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Entrepreneurship and Venture Capital Environment in India Independent Study By Kumar Gounder OHSU/OGI Fall 2005 With Professor Jack Raiton Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 1 of 19

TABLE OF CONTENTS 1 ABSTACT .....................................................................................................3 2 PRE-LIBERALIZATION - BETWEEN 1947 AND 1990.................................3 2.1 Venture Capital in India during Pre-liberalization period .........................4 3 POST ECONOMIC LIBERALIZATION - AFTER 1990 .................................4 3.1 India Venture Capital History ..................................................................5 3.2 Visibility of Indian entrepreneurs’ Success in Silicon Valley (SV) ...........5 3.3 Drivers of Venture Investing in India .......................................................7 3.4 BSE Sensex Journey from 1000 to 9000................................................7 3.5 State of Venture Capital in India .............................................................7 3.6 Highlights & Trends of the Indian VC environment in Recent Years.......8 3.7 VC Activity in Asian Region – 2003 ......................................................10 3.8 Analysis of Investments in 2002 and 2003 ...........................................11 3.9 Deals in 2003 (by stage).......................................................................11 3.10 Fund Raising Position...........................................................................11 3.11 Supportive regulatory Environment ......................................................11 3.12 Entrepreneurship in India......................................................................12 3.13 Trends influencing high-tech entrepreneurship in India ........................12 3.14 The VC “Hotbeds”.................................................................................12 3.15 Issues and challenges ..........................................................................13 4 CONCLUSION ............................................................................................13 5 APPENDICES .............................................................................................14 5.1 Appendix - A: Amount invested in India (Source: NASSCOMM) ..........14 5.2 Appendix - B: Private Equity Investments in Asia: 2001 .......................14 5.3 Appendix – C: Indian Scenario as of 2001 - A Statistical Snapshot.....15 5.4 Appendix – D: List of some VC/PE Companies ....................................17 5.5 Appendix – E - Interview with Ganapathy Subramanian.......................18 5.6 Appendix – F: References ....................................................................19 Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 2 of 19

1 ABSTACT India is the largest democracy on the planet and second most populous country in the world. Its extraordinary history is intimately tied to its geography. A meeting ground between the East and the West, it has been invader’s paradise. Persians, Greeks, Chinese nomads, Arabs, French, Portuguese and British invaded India between 1500 BC and 1947. India’s most ancient civilization, Indus, is one of the world’s oldest and goes as far back as 5000 years. British ruled India for more than 150 years. India fought for its independence for long and gained it in 1947 from the British. After the independence, India decided to have a planned economy, where all the aspects of the economy were controlled by the government and licenses were given to select few. This resulted in ‘License Raj’. The term ‘License Raj’ refers to elaborate licenses, regulations and the accompanying red tape, that were required to set up businesses between 1947 and 1990. In 1991, Mr. Narashimha Rao, the then Finance Minister of India, facing macroeconomic crisis introduced economic reforms by dismantling licensing regulations in order to attract Foreign Direct Investment (FDI) and private businesses. License Raj was believed to be dismantled in that year. We can witness the outcome of the economic liberalization in the journey of Bombay Stock Exchange (BSE)’s 30 stock index known as Sensex from 1000 in 1990 to 9000 in 2005. Close to 7,000 stocks trade on the 130-year old SBE, the oldest bourse in Asia. In the last one and half decades, India has proved itself as a destination for Information Technology (IT) and Business Process Outsourcing (BPO). India is also fast emerging as a major center for cutting-edge research and development (R&D) projects for global multinational companies. Lot of activities are happening in India in various sectors such as IT, BPO, Knowledge Process Outsourcing (KPO), Semiconductors, Biotechnology, Textiles, Manufacturing, and Engineering recently. In this paper, I will analyze the entrepreneurship and venture capital environment in India. I will divide the post independence periods between 1947 and 2005 as pre-liberalization period (1947-1990) and post liberalization period (1990 onwards) and analyze the venture capital and entrepreneurship environment during these periods. I talked with Mr. Ganapathy Subramanian of Jumpstartup, an early stage India-US venture capital firm. He is a founding partner of Jumpstartp-I. I will present his views of the Indian Venture Capital industry. 2 PRE-LIBERALIZATION - BETWEEN 1947 AND 1990 After India’s independence in 1947, India’s then Prime Minister, Jawaharlal Nehru, decided to have a planned economy, where government had planned all aspects of the economy and the government granted licenses to a select few. The first and only Governor General of India, C.Rajagopalachari, popularly known as Rajaji, coined the term Licence Raj to oppose its potential for political corruption and economic stagnation. He was absolutely correct. India’s share in the world trade declined from 2% in 1950-51 to 1% in 1965-66, and 0.5% in 1973-74. It continued to hover around this figure until 1990-91. There were widespread corruption in India during these periods especially when one had to deal with government entities. Even today, corruption exists. However, the level has come down because the government started implementing economic reforms by liberalizing, de-regulating, and moving towards e-governance. Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 3 of 19

