle of entrepreneur-wannabes, there's record venture capital, or early stage money, pouring into the country. According to a recent Evalueserve report (it's a research and analytics firm), more than 44 us-based vcs are now "seeking to invest heavily in start-ups and early-stage companies in India". These firms, the report reveals, plan to raise $100 million (Rs 470 crore) a pop, or a staggering $4.4 billion (Rs 20,680 crore) collectively. That may be too much money for a market like India, but start-ups aren't complaining.

Competition will result in one good thing: the VCs will want to look beyond it and ITEs, which until 2003 accounted for almost half of all (private equity) investment. Alok Aggarwal, Chairman of Evalueserve and the report's author, makes an interesting observation: "Given that a typical start-up in India would require $9 million during the first three years ($3 million a year), and assuming that the start-up, in fact, survives for three years, investing $2.2 billion (of $4.4 billion that may eventually get raised, as per the report) during 2007-2010 would imply investing in 150 to 180 start-ups every year during this period...(This) would simply not be possible if the VCs continue to focus on their current favourite sectors."

Aggarwal's got a point and VCs agree. Unlike until recently, the early-stage investors are willing to back ideas that seek to tap India's burgeoning consumer markets. That means, suddenly, a wide variety of sectors now look promising. Says Avnish Bajaj, former co-founder of Baazee.com who has recently joined us-based VC, Matrix Partners, as part of its India team: "We are very happy to deal with consumer services as the theme, especially businesses where the revenue is derived from the end consumer, and India has to be the big market." That's not to say traditional favourites such as it and ITEs, and internet (all of which play on India's competitive advantage) won't get funded. Far from it, they are still red hot for most VCs. The difference is, India as a consumer market has been recognised. BT spoke to a variety of new and old VCs to find out the 10 sectors they are most bullish about and why. Take a look:

Clean Energy

Think clean and green is too iffy for the VC? You couldn't be more wrong. With energy prices soaring and environmental standards getting tougher, thousands of new opportunities are emerging. That means everything from simple recycling to energy-efficient technologies to eco-friendly building materials to bio-fuels to wind energy to eco-tourism. According to World Bank estimates, India's potential energy efficiency market alone is estimated at more than $3 billion (Rs 14,100 crore). And you'll be surprised at how much is already happening in this area.

"There's a chronic shortage of power in the country, so things like green energy have to have a market" Rahul Bhasin Baring Private Equity

Take the case of New Ventures India, a three-way partnership between the Washington, D.C.-based World Resources Institute, CII and USAID. Launched late last year, New Ventures India intends to help entrepreneurs in areas of clean and green technologies and services get their business plans in place and raise funds. Under a business plan competition, entries for which closed end of this July, CII received 60 proposals, of which it has shortlisted 10, being the most viable. These will be showcased to a group of VCs and banks on November 2 and 3 at Mumbai's Taj Lands End, where $4-million worth of potential funding will be up for grabs. Says Subrata Ray, CII's counsellor in charge of the programme: "People earlier thought that clean and green was a risky investment proposition, but now they are clear that it's the order of the day."

Some VCs in India like Matrix and Baring Private Equity are willing to look at this sector, but a large number of others are still a bit hesitant. But you can expect a change of heart soon: VCs on Sandhill Road, Silicon Valley's venture capital hub, have already latched onto alternative energy (solar, wind, etc.) as the next big thing, and last year investment was up 34 per cent to $739 million. Given that almost 95 per cent of venture capital comes from abroad, the India VCs will soon be chasing everything clean and green.

Microfinance/Financial Services

Can you make money financing India's most poor? Vinod Khosla, one of Silicon Valley's best-known VCs, thinks you can. In March this year, Khosla, who co-founded Sun Microsystems and turned VC at KPCB, but now runs Khosla Ventures that funds small, but breakthrough initiatives, was one of the investors who put in Rs 11 crore in Hyderabad-based SKS Microfinance. (His share was Rs 2.1 crore). The firm, which uses modern information technology to disburse micro credit, will use the money to increase its customer base from 2 lakh to 7 lakh by end of this financial year. But let's be clear about one thing: This is no charity. This is a highly profitable business, so much so that there are allegations of usury against some lenders, especially in Andhra Pradesh. The demand for microfinance in the country is estimated at Rs 50,000 crore a year, and 80 per cent of it is currently met by the informal sector. So, obviously, there's plenty of room for organised players like SKS and share Micro Finance. All that is required is for the current uncertainty in the industry to blow over. Says Khosla: "Compared to bio-fuels, which is another area of my current interest, I have found microfinance to be more viable."

