The document discusses strengthening India's risk capital ecosystem by expanding venture capital (VC) and angel investing. It argues that VC and angel investors play important roles in funding startups and helping them scale. While India has made progress, the VC/angel market still lags global benchmarks. The author proposes recommendations to catalyze the domestic risk capital ecosystem, including: 1) encouraging simultaneous development of technology domains, 2) attracting more global VC firms to India, and 3) unlocking domestic rupee-denominated risk capital from sources like banks and pension funds. Overall the recommendations aim to fuel more startups and make India a leading hub for technology investment.

1. Soumitra Sharma, IDG Ventures India
Strengthening Indian Risk Capital Ecosystem
ENTREPRENEURSHIP SPECIAL
About the Author: Soumitra is a part of the Investment Team at IDG Ventures India
Advisors. IDG Ventures manages over US$6 Billion globally and has a portfolio of over
200 technology companies.Prior to joining IDG Ventures India Advisors, Soumitra
has M&A and Corporate Finance Advisory experience at Citigroup Global Markets
India and Deloitte India.He has written extensively on prestigious platforms such as
TIME, Wall Street Journal, Economic Times etc.,and has been a Guest Lecturer at ISB
Hyderabad and IIM Ahmedabad. He holds a Bachelor’s degree in Chemical Engineer-
ing from Indian Institute of Technology (IIT-BHU), Varanasi and an MBA from the
Indian School of Business,Hyderabad.
India’s entrepreneurship landscape has been catalyzed Technology has also dominated the venture-backed
by a combination of vibrant angel investing and pres- exit landscape in India, both in terms of number of
ence of a robust Venture Capital (VC) industry. Angel exits and return multiples for investors. Between
investors fill a vital seed stage financing gap in the 2004 and 2011 (Aug-end), there were 152 venture-
venture lifecycle, and provide business guidance, net- backed exits in India, with 111 (73% of the total)
works and strategic advice that significantly improve exits from technology companies . In terms of re-
the odds of the business scaling up and succeeding. turns , the average multiple on invested capital for
The Indian Angel investing landscape can be broadly technology exits was about 5.2x, compared to 3.4x
classified into three segments – organized angel net- for non-technology exits.
works (Indian Angel Network, Mumbai Angels etc.),
accomplished individual investors, and institutional Venture Capital investors have played critical roles in
seed investors that operate in the Angel investing Indian ventures by scaling their operations, profes-
spectrum (Blume Ventures, Kae Capital etc.). India’s sionalizing their management, helping them access
Angel investing landscape is now coming of age, with quality follow-on investors, and strengthening cor-
several successful exits such as InMobi, One97 Com- porate governance. Value creation by VC investors
munications and JustDial. in their portfolio companies in turn, positively im-
pacts the SME backbone of the economy, leading to
On the VC front, India witnessed close to US$ 5 vibrant economic growth and pan-India job creation.
Billion VC inflows over more than 941 transactions Financial investors typically make companies more
between 2005 and 2011 . Technology—defined as efficient, reliable and productive, thus improving the
enterprise software products and services, digital overall corporate health in the country, especially
consumer (internet, mobile and new media), en- with respect to the SME sector. This also leads to
gineering and electronics—has been the critical increased tax collections for the Government, thus
growth engine of Indian venture investing, account- positively impacting its Fiscal situation.
ing for over 60% of number of deals done between
2006 and 2011 . Total venture investments in India Overall, even though India has made great prog-
are expected to be close to US$ 10 Billion between ress in Angel and VC investing evolution in absolute
2010 and 2015, out of which approximately US$ 7.5 terms, the space still has a long way to go before
Billion will be in technology companies. matching up to global benchmarks such as China and
SJMSOM, IIT Bombay L!VE August 2012 09