The leaders of the independence movement were the supporters of small and medium businesses as an alternative to “exploitation” by the multinational firms. These small and medium businesses were in traditional industries. Despite the emphasis on small and medium businesses, the Indian economy was dominated by a few massive private sector conglomerates such as Tata and Birla groups, and some nationalized firms. Large conglomerates did not need venture capital fund as they had access to fund from national commercial banks. It was very difficult for small and medium firms to venture into a new business because of the license raj system. This situation was not relevant for the emergence of venture capital. 2.1 Venture Capital in India during Pre-liberalization period The earliest discussion of venture capital in India came in 1973 when the government appointed a commission to examine strategies for fostering small and medium-sized enterprises (Nasscom 2000). In 1983, a book titled “Risk Capital for Industry” was written and published in India with the support of the Economic and Scientific Research Foundation of India. This book showed how difficult to raise “risk capital” for new ventures in the Indian financial system’s operation that existed during that time and proposed various measures to liberalize and deregulate the financial market. Later, it led to political discussions on the difficulties India had in encouraging entrepreneurship and the general malfunctioning of the Indian financial system. India did not have any policies toward venture capital prior to 1988. In fact, there was no formal venture capital before 1988. The Indian government issued its first guidelines to legalize venture capital operations in 1988 (Ministry of Finance 1988). These guidelines were aimed at the state- controlled banks to establish venture capital subsidiaries. It was also possible for other investors to create venture capital firm. When the Indian government realized the potential of venture capital, World Bank was also interested in encouraging economic liberalization in India. So, the government announced an institutional structure for venture capital (Ministry of Finance 1988). Thus, the first venture capital company, Technology Development & Information Company of India Ltd. (TDICI) was established in August 1988 and was run by Mr. Kiran Nadkarni. TDICI was formed by Industrial Credit and Investment Corporation of India (ICICI) and Unit Trust of India (UTI) to primarily focus on technologies. Both ICICI and UTI were state-controlled institutions. It was the World Bank funded experimental project. Since the government controlled every aspect of the economy, it was not surprising that the first formal venture capital organization began in the public sector. 3 POST ECONOMIC LIBERALIZATION - AFTER 1990 Even though, the venture capital operation was highly constrained and bureaucratically controlled, TDICI was the most successful early stage government venture capital operation. TDICI was established in Bangalore because technology companies such as Wipro Technologies, PSI Data, and Infosys were based there. The research activities of state-owned firms such as Indian Telephone Industries (ITI), Hindustan Aeronautics Limited (HAL), Indian Space Research Organization (ISRO), Defense Research Development Organization (DRDO), and India’s best research university, Indian Institute of Science (IISc) are also centralized there. Several established software firms received funds from TDICI, including Wipro for developing a “ruggedized” computer for army use. There were several successes, including several firms which went public, such as VXL, Mastek Software Systems, Microland, and Sun Pharmaceuticals. Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 4 of 19

