vanture capital

8/14/2019 vanture capital

1/27

Venture Capital and Innovation:The Indian ExperienceB. Bowonder and Sunil Mani Biographical NotesDr. B. Bowonder is Dean of Research and Chairperson of the Centre for Technology Management at the Administrative Staff College of India. He has aPhD in engineering from the Indian Institute of Science, Bangalore. His contactaddress is Administrative Staff College of India, Hyderabad-500 082, India, Tel:+91-40-3310952, Fax: +91-40-3312954, E-mail: [email protected]. Sunil Mani is Researcher at the United Nations University/Institute for NewTechnologies (UNU/INTECH) Keizer Karelplein 196211 TC Maastricht, The Netherlands, Tel: +31-43-3506331, Fax: +31-43-3506399, E-mail: [email protected]

Venture Capital and Innovation:The Indian ExperienceB. Bowonder and Sunil Mani AbstractThis paper presents an overview of evolution of venture capital support for innovation in India. There are three governmental supported schemes and alarge number of venture funds currently in operation. An analysis of venturecapital funding trends indicates that venture capital also has strong linkages withinnovation-based clusters. The paper also summarizes the support provided bythe venture funds to innovative firms. It has been observed that though they aremany determinants the two major elements that contributed to the success of venture capital assisted firms are: providing market linkages and sharpening the business plan . From the firm side, experiential base of the entrepreneursand clarity of the market are the factors that reduced the market uncertainty. Theanalysis shows that linkages between innovation, clusters and venture supportare becoming tighter. This has got immense importance in public policy arena.Support for creating clusters and developing high-tech entrepreneurs are likely tobe the interventions that are effective.KeywordsVenture capital, innovation, financing innovation and clusters2BACKGROUND OF THE INDUSTRYIn the last decade, one of the most admired institutions among industrialists andeconomic policy makers around the world has been the US venture capitalindustry [Dossani and Kenney 2002]. The sensitivity of venture capital processto government policies and other factors that influence entrepreneurship andinnovation was highlighted in a study by the US General Accounting office onbehalf of the Joint Economic Committee [Premus 1985]. Venture capital


2/27

entrepreneurship and innovation have been closely connected. Entrepreneurshave long had ideas that require substantial capital to implement but lacked thefunds to finance these projects themselves [Gompers and Lerner 2002]. Venturecapital evolved as a response to this felt need. Venture capital represent onesolution to financing the high risk, potentially high-reward projects [Gompers and

Lerner 2002]. The experience of US, Taiwan and Israel show that technologicalinnovation and the growth of venture capital markets are closely interrelated[Premus 1985]. It has been reported that capital markets overlook smallbusiness opportunities because of high information and transaction costs,generally known as capital gap problem [Premus 1985, Smith and Smith 2002].Though venture capital can meet this gap to some extent, venture capital is aspecial form of venture financing. In the case of venture capital, the capitalmarket has to be conducive for supporting venture funding. At some level,entrepreneurship occurs in nearby every society, but venture capital can onlyexist when there is a constant flow of opportunities that have great upside3

potential [Dossani and Kenney 2002]. This study is a country overview of theventure capital industry supported by a set of case studies.Evolution of VC Industry in IndiaThe first major analysis on risk capital for India was reported in 1983 [Chitale1983]. It indicated that new companies often confront serious barriers to entryinto capital market for raising equity finance which undermines their futureprospects of expansion and diversification. It also indicated that on the wholethere is a need to revive the equity cult among the masses by ensuringcompetitive return on equity investment. This brought out the institutionalinadequacies with respect to the evolution of venture capital. The role of venturecapital was met initially by the following institutions:

_ Industrial Development Bank of India.

_ Industrial credit and investment corp of India _ State Finance Corporations and _ Small Industries Development Bank of IndiaThe first origins of modern venture capital in India can be traced to the setting upof a Technology Development Fund in the year 1987-88, through the levy of access on all technology import payments [IVCA, 2000]. TechnologyDevelopment Fund was started to provide financial support to innovative andhigh risk technological programmes through the Industrial Development Bank of India. Subsequently, Government of India gave the procedures that can be usedfor starting venture funding.4

The growth of VC in India has three separate phases. The first phase was theinitial phase in which the concept of VC got wider acceptance. The first perioddid not really experience any substantial growth of VCs. The 1980s weremarked by an increasing disillusionment with the trajectory of the economicsystem and a belief that liberalization was needed. The liberalization processstarted in 1985 in a limited way. The concept of venture capital received officialrecognition in 1988 with the announcement of the venture capital guidelines.


3/27

During 1988 to 1992 about 9 venture capital institutions came up in India.Though the venture capital funds should operate as open entities, Government of India controlled them rigidly. One of the major forces that induced Governmentof India to start venture funding was the World Bank. The initial funding hasbeen provided by World Bank. World Bank reported that India will require $67 to

133 million per annum as venture capital. It gave a total of US $45 million for starting VC funds in India. The most important feature of the 1988 rules was thatventure capital funds received the benefit of a relatively low capital gains tax ratewhich was lower than the corporate rate [Dossani and Kenney 2002]. The 1988guidelines stipulated that VC funding firms should meet the following criteria:

_ technology involved should be new, relatively untried, very closely held, inthe process of being taken from pilot to commercial stage or incorporatesome significant improvement over the existing ones in India

_ promoters / entrepreneurs using the technology should be relatively new,professionally or technically qualified, with inadequate resources tofinance the project.5

Between 1988 and 1994 about 11 VC funds became operational either through reorganizing the businesses or through new entities and they aregiven in Table.1 .All these followed the Government of India guidelines for venture capital activitiesand have primarily supported technology oriented innovative businesses startedby first generation entrepreneurs [Verma 1997]. Most of these were operatedmore like a financing operation. The main feature of this phase was that theconcept got accepted. VCs became operational in India before the liberalizationprocess started. The context was not fully ripe for the growth of VCs. Till 1995,the VCs operated like any bank but provided funds without collateral. The first

stage of the venture capital industry in India was plagued by in experiencedmanagement, mandates to invest in certain states and sectors and generalregulatory problems. Many public issues by small and medium companies haveshown that the Indian investor is becoming increasingly wary of investing in theprojects of new and unknown promoters [Ramesh and Gupta 1995]. Theliberation of the economy and toning up of the capital market changed theeconomic landscape. The decisions relating to issue of stocks and shares washandled by an office namely: Controller of Capital Issues (CCI). According to1988 VC guideline, any organization requiring to start venture funds have toforward an application to CCI. Subsequent to the liberalization of the economy in1991, the office of CCI was abolished in May 1992 and the powers were vestedin Securities and Exchange Board of India. The Securities and Exchange Board6

of India Act, 1992 empowers SEBI under section 11(2) thereof to register andregulate the working of venture capital funds. This was done in 1996, through agovernment notification. The power to control venture funds has been given toSEBI only in 1995 and the notification came out in 1996. Till this time, venturefunds were dominated by Indian firms. The new regulations became theharbinger of the second phase of the VC growth. The notification had the


4/27

following salient features: _ The guidelines made it easy for both private and government firms toenter the VC arena

_ It relaxed the criteria so as to allow the entry of any kinds of firms.Whereas this activity was restricted to All India Public Sector financing

institutions, State Bank of India and other scheduled banks including thebanks operating in India and the subsidiaries of the above, subject to RBIpermission for banks till 1996

_ a VC fund is prohibited to carry on any activity other than the VC fund _ the minimum size of VC that was stipulated as Rs. 100 million (US $2million) was removed

_ the new regulations prohibited investment by venture capital funds in theequity shares of any company or institution providing financial services

_ to promote early stage financing atleast 80 percent of the venture capitalfunds shall be invested in the equity shares or equity related securitiesissued by a company whose securities are not listed on any recognized

stock exchanges7 _ within the stipulation of 80 percent of the VCF investment, a venturecapitalist can invest in the equity share or equity related securities of thefinancially weak company or a sick industrial company whose securitiesmay be or many not be listed on any of the recognized stock exchanges.This condition is provided for supporting later stage and turnaroundfinancing by venture capitalists.