2. and the US, in terms of entrepreneurship strength With the creation of multiple technology hubs across
and growth. China has exhibited great success in the country, the Government can drive information
terms of channelizing domestic RMB Capital into exchange programs and collaborative innovation ini-
indigenous businesses, through steps such as intro- tiatives with global institutions. Further, establishing
duction of the ChiNext stock exchange, Govern- research centers along with corporate industry lead-
ENTREPRENEURSHIP SPECIAL
ment entities directly investing as LPs in VC funds ers and academia can lead to path breaking innova-
etc. Similarly, the US Government has executed tion. This ecosystem can increase the effectiveness
numerous supportive regulations for the Angel and of Government grants towards technology research
VC investing sector over last three decades, includ- as well as establish India as a leading high technol-
ing measures such as giving tax breaks to individ- ogy and knowledge center among emerging markets.
ual angels, allowing pension funds to invest in VCs
and easing the listing process for small businesses. 2.Encouraging more global VC firms to open
The only sustainable way to strengthen entrepreneur- offices in India.
ship in India is to catalyze the domestic risk capital
eco-system by boosting Angel and VC industry. A few The Government can achieve this if it proactively
recommendations to achieve this are discussed below. reaches out to existing and potential VC General
Partners (GPs) across the world, through targeted
1.Encouraging simultaneous development of ‘Outreach programs’ and road-shows, communicat-
technology domains. ing India’s attractiveness as a premier VC destination.
In light of global economic cyclicality, capital pools
Drawing parallels from the Bay Area experience, have tightened and management fees of funds across
emphasis should be given to all major technology the world are strained. The Government can provide
domains since they tend to have similar eco-system incentives such as office space and infrastructure at
drivers and therefore, grow together. Providing Gov- preferential rates, to improve economics for funds
ernment incentives related to infrastructure, taxes and attract them to the country.
and other policies will act as a strong driver for this.
The establishment of Software Technology Parks was The Government should also strive to create a ‘Sand
instrumental in the growth of the software indus- Hill Road’ parallel in cities such as Bangalore, Delhi
try. Similar technology parks for renewable energy, NCR and Mumbai, with VC firms located in a con-
medical technology and precision engineering would centrated fashion geographically. This allows both en-
in turn, create large number of high technology ven- trepreneurs to easily access VCs, as well as makes it
tures, as well as increase employment and innovation easier for VC firms to exchange notes and syndicate
in the country. deals.
3.Turning India into an Asian financial hub.
It’s important that global institutional capital is in-
vited to move to India, similar to other Asian financial
centers such as Hong Kong and Singapore. Building
an environment conducive to innovation, technology
leadership and financial networks can set India apart
as the most attractive financial center for technol-
ogy investments, on par with the above destinations.
Most international financial houses choose these al-
ternative regions as their headquarters because of
better infrastructure and overall business ecosystem.
Building major cities such as Bangalore, Delhi NCR
and Mumbai along the lines of these regions will not
10 L!VE August 2012 SJMSOM, IIT Bombay

3. only bring in capital flows, but also cement the coun- Young companies are usually constrained in terms
try’s leadership in advanced technical domains. of providing collaterals, and therefore, venture and
growth equity ends up being the only viable op-
tion of risk capital in most cases. In order to make it
4.Unlocking domestic rupee-denominated easier for venture-backed companies to raise money
risk capital through diverse sources, the Government should
ENTREPRENEURSHIP SPECIAL
mandate existing financial institutions such as State
Unlocking rupee risk capital is crucial for providing and Cooperative banks, as well as Non-Banking Fi-
adequate fuel to Indian ventures. There are several nancial Companies (NBFCs), to provide venture debt.
ways this can be done. Similar to prevalent policies
in several states in the US, Indian High Net-worth Venture Debt is essentially a collateral-free loan
Individuals should be allowed tax breaks at the Per- that comes with an interest payment, with the
sonal Income Tax level for individual angel invest- lender also getting a warrant that provides rights
ing. In addition, Commercial Banks, Pension Funds to buy equity at a pre-determined time and price.
and Insurance Funds should be incentivized to invest This essentially compensates the lender for higher
a small portion of their assets in Indian VC and PE risk of default in case of entrepreneurial ventures.
Funds as Limited Partners. While this allocation will
be small enough to not have a large negative impact 6.Imparting stability to VC regulatory regime
on the Funds, it would still hold potential to generate
disproportionately high ‘VC type’ returns for them. International capital requires a long-term predictable
Overall, this step will fuel creation of new innovative governance and tax regime. With frequent changes
ventures that create employment and growth for the in foreign investment regulations, VC investors are
overall economy. forced to spend inordinate time with intermediar-
ies such as lawyers and accountants, figuring out the
In this context, Corporate Venturing is also critical to regulatory structure, which eats into high quality
boosting the overall VC eco-system in India. As most bandwidth that should ideally be devoted to portfolio
Indian majors such as Infosys, Wipro, Biocon, Mari- companies. It’s recommended that a stable and level-
co etc. are still relatively un-initiated to VC invest- playing regulatory regime be ensured forVC investors.
ments, an optimal way for them to venture into this Given that the VC-PE asset class is inherently risky,
area would be to start by investing in existing venture financial investors in this space need long term clar-
funds as Limited Partners. These players could then ity and predictability in policies related to this sector.
align the investing mandate of investee funds with
their corporate strategy. The Government should Implementation of these recommendations will
also give tangible infrastructure and tax incentives go a long way in ensuring that Indian Angel and
to these players, aimed at encouraging Corporate VC VC investing realizes its full potential and be-
activity by them. comes a global force to reckon with, in turn
Once Indian corporates are comfortable with ven- boosting the Indian entrepreneurship landscape.
ture investing, they should be then encouraged to
establish dedicated VC arms that can align closely
with existing VC funds and work with them. For in-
stance, Google Ventures has explicitly aligned itself
with Kleiner Perkins and August Capital in the US
VC market.
5.Enabling existing financial institutions and
NBFCs to provide Venture Debt to startups
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