In 1990, another venture capital company Gujarat Venture Finance Limited (GVFL) started operations with a 240 million rupee fund with investments from the World Bank and other state and central banks and private institutions. Since that fund was sufficiently successful, GVFL started another fund in 1995 and raised 600 million rupees. In 1997, it raised a third fund to target the IT sector. The other two venture funds were formed by Andhra Pradesh Industrial Development Corporation (APDIC) and CanBank (the only bank-operated venture capital subsidiary) formed by a nationalized bank Canara Bank. The performance was marginal. By 1995, even though some fund performance was disappointing, there came a realization that there actually were viable investment opportunities in India, and a number of venture capitalists had received training. 3.1 India Venture Capital History Although the venture capital environment in India is recent and new, there are four phases in the Indian venture capital history. They are: Phase I – Formation of Technology Development and Information Company of India (TDICI) in 1988 – formed by ICICI and UTI Phase II – Entry of Foreign Venture Capital funds between 1995 and 1999 Phase III – Emergence of successful India-centric VC firms Phase IV – US VC’s increasing appetite to invest in India 3.2 Visibility of Indian entrepreneurs’ Success in Silicon Valley (SV) The success of Indian entrepreneurs in Silicon Valley that began in 1980s became more visible in the 1990s. This created a notion in the United States that India might have more possible entrepreneurs. This notion brought the Foreign Investors’ attention toward India. Following are some of the venture capital firms started operations in India after this realization: • Draper International started operations in India in 1995 • Walden-Nikko in 1996 • JumpStartup • e4e • Chrysalis • Infinity In 1993, the Indian Venture Capital Association (IVCA) was formed to create conducive environment in India for venture capital and entrepreneurship. It consisted of nine members: 1. TDICI 2. GVFL 3. IDBI’s venture division 4. RCTC 5. APIDC 6. CanBank 7. Credit Capital Corporation 8. Grindlays (acquired by Standard Charted Bank) 9. British venture 3i Corporation Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 5 of 19

Between 1988 and 1996, the government relaxed the regulations further on venture capital operations. So, only in 1996, overseas and truly private domestic venture capitalists began investing. Indian government realized the potential benefits of healthy venture capital sector in the late 1990s. In 1999, the government announced a number of new regulations. This included a significant regulation liberalizing the ability of various financial institutions to invest in venture capital. As a result, the number of venture capital firms has radically increased as shown in the following table: Year # of VC firms Before 1994 11 1998 18 2001 40 2005 More than 100 The bureaucratic obstacles to the free operation of venture capital remained significant. There continued to be a confusing array of newly created statutes. The following statutes govern venture capital in India: • Stock Exchange Board of India’s (SEBI) 1996 Venture Capital Regulations • The 1995 Guidelines for Overseas Venture Capital Investments issued by the Department of Economic Affairs in the Ministry of Finance • The Central Board of Direct Taxes’ (CBDT) 1995 Guidelines for Venture Capital Companies (later modified in 1999) In early 2000, domestic venture capitalists were regulated by three government bodies: • The Securities and Exchange Board of India (SEBI) • The Ministry of Finance • The CBDT. For foreign venture capital firms there was even greater regulation in the form of: • The Foreign Investment Promotion Board (FIPB), which approves every investment • The Reserve Bank of India (RBI), which approves every disinvestment. The following regulations did not create an inviting environment for investors. • Income tax rules provided that venture capital funds may invest only up to 40 percent of the paid-up capital of a recipient firm, and also not beyond 25 percent of their own funds. • All investors in the venture capital fund had limited liability, and there was no flexibility in risk sharing arrangements. • There were no standard control arrangements, so they had to be determined by negotiation between management and investors in the fund. • Limited life funds were not recognized. So, it was relatively easy to terminate a trust, but this meant that the entire firm was closed rather than a specific fund within the firm. Therefore, each fund had to be created as a separate trust or company. This process is administratively and legally time-consuming. Terminating a fund is even more cumbersome, as it requires court approval on a case-by-case basis. • For firms with more than 50 non-employee shareholders, India’s corporate law does not provide flexibility in using equity to reward employees. While this may be satisfactory for early-stage venture capital investors, it could discourage later-stage investors who invest as parts of a consortium. Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 6 of 19