_ Venture capitalist can finance the companies which have already beenassisted in any of the categories mentioned above

_ Venture capitalist can invest the balance 20 percent of the VCF in anylisted companys securities viz shares and debentures or make inter corporate deposit with listed companies or invest directly in R&D divisionof listed companiesThe second phase of VC growth attracted many foreign institutional investors.During this period overseas and private domestic venture capitalists beganinvesting in VCF. The new regulations in 1996 helped in this. Though thechanges proposed in 1996 had a salutory effect, the development of venturecapital continued to be inhibited because of the regulatory regime and restrictedthe FDI environment. To facilitate the growth of venture funds, SEBI appointed acommittee to recommend the changes needed in the VC funding context. Thiscoincided with the IT boom as well as the success of Silicon Valley start-ups. In

other words, VC growth and IT growth co-evolved in India.8Major recommendations of the VC committee:The committee came to the conclusion that the venture capital industry in India isstill at a nascent stage. It also stated that with a view to promote innovation,enterprise and conversion of scientific technology and knowledge based ideasinto commercial production, it is very important to promote venture capital activityin India. The report prepared a vision, identified strategies for growth and how to


5/27

bridge the gap between traditional means of finance and the capital needs of thehigh growth start-ups.The committee (The committee is known as Chandrasekhar Committee)identified five critical success factors for the growth of VC in India, namely:

_ the regulatory, tax and legal environment should play an enabling role asinternationally venture funds have evolved in an atmosphere of structuralflexibility, fiscal neutrality and operational adaptability

_ resource raising, investment, management and exit should be as simpleand flexible as needed and driven by global trends

_ venture capital should become an institutionalized industry that protectsinvestors and investee firms, operating in an environment suitable for raising the large amounts of risk capital needed and for spurringinnovation through start-up firms in a wide range of high growth areas

_ in view of increasing global integration and mobility of capital it isimportant that Indian venture capital funds as well as venture financeenterprises are able to have global exposure and investment opportunities9

_ infrastructure in the form of incubators and R&D need to be promotedusing government support and private management as has successfullybeen done by countries such as the US, Israel and Taiwan. This isnecessary for faster conversion of R&D and technological innovation intocommercial products.A set of major recommendations were suggested that can help in the stimulationof the VC industry in India, some of these are presented here

_ Eliminating multiplicity : There has been a multiplicity of regulationsrelating to VC. There is a need for harmonization of regulations, as thereare three sets of VC regulations, namely:

SEBI (Venture Capital Regulations) 1996, Guidelines for OverseasVenture Capital investments issued by Dept. of Economic Affairs (1995),and CBDT Guidelines for Venture capital companies [1996]. To eliminatemultiple regulations, the committee proposed that SEBI should becomethe nodal regulator for VCF so as to provide uniform hassle free, singlewindow regulatory framework.

_ Venture capital funds tax pass : VCFs are a dedicated pool of capitaland therefore operates in fiscal neutrality and are treated as pass throughvehicles. Once registered with SEBI, it should be entitled to automatic tax10

pass through at the pool level while maintaining taxation at the investor

level without any other requirement under Income Tax Act. _ Foreign Venture Capital Investors : FIIs registered with SEBI canfreely invest and disinvest without taking FIPB (Foreign InvestmentPromotion Board / RBI (Reserve Bank of India) approvals but FVCIs haveto take FIPB / RBI approvals. It was suggested that atleast on par withFIIs, FVCIs should be registered with SEBI and having once registered,they should have the same facility of hassle free investments anddisinvestments without any requirement for approval from FIPB / RBI.


6/27

_ Augmenting the domestic pool of resources : The present pool of funds available for venture capital is very limited and is predominantlycontributed by foreign funds to the extent of 80 percent. The pool of domestic venture capital needs to be augmented by increasing the list of sophisticated institutional investors permitted to invest in venture capital

funds. _ Flexibility in Investment and Exit : Eligibility for registration as venturecapital funds should be neutral to firm structure. The government shouldconsider creating new structures such as limited partnerships, limitedliability partnerships and limited liability Corporations. The IPO norms of three year track record or the project being funded by the banks or 11

financial institutions should be relaxed to include the companies funded bythe registered VCF. Those companies which are funded by VCs and their securities are listed on the stock exchanges outside the country, thesecompanies should be permitted to list their shares on the Indian stock

exchanges.The second phase of VC growth was essentially a learning phase. The rapidgrowth of VC during 1995 to 2000 made government examine the issues in thelight of the Chandrasekhar Committee. The second phase growth has beenmostly of information technology driven. This was also due to Government of Indias interest in attracting FDI into India. This paved the way for the next phaseof VC growth in India.Based on the recommendations of the committee and based on the budgetproposals SEBI approved two new regulations:

_ SEBI (Venture Capital) Amendment Regulations, 2000 and _ SEBI (Foreign Venture Capital Investors) Regulations, 2000.The purpose of these were to change some of the lacunae in the existingregulations. Government considered these changes as far reaching, whereasindustry viewed this as marginal changes. The major changes brought about bythese are many fold:12

VCF is defined as fund established in the form of a Trust, a company including abody corporate and registered with SEBI which as a dedicated pool of capitalraised in the manner specified under the Regulations; to invest in venture capitalundertakings in accordance with the Regulations. The minimum size of the fundfrom any investor will not be less than INR 500,000 and the minimum corpus of the fund at the start has to be atleast INR 50 million. The new regulations

stipulated that the maximum investment in single venture capital undertaking isnot to exceed 25% of the corpus of the fund. The new regulations allowed VCFto participate in a companys initial public offering through the book building routeas a Qualified Institutional Buyer.The new regulations allowed Foreign Venture Capital Investor to register withSEBI. Also, SEBI registered Foreign Venture Capital Investors will be permittedto make investment pursuant to the automatic route within the overall sectoralceiling of foreign investment without having to obtain the prior approval of the


7/27

Foreign Investment Promotion Board (FIPB). Along with this, with effect fromJune 1, 2000 foreign investment in Indian securities is controlled by theprovisions of the Foreign Exchange Management Act 2000. This required thatan offshore VCF investing in India will need to consider the requirements under the FEMA which Inter alia requires certain categories of offshore / foreign

investors to seek the prior approval of the Foreign Investment Promotion Boardconstituted by the Government of India, before they invest in Indian securities.The changes had a salutory effect on venture capital industry and this is the third13

phase of VC growth. Though the dot.com problem and global economicslowdownaffected VC funding, the software exports continued to surge. The growthof IT exports over the year show that IT exports and VC growth has a strongcorrelation. Unlike that in US, Government of India did not permit pension fundto flow into VC. One of the basic differences between US SBIC and Indian preventure entrepreneurship has been that in that case of India there was no

relationship between entrepreneurship financing and VC financing. In the nextsection a detailed analysis of VC trends are presented.VC Trends in IndiaInitially, only Indian financial institutions were operating VC funds. Then off-shorefunds came into VCF. In 1997, Government of India supported a quasi VC fund Technology Development Board. After the entry of offshore VC funds, the VCsstarted evolving. This along with IT boom made innovative entrepreneurial firmsto evolve. The growth of VCs occurred, mostly, in selected clusters.Growth Trends: Prior to 1988, in the absence of an organized venture capitalindustry, individual investor and development financial institutions have hither toplayed the role of venture capitalists in India. Initial response was poor but by