Then, there are related opportunities. How about organising pension benefits for domestic help via their employers? It's no flight of fancy, but a pet project of Baring's Rahul Bhasin. How will it work? Each employer will agree to contribute Rs 200 a month for 30-40 years and the money, only to be paid back end of the tenure, will be invested in equity. "Most savvy investors earn a 50 per cent return on equity investment every year, why shouldn't our domestic help earn the same?" asks Bhasin. Of course, he's willing to put money behind anyone who can make this work. Another unique financial services idea (incidentally, also funded by Baring) is Parsec Interact. Although incorporated in the us, it's a Gurgaon-based BPO that telemarkets mortgages to, among others, new Indian emigrants in the us.

Healthcare

This is a broad brush that covers everything from niche healthcare services like testing and diagnostic labs to contract research organisations (CROs) to telemedicine. Once again, this is a sector where India has a huge cost advantage over developed countries like the US. Big Pharma, for instance, spends almost a billion dollars on new drug development, and guess where most of the money is sunk? In phases one to three of clinical trials; they suck up more than a quarter of the drug development spend. Do clinical trials in India, and you can cut your bills by almost half. Same goes for research and everything else in the healthcare value chain.

"I think there's a lot of value also to be tapped in terms of niche life science services and products" Saurabh Srivastava Infinity Technology

Some of the VC deals so far have tended to focus on healthcare services with an it aspect to it. For example, us-based Artiman Ventures has picked up a stake in Pune-based BioImagene that provides image analysis solutions to pathologists. Similarly, Sequoia has an investment in Strand Life Sciences (formerly Strand Genomics), which develops high-end it solutions for biotech and pharma companies. More recently, Gujarat Venture Fund Ltd has invested Rs 2 crore in Celestial Biologics, an Ahmedabad-based firm that intends to use the money to set up a plasma fractionation plant. In fact, there seems to be a lot of interest in the biotech space from state-owned funds. For instance, Kitven (a Karnataka government tech fund) is setting up a second with Rs 50 crore in capital that will also invest in biotech start-ups. Says Saurabh Srivastava, an angel investor and Chairman of Infinity Technology Investments: "There's a clear cost advantage in India, but I think there's a lot of value also to be tapped in terms of niche life science services and products."

Hospitality

Not too many people noticed it, but early August, private equity giant Warburg Pincus picked up a 27 per cent stake for Rs 70 crore in Patu Keswani-promoted Red Fox Hotels, a low-budget hospitality chain. Warburg can't be called a VC by any stretch of imagination (although the size of the investment is well within the reach of, if not one, two VCs), but it points to an important trend: The Indian hospitality industry is booming and as more money comes into it, there will be a demand for products and services aimed at the industry. (A New York-based hedge fund, Hayground Cove, has also raised $100 million on the London Stock Exchange's aim, and will use that money to buy hotels in India.)

"Some internet companies in India don't have a vision for the next level. That's where we come in" Alok Mittal Canaan Partners

"Media & entertainment has a lot of growth potential, because it's a relatively young business" Rahul Khanna Clearstone Venture Partners

The Band of Angels, a group of entrepreneurs-turned-angels, for instance, has funded a company called Knowcross. What does Knowcross do? Founded by former Antfactory partner, Nikhil Nath, Knowcross is a software solutions provider for the hospitality industry. Its product, Triton, is a one-touch service system that is used by hotels such as the Hyatt and the Oberoi. There are other related services that aren't as capital intensive as setting up a hotel (which, obviously, VCs can't fund), but can ride on the back of the industry. Training, convention management, food technology are just some of the areas where it is possible for a service provider to step in and create scale. Entrepreneur wannabes may not have to wait too long for a VC to come along. Studio Venture Partners, a New York-based offshore fund that manages capital on behalf of more than 12 investors, launched its India operations in July this year. Although it has a relatively modest fund of $50 million, it is keen on entertainment, hospitality and real state. Besides, it's completely focussed on Asia.

Education

What's the single-biggest investment, both emotional and monetary, that Middle-class India makes in its children? Education. In a country where professional qualification is a sure ticket out of poverty, (quality) education is a big market. Already, India spends a staggering $3 billion (Rs 14,100 crore) on educating its children abroad--that's equal to 40 per cent of FDI received by India last year. What drives Indian students abroad? The fact that education in India is in the vice-like grip of the government, which has the final say on everything from admissions to syllabi to grants. Nothing wrong, except that the system is sclerotic and in complete disarray. As a result, there are just a handful of world-class institutes (the IITs and the IIMs), that too from the point of view of student selection and not research or original work. "I can roll out coffee shops, but not schools," says Baring's Rahul Bhasin, pointing to the absurdity of the situation.