• Tax restrictions on corporations require that corporations paying dividends must pay a 10 percent dividend–distribution tax on the aggregate dividend. On the other hand, trusts granting dividends are exempt from dividend tax. • The tax code in 2001 was disadvantageous from the viewpoint of the international venture capital investor. Earnings from an international venture capital investor are taxed even if it is a tax exempt institution in its country of origin. 3.3 Drivers of Venture Investing in India • Knowledge based industries growing fast and mostly global and are less affected by domestic issues • World class engineers, professionals, entrepreneurs - success evident in the US as well • 2nd largest English speaking population with emphasis on science and mathematics among Indian students • India has advanced rapidly in the 90’s, catching up with global markets in many sectors. Evidence of this in the US as well • 25% of small IT companies in the US have Indian founders • Disproportionately large presence of Indians (1 million+) in the US Software Sector • 50% of all H1 visas issued to Indians 3.4 BSE Sensex Journey from 1000 to 9000 Bombay Stock Exchange (BSE), the oldest stock exchange of India was established in 1875. The BSE Sensex comprises 30 stocks. BSE crossed 9000 mark for the first time in its history on Nov 28, 2005. Following is the timeline: 1000 – July 25, 1990 2000 – Jan 15, 1992 3000 – Feb 29, 1992 4000 – Mar 30, 1992 5000 – Oct 8, 1999 6000 – Feb 11, 2000 7000 – Jun 20, 2005 8000 – Sep 8, 2005 9000 – Nov 28, 2005 Businesses and consumers are very bullish on Indian Economy. Economic liberalization and Regulation of Venture Capital Operations paved the way for Mergers and Acquisitions (M&A). Associated Chambers of Commerce and Industry of India (Assocham) estimates M&A activities in India will touch $17B in 2005. The hot sectors in M&A are banking, pharmaceutical, IT, media and telecom. 3.5 State of Venture Capital in India Despite there was no venture capital firm in India until 1988, India jumped to 15th position world wide in 2001 and 12th position in 2002 based on investment. India ranked #1 when it was based on Compound Annual Growth Rate (CAGR). India’s CAGR was 82% for the period 1998-2002. The following table illustrates the fact along with other countries’ positions. Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 7 of 19

State of Venture Capital – Top 20 Countries in 2002 – Based on Investment (Source: IVCA and Infinity Ventures) 2002 Country 2001 CAGR Growth Rank Rank 1998-02 (%) 1 USA 1 <1 2 UK 2 5 3 France 5 29 4 Italy 7 24 5 Japan 6 31 6 Germany 3 2 7 Korea 10 39 8 Netherlands 11 8 9 Canada 4 9 10 Sweden 9 57 11 Australia 14 39 12 India 15 82 13 Israel 12 14 14 Spain 17 22 15 Hong Kong 8 - 16 Indonesia - - 17 Finland - 19 18 South Africa - - 19 China 13 11 20 Belgium 19 4 3.6 Highlights & Trends of the Indian VC environment in Recent Years Year 2001 • Nearly all VCs were hesitant to invest in startups with inexperienced management team, or a clear, scalable business model. Consequently, the seed funding share in total disbursements was only 15 per cent. • VCs preferred to continue funding the late stage or expansion ventures. This venture grew to 41% of the total. The typical deal sizes were: o Series A - $1 to $1.5 million o Series B - $3 to $5 million o Series C - $4 to $8 million o Series D - $5 to $15 million • Nearly 70 VC funds were operating in India with total assets under management of nearly $ 5.6 billion. The amount had grown nearly twenty fold between 1996 and 2001. o Most VCs were not keen to fund small companies. They were interested in a minimum deal size of $1M. They wanted to invest in listed companies. o VCs turned their attention to IT enabled services, wireless applications and biotechnology sectors as small software service companies were not able to offer a differentiated value proposition and internet centric ventures faced the difficulty of sustaining and scaling up of revenues. • IP software development companies slowly came into the limelight. This was especially true in the areas of embedded software, digital signal processing, and system on chip (SOC) among other applications. A number of VCs expressed tentative interest, of course, the caveat of domain knowledge, and management capability continue to rule strong. Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 8 of 19

• Internet investments declined and non-Internet related investments increased from 28 per cent of VC investments in 2000 to 68 per cent in 2001. Year 2002 • India ranked as second most active VC market in the Asian region, outside of Japan, in attracting capital • $590M Venture capital fund and private equity was invested • There were 41 exits that included Spectramind, Customer Asset, Exl and iFlex • 76 deals received investment • Indian VC funds received $241M in new commitments, up 11.7% from 2001 • The digital signature regime implemented in April 2002 offered a big boost to the e- commerce sectors especially e-banking and online trading. Year 2003 • $774M in venture capital and private equity funds invested in 2003, up 40% year-over- year. • Increased M&A and attractive IPO market led to big ticket exits that included UTI Bank, TV Today, Indraprastha Gas, Worldzen and VisionSource • Majority of the investments in Late Stage & Private Investment in Public Equity (PIPE) transactions with bank and media as hot sectors • Average deal size was much larger though the number of deals decreased to 42 • Indian VC funds received approximately $360M in new commitments Year 2004 • VCs and Private funds invested over $1.1B in 66 companies • This was significantly more compared to $774M invested in 2003 • Warburg Pincus’ $149M investment in a New Delhi based Moser Bayer (a listed company engaged in optical storage media) was the single largest investment in 2004 • Major portion of the venture capital and private investment went into late-stage and publicly-listed companies • Business Process Outsourcing (BPO) attracted the maximum number of investments in 2004 with 9 companies, raising about $148M. However, investments in the sector declined both in terms of number of deals and the amount invested compared to 2003. • VCs changed direction in 2004 from the usual focus on export-led sectors to companies that could benefit from the booming domestic economy. • VCs and private firms have had dream run in 2004, with a number of them exiting their multi-year old investments. In total, firms exited from 30 investments and took out more than $700M compared to 12 in 2003. Majority of them (24) were in the way of M&A and the rest 6 were through IPOs. Year 2005 • Private equity funds are likely to invest more than $2 billion this year, said Arun Natarajan, founder of TSJ Media, which tracks Indian private equity deals • In the first nine months, they invested $1.2B surpassing last year’s $1.1B • Though venture capital is inherently risk capital, the funds are increasingly tilting toward sure returns," said Natarajan, who says the inflow may very well increase in 2006. Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 9 of 19