1995 the VC industry picked up. The SEBI initiated interaction with industryparticipants and experts in the early 1999 led to a series of changes. Strictlyspeaking the results of the earlier years and current growth are not comparablebecause of the difference in capital investment requirements. In 1996-97, the14

total quantum of funds disbursed was US$20 million but in 2001-2002 it was US$ 1.1. This was only marginally higher than what was actually disbursed in theearlier year. Though 2001 was a relatively bad year investments in VC continuedat the same level. There has been increased interest in off-shore VC funds toinvest in India. Nearly 70 VC funds were operating in India, and they have anasset base of US $ 5.6 billion. The amount has grown nearly twenty fold in the

past five years. It is reported that India will get about US $3 billion in 2002,through India centric funds. Nasscom has reported that by 2007-2008 the VCdisbursement will reach US $10 billion per annum, as shown in Fig1.Where does India Stand?India was next to Japan in private equity investments in 2001 as shown in Table2. China supported only 11 ventures where as India supported 91 ventures. Thegrowth of VC has been phenomenal in the Asian region [Varma 2002]. Tillrecently firms were mostly obtaining license ensured profits in India. Hence, both


8/27

home grown VCs and entrepreneurs have minimal risk evaluation skills. Capitalis flowing into private equity funds after 2000. Most of the VCs are offshoots of financial institutions in India. They have a lending mindset and look forward tosecurity in what essentially a risky venture (www.vcline.com). The regulatorystance in India continued to be rigid. India would have attracted much more if the

context was less control oriented.15Distribution of VC units: It is observed that 75 percent of the investments havebeen placed in five states such as Maharashtra, Tamil Nadu, AP, Gujarat andKarnataka. VC activities have been weak in most of the northern states. Thispartly represents weak entrepreneurial spirit and lesser emphasis on governanceindicating that economic situation and innovation have a strong correlation. Outof the 728 units that has been reported in 1998 about 540 units were located inthe top five states, as shown in Table.3. A comparison of the earlier trendsindicate that the gap between better off states and poor states are increasing.The government funded technology development fund also exhibited a similar

regional dispersion. An analysis of entry of foreign firms and use of innovationbased funds have been found to be clustered in six locations in an independentstudy [Bowonder 2001]. The distribution of R&D centres of global firms andinnovative small firms are clustered in the same locations as shown in Fig 2 toFig. 5 [Bowonder 2001]. FDI in R&D has enormous spill-over effects. Locationaldecisions are mostly based on cluster advantages and specialization. In US aswell, the venture firms have been found to be distributed around certain locations[Lerner 2002]. In the recent years the clustering effects are becoming dominantand clusters are driving innovation. The relationship between VC and clusteringis intensifying and local linkages are becoming important. The earlier policies of deliberate dispersal is likely to be ineffective. Local factors and specialization isbecoming important for innovation.16

VC Investment in Stages: An analysis of VC investments in 1998 in variousstages is presented in Table 4. It has been reported that nearly all VCs arehesistant to invest in startups with inexperienced business personal or in firmswith unclear scalable business model, consequently seed funding in totaldisbursements is only 15 percent in 2000-01. It has increased to a higher levelcompared to what it was in 1998, indicating increased risk bearing attitude. Thetotal amount disbursed over expansion and late funding grew to about 41 percentof the total, indicating VC preference to continue funding ventures that haddemonstrated success in their enterprise. The behaviour is similar in other countries, but in India VC is a new phenomena and start-up accounted for 41percent of the total disbursements. Because of the same reason, the third stagefunding is negligible. Also in India VCs did not have any preference for turnaround investments. In US and Hong Kong this was prevalent to the extendof 16% and 23%, as shown in Table 5 . As per an earlier analysis VCFspreferred investing in early stage ventures (70 percent of the disbursement). Tillrecently, VCFs did not provide any of the following types of assistance toindustrial enterprises namely:


9/27

_ expansion capital _ buy-out finance in the form of management buy out or leverage buy-out _ acquisition finance and _ sick company rehabilitation finance.17

One of the first large management buy-out occurred in Oct 4, 2002. SatyamInfoway (SIFY) is the largest Internet Service Provider (ISP) in India. Twoventure capital funds acquired 33.4% stake of SIFY for US $20 million. The twoventure funds that picked up stake are:

_ Softbank Asia Infrastructure Fund (SAIF) _ Venture Tech Solutions Private Ltd. (VTS)SAIF will pick up 21.7 percent and VTS will pick up 11.7 percent. This is amanagement buyout. Both the VCs have picked up the stake at a price of $1.72 per ADR.Investments by Industry: The distribution of investments in India by industry isgiven in Table. 6. In the case of US, computers and Internet are the top two

venture investment categories followed by biotechnology [NSB 2002]. In India,NSB US and Israel computer related products come in the top category followedby consumer products, as shown in Table. 7. In India, electronics and telecomhave a relatively low share. The pattern till the end of 1995 is shown in Table. 8 .The pattern till 1995 was dominated by industrial products and slowly IT andsoftware started picking up. The reason for the shift has been that revenuegeneration in IT ventures are rapid in comparison with the other sectors.Contributors to the Venture Fund: The break-up of contributors to VC are given inTable. 9. About 50 percent of funds came from foreign institutional investors.The major VCFs operating in India are given in Table.10. Many of the VC funds18

did not have any prior experience, as indicated in the Table. 10 . Most of foreignfunds came after 1998. One of the major triggers that changed the complexionof the venture funds in India has been the entry of Intel. Intel Capital has usedvery systematic criteria for screening the candidates and they have extensiveexperience in assessing VCs. Most of the Intel supported VCs are well managedfirms and they acquired capability to manage business due to the supportprovided by Intel Capital. External corporate venturing has been a model used bymany firms [McNally 1997]. Intel has been aggressively using this model. Theentry of external corporate venturing is a relatively new phenomena and most of the firms supported by them are innovative firms. This phenomena enhances themanagerial expertise for assessing and supporting innovative firms.

TECHNOLOGY DEVELOPMENT BOARDGovernment of India initiated a major fund for supporting innovations in 1995.This is a quasi-venture capital fund. It supports high opportunity projects byproviding equity or loan. It is a revolving fund. Government of India operated twomore similar funds. These are smaller in scope and of limited coverage. In thecase of TDB loan or equity till the project is commercialized there is norepayment needed. After commercialization of the venture interest has to be paidback. The Technology Developed Board invests in equity capital or gives soft


10/27

loan to industrial concerns and other agencies, attempting development andcommercial application of indigenous technology or adapting importedtechnology to wider domestic applications. Though the support could be in the19

form of equity or loan the support provided to the firms so far has been

predominantly in the form of loan. They provide support to the extend of 33%provided a commercial bank supports 33% of the total project cost. This Fundhas been one of the most successful government initiatives for supportinginnovations. The success rate has been more than 80% as the selection is basedon both commercial and technical feasibility. A similar fund is envisaged for biotechnology. This scheme has produced many firsts in India. The Fund is goingto be enlarged in scope in the near future. The Board came into existencethrough a separate legislation. The technology development assistance providedby the Technology Development Board during the last five years is given inTable .11 . Transportation sector is the top category. Health and medical serviceshas come as the second largest category. Two good examples of TDB funded

cases are that of electric car and hepatitis B vaccine development. Details aregiven in the case study section.20