But with more than 20 million children being born in India every year, there's obviously a big market for education. More than a third of India's population is 15 years old or less. Assuming an absurdly conservative annual spend of Rs 100 per child, that's Rs 3,000 crore a year. Not surprisingly, VCs expect this to emerge as a major opportunity. Forget about primary and higher education, where government regulations discourage private funding, there's plenty of room in between. For instance, coaching and training. Career Launcher, a training and preparatory school, has been funded by Intel Capital. IT training and tutoring are also promising from a VC perspective. TutorVista, a Bangalore-based start-up that tutors American kids online, received $2 million in investment from Sequoia Capital India. Add content creation and prep schools, which can be venture funded, the market becomes very big. John Doerr, Silicon Valley's fabled VC, already runs a NewSchools Ventures that mixes venture funding with charity. But in India, education can be run as a successful commercial venture.

Media & Entertainment

By 2009, the Indian entertainment industry alone could be worth Rs 30,000 crore in revenues. Movies, television, radio, live events and production are all segments where many new businesses could get funded. Over the recent years, a lot of private equity or PE money has gone into this industry (almost all the big television channels have got PE funded, besides film distributors like Shringar). But there's more money coming in. Henderson Partners, a UK-based private equity investor, is said to be raising $700 million for India, and will invest in media & entertainment, among others. Sure, Henderson's investments will be much larger than that of a VC, but the point is different. As India's fragmented entertainment industry consolidates, it will be easier for small businesses in this space to take off. Says Infinity's Srivastava, who himself has invested in movie production: "The universe is wide and the talent pool huge. You can invest in everything from animation to pre-production work to distribution across cable, internet and mobile."

Srivastava isn't exaggerating. There has been a flurry of deals already in entertainment. Late last year, an IL&FS fund invested nearly $7 million in Chennai-based Prasad Corporation that does pre- and post-production work. Another Chennai-based firm, Real Image, which focuses on digital entertainment technology, got funded by Intel Capital in May this year (the size of the investment has not been disclosed.) Intel Capital is already an investor in Ketan Mehta-promoted Maya Entertainment, an animation and visual effects studio based in Mumbai. Incumbent media companies, too, are looking to fund niche ventures. TV18, for instance, announced plans of setting up a Rs 50-crore media fund. Says Rahul Khanna, Partner, Clearstone Venture Partners: "Media & entertainment is a sector with a lot of growth potential, simply because it's a relatively young business." Clearstone, which appointed Khanna in August to oversee India investments, will be investing out of a $200-million global fund, half of which has already been invested.

Internet

When it comes to the internet, most VCs seem to be following a simple logic. "There are several successful internet businesses in the West that aren't yet present in India," says Alok Mittal of Canaan Partners. "I think it is reasonable to expect that at least three or four companies in the top 20 of each internet segment such as online commerce, social networking, payments and personal finance should have a market in India too." Some others are a little more cautious. "Theoretically, there is a concept arbitrage," says Avnish Bajaj of Matrix Partners, "but is the dynamics of the Indian internet market the same as in the us? I am not sure." Part of the problem, of course, is that the internet user base in the country is small: 50 million at last count. But there is no denying the fact that the subscriber base is growing, and once broadband becomes more prevalent and popular, the market may simply explode. As mentioned earlier, entertainment (movies and games) over the internet may take off, and allow more sophisticated advertising. Currently, internet advertising is estimated at a little over Rs 100 crore.

The big bet, however, is on internet-based consumer services. A lot of money, for instance, has gone into travel portals. Ram Shriram of Sherpalo Ventures (now merged with Kleiner Perkins) invested in Cleartrip.com in June this year; Sequoia has acquired a stake in Travelguru, Gabriel Venture Partners in MakeMyTrip.com and Norwest Venture Partners (alongside tv18 and Reliance Capital) in Yatra Online. But there are other categories getting VC money. Matrimonial websites (BharatMatrimony and Shaadi.com), jobs (Naukri.com, where Sherpalo is an investor, and Jobstreet.com), and portals (Times Internet, where Sequoia is an investor) are some popular segments. The deals will get more interesting as the much-anticipated Web 2.0 era dawns in India. "You have to realise that some internet companies in India don't have a vision for the next level and, therefore, don't realise they need money," says Mittal. "That's where we come in."

Mobile

Heard of bubble Motion? Chances are you haven't. But the guys at Sequoia did and they thought the firm was onto a good thing. Like what? Like short voice SMS. Called Bubble Talk, the application could open up an entirely new segment in mobile services-one reason why Sequoia agreed to put in $10 million. Although the company is headquartered in Singapore, it is Indian-founded (Sunil Coushik and Venu Sriperumal). Airtel launched Bubble Talk in Pune early September on a trial basis. Given that 100 million text messages are exchanged across India every day, Bubble Talk (it costs 75 paise for a Bubble message up to 29-second long) has a fair chance of becoming a killer app.