• In the first nine months of 2005, private equity funds invested in 98 companies, compared to 66 companies in all of 2004. Of the 98 companies, 29 were either already listed or readying for an IPO. In 2004, there were only 21 such investments out of the total of 66. • "Lots of bigger funds who are traditionally late-stage investors are now moving into India," said Vijay Angadi, managing director at the $50 million ICF Venture Novastar Fund. • Warburg Pincus sold two-thirds of its 18% stake in Bharti Tele-ventures Ltd. (532454.BY) for close to $1.1B during Bharti's IPO in 2003. The private equity firm had invested $300 million in the company in several stages from 1999 to 2001. • "Historically, venture capital flowed into export-led industries like software, biotech and textiles. Now it is also going to domestic-demand driven companies," said Puneet Bhatia, managing director at Newbridge Capital, which manages a $1.7 billion private- equity fund. • In October, Newbridge invested $100 million for a 49% stake in Shriram Holdings, which finances truck purchases by fleet operators. • U.S. private-equity firm Blackstone announced in September that it plans to set up a $1 billion fund to invest in Indian companies. The fund plans to invest $23 million on average in each company across various industry segments. • Several sector-specific funds, led by retail and real-estate focused investments, are setting up operations. • SEBI cleared 10 proposals in October from real-estate dedicated venture capital funds like Solitaire Capital, while U.S. venture capital fund Oak Ventures has announced a plan to set up a $200 million fund aimed at the local retail sector • "There is an emergence of a clear stratification within the industry, on who specializes in what, in terms of stage and size of financing," Natarajan of TSJ Media said. "At every stage of a company's growth, we now have a private equity player ready to invest." 3.7 VC Activity in Asian Region – 2003 Country Amt Invested ($ Mil) # of companies Japan $7298 77 South Korea $3153 21 Australia $2175 71 China $1280 44 India $774 42 Indonesia $654 5 Singapore $502 16 Bangladesh $473 2 Philippines $149 4 Hong Kong $131 7 Taiwan $38 3 Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 10 of 19

3.8 Analysis of Investments in 2002 and 2003 Deal Stage # of Companies Sum Invested ($ Mil) Average per deal Startup/Seed 7 27.98 3.11 Early Stage 9 52.8 5.28 Expansion 44 345.82 7.36 Later Stage 2 4.56 2.28 Other/Unknown 15 159.05 10.6 Total 2002 77 590.21 7.03 Total 2003 42 774.01 18.43 Even though the number of deals in 2003 was less than number of deals in 2002, the total amount invested in 2003 was much higher than the amount invested in 2002. 3.9 Deals in 2003 (by stage) Stage Sector VC/PE Fund Company Amt ($m) SEED/ Banking Citicorp, Chrys Capital, Yes Bank 15.5 EARLY Russell Infra Fund BPO Sequoia Capital 24/7 Customer 22 BPO WestBridge Indecomm World 4 LATE/ Chemical CDC Capital ICI 16.5 MBO Retail ICICI Ventures PVR Cinemas 8.5 Media Henderson Capital Hindustan Times 25 Media Standard Chartered NDTV 11 BPO West River Capital V-Customer 7 Consumer Warburg Pincus Radhakrishna Foods 50 PIPE Infrastructure Chrys Capital & Citicorp IVRCL 23 Pharma Newbridge & Citicorp Lupin Labs 55 Media ICICI Ventures Tata Infomdia 22.5 Auto CDC Capital & GIC Punjab Tractors 57 3.10 Fund Raising Position Year # of funds Amt Raised ($Mil) Avg per fund 2001 10 216.5 21.65 2002 5 241.8 48.36 2003 2 260.0 130.00 Total 17 718.3 42.25 3.11 Supportive regulatory Environment • Indian Government irrespective of the party that ruled India since 1990 is highly supportive of growth in technology and knowledge based sectors • Strong and supportive legal framework Information Technology Act VC norms ESOPs Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 11 of 19