Case Studies on VC assisted FirmsA number of VC assisted firms were visited by one of the authors. The followingare the firms covered in the study. After interviewing the Chief Executives of 26firms, nine firms were selected and studied in detail. The firms visited andexecutives interviewed are given below:Name of the company Persons interviewedVinciti Networks Mr. P.S. RavindranathIttiam Mr. Srini RajamBharat Biotech Dr. K ElaIndus Biotech Mr. Sunil Bhaskar Venture Infotek Mr. N. Ravi Kumar SIFY Mr. R RamarajKshema Technologies Mr. A.R.Koppar Process Mind Mr. Nagendra RaoJataayu Mr. M. K. JainShantha Biotechnics Mr. K.Vara Prasad ReddyTejas Networks Mr. S. NayakReva Car Dr. U.R. MadhyasthaIcode Mr. N.G. KrishnaAvesthagen Dr. V. M. PatellMitoken Mr. S. PannalaAPIDC Venture Fund Mr. S. Naru *Network Solutions Mr. S. SarmaIonic Microsystems Mr. R. PadmanabhanAdamya Mr. N.R. MuralidharanFabmart Mr. K. VaitheeswarnInnomedia Mr. Mohan TambeDhunn-carr Mr. G.M. Iqbal *Deccanet Designs Mr. M.T. KarunakaranMistral Mr. A. Ahmed


11/27

Global Technology Ventures Mr. V. Shankar *Walden-Nikko Mr. S. Sethi *Strand Genomics Dr. Vijay ChandruChrys Capital Mr. S. Padam *Dresdner Kleinwort Mr. N. Deshmukh *Mindtree Mr. Rostow RavananMetahelix Dr. K. K. NarayananImpulsesoft Mr. Baskar * VC Executives21

The analysis of nine firms studied are reported below:TEJAS NETWORKS INDIA PVT. LTD.The vision of Tejas Networks is to create state of the art products and solutionsin the telecommunications and optical networking arena. Tejas Networks wasfounded in 2000. Tejas Networks developed software differentiated opticalnetworking products that provide high price / performance in their class, enablingcarriers to maximize revenue generating services while optimizing their overallnetwork costs. Tejas Networks also partners with leading third party equipmentvendors to build intelligent optical networks for its customers.Founders and their experience: Sanjay Nayak is the Cofounder and Chief Executive Officer. He worked as the Managing Director of Synopsys India. Hehad experience in working with Synopsys, Viewlogic Systems and CadenceDesign Systems, in US. Dr. K.N.Sivarajan is the cofounder and Chief Technology Officer of Tejas. He was a professor at Indian Institute of Science.He worked prior to this in IBM Watson Research centre. He received his Ph.Dfrom California Institute of Technology. Arnob Roy is the third co-founder andearlier he worked with Synopsis India. The Tejas team consists of outstandingprofessionals with a wealth of experience in deploying carrier class opticalnetworks in India and USA.Origin of the idea: Mr. Nayak and Dr. Sivarajan decided to create something newfor self-actualization. The wanted to create a world class product company, asthey wanted India to develop innovative telecom products. Mostly, Indian firms22

were in software services. They wanted to create products from India. This urgemade them seek venture capital as they had innovative ideas.Venture Investors: There were three venture investors for Tejas Networks in thefirst round, and they are

_ Mr. Gururaj Deshpande, Chairman of Sycamore _ Sycamore Networks, a publicly held corporation and _ ASG Omni LLC, a financial agency.In the first round the three investors funded US$ 5 million. In the second roundMr. Deshpande, Intel Capital and ILFS invested US$ 6.7 million. Intel Capital isthe strategic investment arm of Intel.Products: The main products of Tejas are cost effective SDH Multiplexer equipments designed to manage bandwidth and derive services from the opticalcore to access. Innovation in optical networking requires high levels of softwareand hardware integration capabilities. Tejas has undertaken the design and


12/27

deployment of optical networks. Through innovation and learning Tejas is able tocompete with global firms like CISCO, Nortel and Lucent. Tejas combines thecost advantage of India and the innovative strength of its founders. The opticalproducts are based on the dense wave diversion multiplexing and opticalamplification to transmit data optically at aggregate rates exceeding one terabit

per second over distances of a few thousand kms on a single strand of fibre.23Tejas Networks India Ltd, an optical networking start-up launched its intelligentoptical access product in India in less than year after its start. Intel Capitalannounced funding after the product was announced. The nine month companygot immediately its first customer, Tata Power to deploy the TJ-100 accessproduct. This is the first intelligent optical network in India. The system leveragesthe capacity creation of DWDM technology and innovative networking software.With the Internet infrastructure market growing at about 20 percent per annumTejas Networks hopes to market its TJ 100 family of products in the globalmarket. Venture funding and value addition: Tejas Network is a knowledge

integrator. The firm essentially develops network software and marketsSycamores optical networking products in India and the Asia Pacific. It alsodevelops some regionally specific networking products: The venture capital firmssupported Tejas in a number of ways:

_ The name of Deshpande added reputation and acted as a non-tradedexternality to attracted VCFs

_ Intel capital helped in wetting the business plans _ ILFS helped in co-funding through its private equity arm and _ ASG-Omni helped in developing business contacts.STRAND GENOMICSStrand Genomics is a bioinformatics company, that develop innovative

algorithms and solutions in the field of bioinformatics. Stands vision is toaccelerate the drug discovery process by developing a suite of products for 24

genomics, proteomics and in silico-biology. Use of the state of the art knowledgemanagement solutions allow nuggets of knowledge to be extracted from a largepool of data generated by high throughput technology. Though it is a new firm, ithas been able to get contract research from many global firms. It is likely to getits second stage funding. The exact amount has not been announced.Founders: A group of scientists and engineers from US and in India cametogether to become a world leader in bioinformatics. The founders werecomputer scientists with complementary skills in

_ clustering techniques _ graphics and visualizations and _ stringology.All the Board members have a Ph.D degrees and rich domain experience Dr.Vijay Chandru who is a Professor of Biochemistry at Indian Institute of Science,came from MIT. The objective of setting up Strand was to develop tools thatleverages unique high-end computational skills.Venture Funding : UTI Venture Funds picked up a 17.5 percent stake for an


13/27

undisclosed sum. UTI Venture funds picked up a 17.15 percent stake in strandafter a thorough assessment. The second stage funding is by Westbridge, anoffshorefund.25

Product: Strand Genomics had launched two products Soochika is a micro-arrayknowledge management tool and sphatika is an image classification software.The objective is to provide a tool box that addresses the most common problemsfaced by drug discovery scientists. The company has a total solutions approachto drug discovery. The tools cover modules for

_ visualization _ high dimensional data analysis _ microarray analysis _ intelligent drug prediction tools _ protein modeling and _ sequence modeling and analysis tools.Strategy : Within an year of its establishment it introduced a series of products.Strands business model is a combination of providing high-end services andbuilding out a suite of products called Oyster to improve the productivity of thedrug discovery process. Strand uses a service model that provides revenue on acontinuous basis. For example, Strand entered into a partnership with GladstoneInstitutes to analyze complex microarray data. Strand will use its proprietary dataanalysis techniques to analyze microarray data sets generated at GladstoneInstitute from experiments using Alzheimers disease related mouse models toidentify certain genes and associated regulatory networks. Strand also enteredinto partnership with Automated Cell which is a disease phenotype driven drugdiscovery company. Strand provides advanced algorithmic skill sets and software26

engineering skills to develop products and solutions for Automated Cells drugdiscovery platform which quantifies in vitro disease phenotypes for targetprioritization and validation and lead optimization in oncology and immunedisease.Strand is a unique company with skill sets normally not available. The senior team consists of a group of scientists and problem solvers encompassing theareas of computer science and biology with the requisite skills for drug discovery.Strand focuses on solutions that have resulted in huge improvements in bothproductivity and interpreting knowledge from genomic data. The solutions thatstrand provides are cost effective and scalable and hence an unbeatable

combination. Strand Genomics Cofounder Dr.R.Hariharan is in the TechnologyReview TR100 list in 2002. The service oriented and long term partnershiprelationships make Strands model a fast growth and low risk model. The secondstage funding was announced recently.AVESTHAGENAvesthagen is a fully integrated biotechnology and bioinformatics company setupprimarily to promote research and development services world wide making useof proven latest high-throughput technologies and supported by a well trained


14/27

research team. The vision of the company is to improve the productivity inagriculture and develop agro-technologies that would lead to value addition infood and pharma products. Avesthagen focuses on contract research for global27

firms and it is a cost effective research firm in genomics. Research as a business

concept it has developed research competence.Founder: The company was founded by Dr.Villoo Morawala Patel. He wasawarded a Ph.D in 1993 in plant molecular biology from the University LouisPasteur, France and work experience at University of Ghent, Belgium. Shefounded Avestha Gengzaine Technologies in April 1998.Origin of Idea: Dr Patell returned to India with high hopes and spun off Avesthagen in April 1998 with four employers using the technology developed byper at TIFR through the funding from Rockefeller Foundation. Avesthagen raisedUS$ 2 million as venture funding from ICICI Ventures, Global Trust Bank andTata Industries Ltd. The dream of Dr. Patell was to invent edible vaccines andnew plants using genomics.