Although based in the US, Shriram has managed to cherry pick dotcom companies in India, including Naukri Ram Shriram Sherpalo Ventures

"Innovation and growth in some technology-" powered sectors in India is truly impressive." Ashish Gupta Helion Venture Partners

To come to the point, mobile is a huge opportunity, especially seen in the context of 3G (third generation) wireless services, which will push data with as much ease as voice to the 115 million users in India today. In fact, most VCs see it as an extension of the internet because it will soon allow everything that the internet currently does: News, entertainment, commerce and search. In July this year, Sherpalo and KPCB invested about $5 million in Mumbai-based mobile commerce provider Paymate and a month later Ashish Gupta's Helion Venture put $2.2 million in a similar company called JiGrahak. Then, there are others like imimobile (developer of value-added services platform; investment: $10 million; investor: Pequot Ventures), Mauj Telecom (games developer; $10 million; Sequoia & Intel Capital) and Nazara (mobile entertainment; $1.5 million, Sequoia) who've received venture capital in the recent past. Vinod Dham (of Pentium fame) is eyeing mobile too. He has joined hands with New Enterprise Associates (and Vani Kola) to invest in mobile start-ups.

Infotech

This is a no-brainer. IT continues to be India's biggest success story. It not only has critical mass, but also a vibrant eco-system-at least, in the area of it services, product testing, and chip design and development. But don't expect VCs to get excited about businesses that take established technologies or players head on. Start-ups most likely to get funded will be in it sweet-spots. For example, products, applications or services aimed at, say, the retail industry or network security. In December last year, Pune-based Persistent Systems received $18.8 million from Norwest Venture Partners and Gabriel Venture Partners ($13.8 million and $5 million, respectively). What's hot about Persistent? It's an outsourced software product development company that has been growing at a CAGR of more than 60 per cent over the last three years. Norwest decided to invest after it heard good things about Persistent from its portfolio companies.

"As we get speed on the street, we will look to making investments outside of information technology" Promod Haque Norwest Venture Partners

And there's no indication that the VC appetite for it companies is declining. Tholons Inc., an investment and advisory firm launched by former CEO of Neoit Avinash Vashistha, has sewed up a $200-million fund to invest in small and medium it firms valued $15-20 million. Companies that focus on generating their own products also make attractive investments for VCs. Something like Bangalore-based Ilantus Technologies, which offers identity management solutions (to heighten network security). Earlier this month, IntelCapital picked up a stake in it. "Innovation and growth in some technology-powered sectors in India is truly impressive," says Ashish Gupta of Helion.

ITEs

In case you didn't realise, our 10 hot sectors are listed in reverse order. So that makes it-enabled service (ITEs) sector the hottest of them all. Surprised? Don't be. It's a booming industry with relatively low risks compared to the others. And as the shift towards knowledge process outsourcing (KPO) takes place from voice-based telemarketing work, the potential value that the industry can derive from global markets will only soar. "There's huge traction in BPOs," says Raman Roy, former founder of Spectramind and current Chairman of Quattro BPO Solutions. "There's tremendous scope in high-end BPOs, there's too much money chasing them, and VCs are struggling to invest."

Not surprising at all. Compared to voice work, which fetches between $6 and $9 per seat per hour, KPO work such as research and analytics can command $16-26 per seat per hour (see India Calling, Still on page 117). Clearly, that's what excited Edison Venture Fund and Milestone Venture Partners about SmartAnalyst, a Manu Bammi and Ranjit Shastri-founded company that does outsourced custom research and analytics. Mid-September, the two firms invested $3.75 million in a third round of funding. Integreon, Tracmail and Slashsupport are some other KPOs/BPOs that have been (re)funded. "As of now, I haven't seen any KPO/BPO offer a packaged service that a customer can accept it as it is," say Helion's Gupta, hinting at the innovations that are yet to come in the industry. Throw in high-end work like teleradiology and engineering services, there's plenty to be excited about this industry.

It won't be all offshored work, though. Many experts believe that the domestic outsourcing market is set to take off as well. Although the cost advantage may not be significant for an India-based company, it will be important from a strategic sense: It will free up the company to focus on issues that are more critical to its competitiveness. In fact, a NSSSCOM-IDG study reveals that the market for domestic outsourcing could touch Rs 6,608 crore by 2008. Says Roy: "There's so much potential, money will chase good ideas."