Copyright, etc • Government controlled telecom being fully deregulated • Capital Market system amongst most advanced in Asia • Electronic trading – through National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) 3.12 Entrepreneurship in India Global entrepreneurship monitor (GEM), a joint research by Babson College and London Business School, quantifies various factors that determine entrepreneurial activity globally. Its findings are: o India fares fairly well on the entrepreneurship scale: o Small entrepreneurial new firms created 33 million new jobs in 2003 Parameters for measuring entrepreneurial activity Global Avg India TEA * Index – Overall 9 17.9 TEA Index – Men 13.3 19.46 TEA Index – Women 8.5 9.62 Ratio of impact of start-up vs entrepreneurial activity of 5 10 existing firms Level of necessity start-up activity (%) 33.3 27 * Total entrepreneurial activity (TEA) index measures # of start-up entrepreneurial ventures A global study says India is an enterprising nation. Global Entrepreneurship Monitor (GEM) findings show that in India, there are more than 107 million people seeking actively to establish 85 million new businesses. In the period 2000-2004, an average of 15 out of every 100 Indians was aiming to be an entrepreneur. 3.13 Trends influencing high-tech entrepreneurship in India o The rapid pace of globalization and the fast growth of Asian economies present tremendous opportunities and challenges for India o Increasing outsourcing to India not just for services but also for core businesses, engineering activities & cutting edge R&D work o IT off-shoring industry has spawned market for number of ancillary industries like entertainment, media, transportation, hospitality, infrastructure, etc o “Micro-Multinational” model gaining popularity providing globalization of talent, markets, business models & capital o Migration of number of Business Unit functions o World class knowledge of technology, markets, systems; adhering to global quality standards o Strong US linkages especially with Silicon Valley (SV), known for its entrepreneurial culture o More than 50% of SV VC portfolio leverages India connectivity, in some cases being a pre-requisite for investment 3.14 The VC “Hotbeds” The VC Hotbeds are Bangalore, Delhi and Bombay. Other cities such as Chennai, Hydrabad, Pune, Calcutta and Trivandram are also emerging. All IP-led companies, IT and IT enabled service companies are in Bangalore. Delhi has Software and IT enabled services and Telecom. Software and IT enabled services, Media, Computer Graphics, Animation and Banking sectors are strong in Bombay. Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 12 of 19

Apart from the above mentioned sectors, VCs invest in the following hot sectors: • Software Products (Mainly Enterprise-focused) • Wireless/Telecom/Semiconductor • PSU Disinvestments • Media/Entertainment • Bio Technology/Bio Informatics • Pharmaceuticals • Electronic Manufacturing • Retail 3.15 Issues and challenges • Indian VC yet to be established as a sustainable asset class among institutional investors • Limited amount of true “risk-capital” will impact entrepreneurial activity. Mr. Ganapathy Subramanian of Jumpstartup said “It is still very difficult for the entrepreneurs to raise less than $5M.” • Exit challenges – shallow capital markets and dull M&A environment for small companies • Beyond services, India is yet to create a brand-name for IP-led companies, like Israel has successfully done • McKinsey & Company survey shows two skill gaps in most Indian start-ups: o Entrepreneurial (how to manage business risks, build a team, identify and get funding) o Functional (product development know-how, marketing skills, etc.) • Indian entrepreneurs have very little access to “Risk” capital. o Various educational institutions like Indian Institute of Technology (IIT) and International Scholl of Business (ISB) provide right skills that promote entrepreneurship and also incubate start-ups o Seed/ angel funding VCs increasingly seeking opportunities 4 CONCLUSION India has advanced very rapidly since economic liberalization in 1990 and is catching up with other developed markets quickly. The environment for venture capital has improved many folds since 1990. This is evident from the fact that while the amount invested in India in 1996-97 was just $20M, the amount invested is estimated to be $2B in 2005. This has resulted in Indian companies acquiring foreign companies and become true global companies and allowed foreign companies to invest in Indian companies directly. Assocham estimates that the total M&A activities in India will touch $17B in 2005. Indian venture capital industry has entered into its fourth phase now, i.e. US firms are investing directly in companies headquartered in India. Despite there are some issues and challenges in the Indian VC industry compared to other developed markets such as the US, India is catching up with other markets very quickly. VC operations in India will be regulated further in the future to create even more conducive environment for venture capital operations and entrepreneurship. Global Enterprise Monitor research showed that India is an enterprising nation and 15% of the Indians were aiming to be entrepreneurs in 2003-2004. Small entrepreneurial firms created 33 million jobs in 2003. The overall environment for venture capitalists and entrepreneurs in India is very good. It can only get better in the coming years. Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 13 of 19

