Monday, March 10, 2008

VC Funds: The Problem Of Plenty

It's long been suspected, the problem of plenty. But now it seems real. India is flush with VC funds but not enough worthy enterpreneurs. This, according to Sramana Mitra at Forbes.
Saramana is an MIT educated Silicon Valley serial enterpreneur & strategy writer. In her commentary on Indian VC space at Forbes she makes following observations.

In 2007, 50 new VC firms were added taking the total to 500, ready to fund close to $1 Bn.

According to her, the tech. enterpreneur's natural instinct to build outsourcing companies is a by product of lack of understanding of how global technology markets work. Hence BPO, Software Services & Chip Design etc., each takes less capital & begins generating revenue shortly making VC capital redundant. It further has few entry barriers. However it's the only available model in Tech VC space & has returned money hence a common investment thesis.

That nearly $1 billion of venture money, however, has been seeking other opportunities. That's made consumer Internet and mobile offerings the next stopping point; India's growing mass of connected consumer population is the target wallet. Travel, matrimonials, jobs, games and mobile payments are all segments getting substantial capital infusion. The engineering or product marketing required in building these sites is marginal, brand marketing being the big differentiator--something the Indians know how to do.

But consumer Internet alone cannot exhaust the available capital, so those who understand the subtleties of these dynamics have started diversifying their portfolios with retail, real estate and hotels. In 2005, Oak Investment Partners announced a $200 million venture fund to focus on the retail boom in India. Veteran Retail investor Jerry Gallagher india visit & a look at revenue per sq. ft at malls & stores prompted him to convince his partners to commit capital to retail.

That apart, with "Product Driven" companies absent, large available funds & not enough avenues in the traditional space, VC funds are moving to areas, where competition already exists. Retail, Real Estate, Bio-Tech, Hospitality each has bigger players making VC presence unwelcome. Add to that increasing thrust from government in creating VC funds catering to SME (read previous post) and we are facing the problem of plenty.

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