Venture Capitalists: The three institutions that funded the first round (US$1.5million) are: _ ICICI Venture Funds _ Global Trust Bank and _ Tata Industries LtdICICI is one of the foremost investor and stakeholder in Avesthagen. GTB hasoffered a loan, which was later, converted into Avesthagen equity. TataIndustries picked up a stake in Avesthagen.28

Avesthagen has engaged Kotak Mahindra and KPMG as investment bankers tofacilitate the process of raising the second round funding. Avesthagen is looking

for a funding of $10 million in the second round. In 2001-2002, Avesthagen hasan income of US$ 1.5 million and it hopes to breakeven this year and reach arevenue of US$ 10 million in five years.Products and services: Avesthagen focuses on both products and services. Thisbusiness model is basically more robust, as services provide for a regular baserevenue. Avesthagen essentially provides four services:

_ providing user friendly database application and management for lifescience companies

_ providing new tools that allow the prediction of complex sequence at thegene and protein level using customized algorithms and annotation tools.

_ providing 3D fold structural insights to protein modeling

_ providing clean vital data from a given bulk sequence.Avesthagen has developed complimentary DNA libraries in 3 modules, namelystandard cDNA libraries, normalized and subtractive cDNA librariesAvesthagen was recently awarded a US patent on a segment of rice DNAsequence. This well help them in enhancing the rice productivity. The second,thrust area is edible vaccines. The vaccines will be made part of the gene in aplant food product so that it can administered easily and in a cost effective29


15/27

manner. This firm is one of the VC assisted firms that is focusing on creation of intellectual property. In this case, venture firms helped in assessing the businessmodel for its robustness.ITTIAM SYSTEMSIttiam is positioned in the fastest growing segment of the core technology space:

Digital Signal Processing Systems: DSP Systems. The DSP chip market is aboutUS$5 Billion in the year 2000, growing at 30%. The market for DSP software andsystem design is about US$9 Billion growing at more than 50% per annum.Founders and their dreams: Mr. Srini Rajam who was the head of TexasInstruments India Ltd and six colleagues decided to create a world classtechnology company in India. The drive to come together was the passion tocreate a world class technology company. Seven people with 15 to 25 years of experience came together. The challenge was to create the worlds best DSPSystems Company. Mr Srini Rajam was the head of TI India Ltd. TI India wasone of the most innovative companies in India as it topped the best companiesoperating in India that were granted US patents in the year 2000.

Venture capital: Ittiam started in 2001 with a seed capital of US$ 5 million fromGlobal Technology Ventures. GTV is an investment arm of Sivam Securities andhas an investment from Bank of America. After that in the second round the Bank30

of America Fund offered US$ 5 million for another 6.6%, a price which value thisstart-up at a staggering $75 million.Products: Within a year of their start, Ittiam has developed multiple products in alltheir target domains. This includes video imaging and audio speech products inmultimedia in addition to wireless and wireline products in communication. Ittiamalso announced its wireless products, which are IEEE 802.11 based wirelessLAN. Ittiam has developed solutions for both 802.11b standard which has abandwidth of 11MBPS and orthogonal frequency division multiplexing.Ittiam will lead the new wave of global product companies from India. Thecompany represents the collective aspiration of the team to lead the new wave of Indian technology products thriving in the global arena. Ittiam is singularlyfocussed on Digital Signal Processor based systems in wireline, wireless,audiospeech and video-imaging products.Consistent with its bold vision, Ittiam is pushing the frontiers in all the keyareasbusiness,technology and people. In business, Ittiam has chosen to go beyondthe traditional service model and has committed itself to products, bothcustomized and off the shelf technology. In technology, Ittiam selectedintegration as its strategy-algorithm, software to the actual reference board thatresides in the end equipment. On the people front, Ittiam works with thefundamental belief that the company is co-owned by all who work and share the31

dream-irrespective of the function. The company gave shares to all itsemployees.Ittiam is one of the most innovative firms operating in India with high qualityintellectual property. DSP solution is implemented on a generic platform. Ittiam


16/27

has system focus and not chip focus. The platform integrate all the interrelateddomains. The company has a full fledged marketing group and it has entered intoa strategic partnerships for overall solutions. In other words, Ittiam is a uniqueniche player with the ability to innovate. There were no technologies companiesin India and Ittiam positioned itself as a technology company. The core

competence of Ittiam is its capability to identify good windows of opportunity. Thefive aspects that distinguishes Ittiam are _ experienced team _ market focus _ world class orientation _ high level platform as the mode of integration, and _ vision to a global leader in DSP design.MINDTREE CONSULTING PVT. LTDMindtree is one of the fastest growing software companies operating in India.Mindtree was selected as one of the best places to work in InformationTechnology. Mindtree was one of the top 100 IT employers in the US within the

third year of its establishment, according to the Computerworld survey in 2002. It32focuses on state of the art technologies and high level reusable intellectualproperty.Founders: A number of highly experienced persons from some of the bestcompanies got together and worked out a plan to start a new firm. The missionwas charted out as: deliver business enabling solutions and technologies bycreating partnerships with our customers in a joyous environment for our people.The logic of their getting together was that many of todays software servicescompanies will not be able to be leaders in the emerging future. Because,knowledge enabled software requires six things to remain in the leadership

position, namely: _ domain capability _ extensive use of tools _ methodology _ quality _ innovation and _ brand positioningMr. Krishna Kumar was the chief Executive of Electronic Commerce Division,Wipro. Mr. Anjan Lahiri, who was working with Cambridge Technology Partnersis the Second Partner. Mr N.S. Parthasarathy General Manager, WiprosTechnology Solutions is the third partner. Rostow Ravanan worked with Lucent

Technologies and prior to that in KPMG. Mr Ashok Sootha who was the chief 33Executive of Wipro is the Chairman of Mindtree. Kamran Ozair who worked withCambridge Technology Partners was another founder. Scott Staples was alsowith Cambridge Technology Partners. Mr. Kalyan Banerjee who worked as thehead of Wipro Technology Solutions Division also joined the founding team.Vision of 2005The company set up a very ambitious and aggressive target:


17/27

_ to achieve a revenue of $231 million _ to be among the top 10% in our business, in terms of profit & ROI _ to be one of the top 20 globally admired companies _ to give a significant portion of our PAT to support primary education.Venture Capitalists: The first round funding was by the Founders, Global

Technology Ventures and Walden International. The first round funding was US$9.5million. In 2001 August Mindtree secured the second round funding. This wasUS$ 14.1million and this was by:

_ Global Technology Ventures _ The founders _ Walden International _ Capital International and _ Franklin Templeton Fund.34

Products and Services: Mindtree is essentially a services company. It operates insix thrust areas namely,

_ internet Technologies _ enterprise Integration and B2B _ ERP and supply chain management _ mobile platform and technologies _ application management and _ setting up offshore development centers.The strength of Mindtree is its ability to leverage its vast knowledge base toprescribe tools and architectures which will work for specific business modelsand industries. The collective experience, coupled with the creation of MindtreeLabs, ensures that the solutions will have high quality and success. The focus of Mindtree unlike the other software firms have been to leverage intellectual

property. Mindtree helps firms to improve its product design life cycle. Mindtreedeveloped a set of intellectual properties to complement the product realizationservice offering. These technology building blocks reduce the product designcycles and may be licensed as individual reusable components. It has amultiplatform, multivendor approach to application development. Mindtreeestablished its own software engineering methodology namely: Distributed RapidArchitecture Development with quality. This methodology encompasses clear processes and measurement criteria and captures organizational learning at allthe stages of product development, from concept to life cycle ownership. In three35

years time Mindtree evolved into a multicultural and multinational organization.