5 APPENDICES 5.1 Appendix - A: Amount invested in India (Source: NASSCOMM) Year Rupees (in US Dollars (in Crores) Millions) 1996-97 70 20 1997-98 320 80 1998-99 1,052 250 1999-2000 2,160 500 2000-01 5,470 1,200 2001-02 5,200 1,100 2007-08 F 60,000 10,000 5.2 Appendix - B: Private Equity Investments in Asia: 2001 Country Amount Number of invested ($ mn) ventures Japan 1,858 39 India 1,105 91 South Korea 1,054 19 Singapore 965 26 Australia 548 81 China 393 11 Hong Kong 263 23 Taiwan 172 4 Malaysia 36 13 Sri Lanka 22 1 New Zealand 17 12 Philippines 8 2 Thailand 7 8 Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 14 of 19

5.3 Appendix – C: Indian Scenario as of 2001 - A Statistical Snapshot (Courtesy: Indiainfoline.com and data source: IVCA) Contributors of Funds Contributors Rs mn % Foreign Institutional Investors 13,426.47 52.46 All India Financial Institutions 6,252.90 24.43 Multilateral Development Agencies 2,133.64 8.34 Other Banks 1,541.00 6.02 Foreign Investors 570 2.23 Private Sector 412.53 1.61 Public Sector 324.44 1.27 Nationalized Banks 278.67 1.09% Non Resident Indians 235.5 0.92% State Financial Institutions 215 0.84% Other Public 115.52 0.45% Insurance Companies 85 0.33% Mutual Funds 4.5 0.02% Total 25,595.17 100.00% Methods Of Financing Instruments Rs million % Equity Shares 6,318.12 63.18 Redeemable Preference Shares 2,154.46 21.54 Non Convertible Debt 873.01 8.73 Convertible Instruments 580.02 5.8 Other Instruments 75.85 0.75 Total 10,000.46 100 Financing By Investment Stage Investment Stages Rs million Number Start-up 3,813.00 297 Later stage 3,338.99 154 Other early stage 1,825.77 124 Seed stage 963.2 107 Turnaround financing 59.5 9 Total 10,000.46 691 Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 15 of 19

Financing By Industry Industry Rs million Number Industrial products, machinery 2,599.32 208 Computer Software 1,832 87 Consumer Related 1,412.74 58 Medical 623.8 44 Food, food processing 500.06 50 Other electronics 436.54 41 Tel & Data Communications 385.09 16 Biotechnology 376.46 30 Energy related 249.56 19 Computer Hardware 203.36 25 Miscellaneous 1,380.85 113 Total 10,000.46 691 Financing By States Investment Rs million Number Maharashtra 2,566 161 Tamil Nadu 1531 119 Andhra Pradesh 1372 89 Gujarat 1102 49 Karnataka 1046 93 West Bengal 312 22 Haryana 300 22 Delhi 294 21 Uttar Pradesh 283 29 Madhya Pradesh 231 2 Kerala 135 15 Goa 105 16 Rajasthan 87 11 Punjab 84 6 Orissa 35 5 Dadra & Nagar Haveli 32 1 Himachal Pradesh 28 3 Pondicherry 22 2 Bihar 16 3 Overseas 413 12 Total 9994 691 Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 16 of 19

5.4 Appendix – D: List of some VC/PE Companies List of Some VC/PE Companies preferring to invest in Start-ups out of around 100 active Venture capital firms Minimum Investment (INR Company million) Aavishkaar India Micro Venture Capital Fund 0.44 West Bengal Asset Management Company Ltd. 1.20 Pitango Ventures 2.22 Gujarat Venture Finance Limited 2.50 Kerela Venture Capital Fund Private Ltd. 2.50 Austin Ventures 4.43 Highland Capital Patners 4.43 INC3 4.43 Infinity Technology Investments 5.00 KITVEN 5.00 SIDBI 5.00 New Enterprise Associates 8.86 Marigold Capital Service Ltd. 20.00 Acer Technology Venture 22.15 Jafco Investments (Asia Pacific) Ltd. 22.15 Jumpstartup 22.15 Mohr Davidow Ventures 22.15 Andhra Pradesh Ind Devp Corp Venture Capital Ltd. 25.00 Mitsuri Ventures 44.30 New Media Spark 44.30 Alta Partners 88.60 Norwest Venture Partners 132.90 Pequot Venture 132.90 Battery Ventures 221.50 Sofinnova Ventures Inc. 221.50 IDFC 300.00 Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 17 of 19

5.5 Appendix – E - Interview with Ganapathy Subramanian About Ganapathy Subramaniam Ganapathy is a founding Partner of JumpStartUp-I. At JumpStartUp, Ganapathy led the investments (and exits) in CustomerAsset and Smartcc and served on their boards. Currently he serves on the boards of Apnaloan, NetDevices (India) and Meru Networks (India) and is a board observer at July Systems. Ganapathy also oversees the Fund operations and investor relations. Ganapathy has over 15 years industry experience including 11 years of life cycle experience in Venture Capital investing in India and US. His area of focus has been investments in young and high growth companies in the software and services industries. Ganapathy has held active board member in several technology companies and has assisted the companies successfully execute strategic initiatives like spin-offs, acquisitions, sale, IPO and additional financings. Over his 11 years as a VC, Ganapathy has been directly involved in over 30 investments and 12 exits. Prior to founding JumpStartUp in 2000, Ganapathy served as Group Manager of Private Equity Investments (Information Technology) at ICICI Venture, India's leading venture capital firm. Ganapathy played a lead role in the formulation and implementation of the Software Fund, one of the most successful funds in India (4.6X, IRR: 180%). Ganapathy also made significant contributions to the formulation and execution of the investment plan of ICICI Venture's first offshore fund in partnership with US based Trust Company of West (TCW). Prior to ICICI Venture, he worked for Marico Industries Limited and Southern Petrochemical Industries Corporation Limited. Ganapathy is well networked in the VC and financial community in the Indian markets and leads efforts in catalysing the development of an ecosystem through various industry associations. Ganapathy graduated with Honours in Chemical Engineering from Regional Engineering College, Tiruchirapalli and has an MBA from XLRI, Jamshedpur, India. Can you tell me about VC environment in India? “India is 13 years old as far as VC is concerned.” True VC investment started around 2000 even though the first company TDICI was established in 1988. However, it is growing very fast. In the early 1990s, there were handful of VC firms were there. Today, there are around 100 VC firms are operating in India. How do you compare the VC environment in India and the US? Even tough India has started regulating VC operations in the last few years there exist some restrictions unlike in the US. What are some of the problems entrepreneurs face today in India as far as VC is concerned? Since most of the VCs invest in late stage companies, it is very difficult for entrepreneurs even today to raise less than $5M. How do you come to know about an investing opportunity in a venture? Usually entrepreneurs get in touch with us. Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 18 of 19

5.6 Appendix – F: References ♦ Creating an Environment: Developing Venture Capital in India by Rafiq Dossani and Martin Kenney (May 2001) ♦ The India Venture Capital Association - http://www.indiavca.org/ ♦ http://www.altassets.com ♦ TSJ Media Pvt. Ltd. - http://www.tsjmedia.com/ ♦ National Association of Software and Services Companies – http://www.nasscom.org ♦ www.jumpstartup.net ♦ Economic Times of India – http://conomicsindia.indiatimes.com ♦ http://www.indiainfoline.org ♦ Rediff India Abroad - http://us.rediff.com ♦ http://www.geographia.com/ ♦ http://www.sify.com ♦ http://www.reherring.com Kumar Gounder - MST502D - Venture Capital and Entrepreneurship environment in India Page 19 of 19

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