The word Mindtree appears in ancient Indian literature, written in 4000BCmeaning a source of eternal intellect and wisdom for all who came in contact withit, because it springs from the mind.In the interview with one of the founders he indicated that companies failnot because of market, but lack of experienced teams. Mindtree has one of thebest teams with strong business leadership. The focus of the company has beenon intensive learning. It works global firms and mostly on difficult projects andnewer state of the art areas. The main contribution of venture capitalists has


18/27

been the refinement and sharpening of the business plan.NETWORK SOLUTIONSNetwork Solutions was a Venture funded company. It focuses on convergencesolutions to network problems. It has become the preferred vendor for manyfirms for integrated data networks. Mr.S.Sharma who started this was nominated

for the outstanding Entrepreneur of the year 2000 Award. It had an income of US$ 3 million in 1994 and it reached US$ 19 million in 2001.Founder: Mr. Sharma is an electronic engineer. He worked with Motorola and HPfor sometime. Subsequent to this he implemented a number of independentprojects in Asian countries such as China, India, Singapore and Thailand. Whileworking on these projects he started a networking service firm for themultinationals operating in Bangalore. The main focus was designing networks36

that are cost effective and reliable and identifying network architectures that arereliable, secure, cost effective and platform independent.Venture capitalists: Intel capital acquired 15% of its stake in the first round

funding. This was for US$ 1.1 million. There was a sharp increase in its revenueafter 1997. During the Internet bust the management purchased the stake of Intel. Network Solutions is a private limited company, presently.Products and Services: Network solution provision is the business of thecompany. This has 800 people working. It is Indias largest vendor independentnetwork and telecom infrastructure solution provider. CISCO, Nortel, HPCabletron are its major clients. The growth of revenue of Network solutions isgiven in Fig. 6. Network Solution is a unique company as it is the largest vendor independent network infrastructure solution provider. It has become the preferredsolution provider for the large banks as well as the stock exchanges in Indiathough it is started by a single entrepreneur.The uniqueness of the firm is that none of its customers have deserted it. Thecompany has a prudent debt planning policy and cost management system. Thefirm has three domains of expertise and operates at 8 major centres in India.It manages all aspects of the network lifecycle. The managed operations of Network Solutions are shown in Fig. 7. Recently it has started providing call37

centre support. It is one of five fastest growing IT companies in India according asurvey conducted by Computer Today. It maintains its revenue through servicesand retaining its client base. One of the value added services it provides issoftware integration. The essence of learning has been collaborative learning.The learning has been hierarchical as shown in Fig. 8. The venture support byIntel Capital helped Network Solutions in enhancing the reputation. The supportprovided was mostly financial in nature.REVA The electric car companyReva is the Indias first electric car designed by Reva Electric Car Company(RECC) and is the short form for Revolutionary Electric Vehicle Alternative .The vision of Reva is to establish a tradition of excellence and leadership inenvironment friendly urban transportation by offering the best value and highestquality electric vehicles in the world. Recently they have been able to get an


19/27

export order from UK.Founders Reva is the creation of the Maini group headed by Sudershan Maini.Founded in 1973, the Maini Group is today a multi-product, multi-division,enterprise with business interests ranging from manufacture of high precisionproducts for the auto industry to electric "in-plant" material handling equipment,

from granites to abrasives and international trading. Sudershan Maini nurturedthe idea of a small car for India for 30 years but the idea conceptualized and tooka form only after Chetan Maini, his son joined Amerigon an U.S. based companyto work as a program manager on an Electric vehicle project. Chetan Maini who38

has a B.S., (Mechanical Engg) from University of Michigan and M.S.,(Mechanical Engg) from Stanford University worked for General Motors (U.S.A.)and Amerigon group of Incorporation (U.S.A.) before taking change as M.D. of Reva Electric Car Company Private Ltd. He was the team leader of the solar car team that won the GM sun race and stood 3 rd in the world solar challenger inAustralia. He was also the project leader for the hybrid electric car project at

Stanford University. Before taking charge as Managing Director of REVA ElectricCar Company (P) LTD has worked for General Motors (USA) and Amerigon Inc.(USA). Chetan Mainis experience with Maini precision products, his corebusiness, which produces high quality parts for OEMs in India and overseascame very handy. The group got its first taste of electric powered vehicles atMaini materials movement, which manufactures high tech equipment to transportmaterial people across shop floors. The company is committed to make availablefacilities, which offer the customer maximum comfort at a minimal cost and makeReva the vehicle of the future generation.Origin of the Idea: Though the first electric vehicle was built in 1834, it was theinternal combustion engine that gained popular acceptance. Gasoline drivenvehicles were faster and cheaper with a greater range. Ready availability of petroleum products resulted in a further drawback to the growth of electricvehicles. It was only in the 1970s when the world was hit with the oil crisis,people realized the increasing need for alternative energy technologies for automobiles. Growing concerns about environmental pollution only enhanced39

the interest in Electric vehicles. Mr. Maini wanted to eliminate urban air pollutionand he looked for new technologies that can be cost effective. His dream was todevelop the first electric car in India. The REVA project was started in 1994.Thefirst Reva proto type was ready in mid 1996. It was internally funded. Thisprototype was displayed in Bangalore in 1996-97 after extensive testing at theARAI, Pune.Evolution of the idea: RECC is a joint venture between Bangalore based Mainigroup and Amerigon electronic vehicle technologies (A.E.V.T. Inc.) of U.S.A.Reva has built its reputation on leading rather than following technologicalchange. In line with their motto to introduce technology ahead of the world toconsumers in India the company has technical collaboration with world-classcompanies. The company has collaboration with the following companiesAmerigon Electric Vehicle Technologies Inc ., specializes in bringing


20/27

aerospace technology to the automobile industry.Curtis Instruments Inc., USA, is a manufacturer of instrumentation, controlsand integrated systems for electric vehicles of all types. This has developed themotor controller for the electric car Tudor India Limited, a subsidiary of the largest and oldest Battery Company in

the world (located in the USA), provided the Prestolite batteries speciallymanufactured for use in the Revas high-tech Power Pack.Modular Power Systems USA, a division of TDI, is a world leader in Charger and Power supplies. The Charger for Reva, which was developed by MPS, is40

now being made in India through a technical collaboration agreement they havewith the Maini Group. The main contribution of RECC is designing, developingand manufacturing electric cars that are cost effective and easy to manufacture.Learning strategies: Maintaining quality had always been an important issue for the Maini group. Modeled on the zero principle zero defects, zero time delaysand zero inefficiencies - the Group has crafted a unique quality image for itself,

both in India and abroad. The Maini groups recognition for quality and reliabilityinclude the ISO- 9000 Certificate for 3 of its group companies. All thecomponents of Reva are thoroughly inspected and only after due verification areforwarded to the next stage of manufacture. Even though the first prototype of Reva was ready in Mid-1996, it was introduced in to the market only after extensive testing at the Automobiles Research Association of India (A.R.A.I.),Pune for homologation.RECCs product quality and reliability have helped it to secure severalInternational collaborations that include General Motors U. S. and BoschGermany.R & D Strategy: The Maini group has always viewed technology and innovationas the main driver of growth and profitability. The group has always focused oninnovation, technology, quality and reliability. The group has 2 in-house R&DCenters, recognized by D.S.I.R. (Dept of Scientific and Industrial Research, Govtof India). Reva has a 25 strong R&D team which is constantly striving to improvethe quality of product it is working to come out with a new car by the year-end.41

The company is also working on an enviable project of drive system for GeneralMotors. Keeping in trend with the international standards REVA spends almost8% of its turnover on R&D. The R&D efforts have resulted in innovativetechnologies that are patented. Apart from its design Reva deploys the following3 key patent protected technologies in its electric car namely:

_ running chassis, _ energy management system, and _ climate Control system .Market dynamics: Majority of the capital equipment is indigenously availableexcept for few sophisticated machines. This battery could be charged using a220-volt, 15-amp power source. 227-kg is the payload. Reva was developed asa completely indigenous car for India. Unlike conventional internal combustionengine car which has more than 7000 components Reva has only 1000


21/27

components and more than 95% of these components are indigenouslymanufactured. Few examples where RECC used their manufacturing philosophyinnovatively are use of color-impregnated panels to eliminate any painting at theassembly stage. This construction method reduced capital costs by 40%. Optingfor a thermo-formed (rather than injection-molded) instrument panel, dispensed

with curved glass and winding windows it selected conventional lead-acidbatteries rather than new-generation lithium types. The car is shown in Fig. 9.Institutional support: Reva received commendable support from the Departmentof Information Technology, IISc. Bangalore. Reva also receives support fromMaini Info Solutions, a subsidiary of the Maini Group. On the financial front Revareceived financial support from Technology Development Board (India).42

According to the company Government support for electric vehicle industry is notadequate. It is appropriate that this venture receives the support of thegovernment, since the technological performance of the Electric vehicle largelymeets the specifications. Technology Development Board gave RECC a new

venture loan of INR 185 million for the development and manufacturing.Organizational strategy: The marketing strategy is aimed at developing a wholenew concept in city mobility non-polluting, noiseless, affordable personaltransportation for all ages. The company has targeted to sell 1,500-2,000 cars in2002-2003. According to Mr. Maini ,Electric cars are appropriate in cityenvironments due to increased mobility, zero pollution, less parking space andquiet operation and it is particularly tailor-made for countries like India due to lowrunning and maintenance cost. The feedback shows that for most buyers, Revais their second car, which they prefer to use in-city, while their regular vehicle isused for long-distance trips. The company is also working on a platform for larger electric cars .43

The deluxe version is expected to be launched by the end of this year while ACversion, with 15-20 per cent lower range than present 80 km, is also in thepipeline. The 75 team strong R&D team at RECC is also working on heater version and another one with cooled seats. There are also plans to expand theReva platform by launching another vehicle by year-end. In the five years sinceits inception, the Reva project has cost US$20 million, with an additional US$5million to put the car into production.Features of REVA car are as follows:

_ running cost of 40 paisa per km. _ priced at Rs 254000 _ zero pollution car. _ seat two adults and two children vehicle _ easy driving as it has no clutch or gears. _ on a single charge, 'Reva' can be driven for 80 km. _ two-door hatchback and _ battery life span of 40,000 km which should last for 3-4 years in city drivingconditions.Learning from the case study: The case was aimed at understanding the electric


22/27

vehicle industry in general and Reva Electric Car Company in particular. Thisstudy on Reva gave an understanding as to how a company could leveragetechnology to indigenously develop world class products. This innovative creationfrom the Maini group was tremendously helped by Chetan Mainis previousexperience in electric vehicular technology. This is one of the biggest funded

projects that is supported by TDB.44SHANTA BIOTECHNICS PVT LTD.Shanta Biotechnics is engaged in the development, production and marketing of biotechnology based human health care products. Shanta Biotechnics developedHepatitis B Vaccine. This is named Shanvac. Shanta Biotechnics was the firstIndian company in to use recombinant DNA to create a pharmaceutical product.It is the first indigenously produced vaccine for Hepatitis B. With an estimated 42million Hepatitis B Vaccine carriers a whopping four percent of the countryspopulation India is the second large pool of carriers in the world.Founders: The man behind Shanvac is Mr. Varaprasad Reddy, an electronic

engineer by training. He was working Defense Electronics Research Lab. Thenhe started a battery making unit for supplying high power batteries to the IndianAirforce. He had the urge to do something for India and also the urge to be anentrepreneur. Mr. Varaprasad Reddy wanted to start a new industry that is morechallenging. Both innovation and entrepreneurship were his dreams. When Mr.Reddy went to US people suggested that he should focus on biotechnology asthere are many new opportunities emerging. When he attended a workshop inEurope someone mentioned about the need for vaccines in developing countries.This immediately became a trigger for action, and he worked relentlessly. Hisdream was to introduce affordable products that can have significant impact.Venture capitalists: Mr. Reddy was looking for a venture capitalist. The ForeignMinister of Oman H.E.Yusuf Bin Alwai visited Shantha Biotech when he came to45

Hyderabad. He liked the project and invested USD 1.3 million as an angelinvestor. Then the project took off. In the meanwhile Technology DevelopmentBoard gave a loan of INR 85 million (USD 1.7 million), as the first stage and SBIMutual Funds invested US$11 million and acquired 6.9% stake in ShantaBiotechnics. Subsequently TDB again gave a load of INR 180 million. In 2002Shantabiotech achieved a sales turnover of INR 300 million (US$ 6 million).Product and services: Shantha has a state of the art facility is equipped withsophisticated instrumentation for industrial R&D in modern biotechnology.Shantha Biotechnics is the largest bitotechnology company in India in the privatesector. Shanta developed Indias first genetically engineered r-DNA Hepatitis-BVaccine after five years of intense research. They developed Indias firstgenetically engineered Interform alpha 2 b shanferon. Vision of shanthaBiotechnics is: to achieve breakthroughs in modern biologicals leading todevelopment of products and services that address critical healthcare needs ataffordable cost. Shantha Biotechnics has a strength of 376 people out of which75 are R&D personnel. Shanta Biotechnics will be commencializing streptokinasein the last quarter of sept 2002. In the next 2 years Shantha will commercialize


23/27

recombinant Erthyropoeitin, insulin G-CSF and, GM-CSF.Shanta Biotechniques has a joint venture with East West Labs, USA for thedevelopment of novel therapeutic monoclonal antibodies for the treatment of different types of cancer. The targets that are being planned are46

_ non small cell lung cancer _ breast cancer _ pancreatic cancer _ colon cancer and _ melanomaShanta Biotechnics has patents for the following:

_ anti non small cell lung and colon cancer _ anti pancreatic cancer, lung cancer and melanoma _ anti pancreatic cancer and _ anti colon and breast cancer.It is a firm that is intensifying its drug discovery efforts.

Strategies and learning: Shantha Biotechnics moved quickly in the drugdiscovery cycle, through intensive learning. Shanta Biotechnics has threetechnological alliances that facilitated learning, namely

_ Shantha Marine Biotech has a joint venture with ABL Technologies tofocus on marine biotechnology products.

_ Shantha Biotech has tied up for Pfizer for marketing shanthas productslocally in India and in future in the global markets

_ Research alliance with International vaccine Institute, Korea for thetechnologies for Typhoid vaccine.47

Shantha Biotechnics is planning to go for an IPO in the near future. Before that

they are building the product pipeline. For manufacturing Shantha Biotechnicshas entered into a joint venture agreement with Biocon, located at Bangalore.The venture capitalist helped in getting a large investment from a Bank for putting up manufacturing facilities against his personal guarantee.KSHEMA TECHNOLOGIESKshema technologies was founded in 1997. It is one of the Indias first venturecapital funded software solutions companies. With an annual rate of more than125% since inception, Kshema is the countrys fastest growing softwarecompanies and has clients predominantly from global 1000 companies.Founders: Kshema is promoted by A.R. Koppar, A.Mutalik and L.B. Joseph whocame together to realize a dream of creating an employee owned organization.

The first two are engineers. They earlier worked at Wipro at senior levels. Thedream was to create a firm that is innovative and ethical.Venture Support: The three investors who invested in Kshema are:

_ Global Technology ventures _ I L & FS Venture capital corporation ltd and _ Citibank48

Global Technology Ventures have invested 50.88%, I L & F S Venture Capital


24/27

Corporation Ltd 12.69%, Citibank holds 4.61%. The software revenues in 2002was Rs 560 million. Profit after taxation was Rs 122 million. Inspite of the poor markets revenues didnt show any substantial decline.Product and services: Kshemas Software Services is a firm that has 45 clientsfrom the Global 1000 (Business Week) firms.

Kshemas mature software development is backed by years of experience indelivering software solutions in a global environment. The services are based onobject technologies, web technology, wireless solutions and automation.Automotive embedded software, in-vehicle multimedia systems, embeddedtechnologies for handheld devices etc are some of the major technologies of Kshema. Kshema has been at the forefront of handheld device evolution.Kshema has been involved in some of the worlds first technology prototypes inthis area. Some of the pioneering work Kshema has done are

_ integration of Bluetooth communications module for PDA _ design and development of a new generation of PDA and phone _ bluetooth stack for handhelds

_ voice recognition integration for new generation devices and _ word processor and spreadsheet applications for a PDA platformKshema has started providing bioinformatics services recently. Stimulation of metabolic pathways using databases, datawarehouse application for geneticsequencing etc are some of the applications. Kshema has recently developed a49

image enhancing and spot identification system to map coordinates of the proteinshots for robot excision.Kshema has strong motivation systems for inducing learning. Kshema operateson a customer centric virtual extension business model that ensures value atevery stage in its software development cycle. The three venture firms have been

able to increase the value creation in three ways, namely _ continuous monitoring of business plans _ helping to get business contacts from different countries and _ providing funding quickly. In a shortest possible the venture came intooperation as one of the venture capitalists provided the necessaryinfrastructure.50

CONCLUSIONSThe venture capital industry has started creating innovative firms in India. Duringthe last five years many new entrepreneurial firms have ventured into newproduct development and contract research for global firms. Till then Indian firms

weak in new product development. Firms like Avesthagen, Strand Genomics andBharat Biotechnics have achieved high revenue levels through revenue fromcontract research as well. Firms like Tejas Networks, Reva and Ittiam havebecome product developers for the global market. Mindtree and Kshema havegrown rapidly by focusing on new high technology business segments. Asummary of the firms covered are presented in Table 12. Venture Capitalassisted firms are still in its infancy. Management buyouts and external corporateventuring have started emerging indicating that off-shore funds are started


25/27

considering India as a potential opportunity. This will reduce the capital gap for entrepreneurial firms. Major observations are given below:1. Venture Capital is becoming a major mechanism for stimulating innovationand entrepreneurial growth. In India, this is catalyzed by the rapid growthin information technology. There is a strong need to enhance availability of

venture capital in developing countries as most of these risk averse butawareness about the role of venture capital has been very limited. Therehas to be systematic initiatives for simulating entrepreneurship throughuse of venture funds. The distortions in the capital market due to over regulations and multiple controls are also a problem that is hindering thegrowth of VCs.51

2. Expertise needed for managing new ventures and managing venturefunds is yet to evolve in India. Most of the off-shore Funds have a strongexperiential base that is absent in local institutions. Off-shore Funds havebeen able to provide support and business contacts. From the personal

interviews it is evident that off-shore funds are able to add more value tothe venture assisted firms through the provision of help in preparingreliable and precise business plans. Entrepreneurs generally focus ontechnical aspects and not on business success. Venture capitalists bringsthe balance between business and technology so that innovation becomesa commercial success.3. Most of the new ventures have benefited from venture capital, especiallythose supported by the off-shore funds. Three aspects of support providedby VCF that adds value are:

_ monitoring the business plans _ support for getting business contacts from other countries and

_ bringing an external perspective in the business plan.4. Venture capital growth and industrial clustering have a strong positivecorrelation. Foreign direct investment, starting of R&D centres, availabilityof venture capital and growth of entrepreneurial firms are gettingconcentrated into five clusters. The cost of monitoring and the cost of skillacquisition are lower in clusters, especially for innovation. Entry costs arealso lower in clusters. Creating entrepreneurship and stimulatinginnovation in clusters have to become a major concern of public policy52

makers. This is essential because only when the cultural context isconducive for risk management venture capital will take-of. Clusterssupport innovation and facilitates risk bearing. VCs prefer clustersbecause the information costs are lower. Policies for promoting dispersionof industries are becoming redundant after the economic liberalization.5. An analysis of venture assisted firms clearly shows that the factorscontributing to the success of innovative firms are essentially three fold,namely

_ strong experiential base _ vision and urge to achieve something and


26/27

_ a realistic business plan.6. Bank operated venture capital funds are relatively risk averse and theyhave a weak experiential base. Local funds are focusing on softwareservices and retail business but not innovative products. The real growthof venture capital in India started after the entry of off-shore venture funds.

India has become a preferred destination of venture funds in Asia.7. The presence of an excellent academic research institutions is aprerequisite for the success of venture firms in a location as it canprovided high quality manpower. In the case of Bombay, Madras,Hyderabad, Bangalore and New Delhi the presence of researchinstitutions have facilitated the growth of venture supported firms.8. One of the untraded externalities that stimulates venture growth is ideaentrepreneurship. Idea moves faster and evolves quickly in clusters.53

Venture capital growth has occurred in clusters in India like in US, Israel,UK and Taiwan.

9. In developing countries venture funds are not fully evolved and, it may benecessary to start public venture funds. Public venture funds can act asseeds of entrepreneurship. Special attention may be essential for this sothat commercial and technical perspectives are integrated. In developingcountries public policy should support and evolve institutional systems for stimulating public venture funds. The government supported quasi-venturefund, namely Technology Development Board has been effective instimulating innovations in India. Good corporate governance of venturefunds is one of the critical success factors that has helped TechnologyDevelopment Board to select and support innovations.To sum up, developing countries have to harmonize the capital market

requirements and venture capital needs so that they can stimulateentrepreneurial firms that focus on high-tech innovations. Though most of venture funds state that high technology is their priority only firms started byexperienced persons find support by VCFs. Capability for assessing ventureprojects continues to be a weak area in the case of developing countries such asIndia because of the lack of prior experience.54

ReferencesB. Bowonder [2001], Globalization of R&D, Interdisciplinary Science Reviews ,Vol. 26, No. 3, Pp 191-203.V. P. Chitale [1983], Risk Capital for Industry, Allied , New Delhi.

R. Dossani and M. Kenney [2002], Creating an Environment for Venture Capitalin India, World Development , Vol. 30, No. 2 Pp 227-253.P. Gompers and J Lerner [2002], The Venture Capital Cycle, MIT Press ,Cambridge.IVCA [2000], VC Industry in India, IVCA, Bombay.J Lerner [2002], Venture Capital, (Eds) B. Steil, D. G. Victor and R. R. Nelson,Technological Innovation and Economic Performance, Princeton University Press, Princeton, Pp 327-346.


27/27

Documents

vanture capital