It is very important to promote venture capital activity in India with a view to promote innovation, enterprise, entrepreneurial skills & ideas and conversion of scientific technology and knowledge based ideas into commercial production. It is very difficult for new startups and enterprises to raise enough capital through securities market, therefore raising funds form venture capitalists is the only viable option available. A flourishing venture capital industry in India will fill the gap between the capital requirements of technology and knowledge based startup enterprises and funding available from traditional institutional lenders such as banks. The gap exists because such startups are necessarily based on intangible assets such as human capital and on a technology-enabled mission, often with the hope of changing the world.
India’s Success Factors
India always has lacked capital because it is not endowed with traditional resources like oil deposits or mineral reserves that have enriched other nations. India’s government also is empowered (and constrained) by the world’s largest democracy. Over the last decades, India has attracted very little foreign investment. Over the last 25 years, India has pulled in less than one-fourth the foreign capital China has.
Historically India’s large, family-run groups have filled the country’s capital voids by serving as the best—and most easily obtainable—source of capital to entrepreneurs. India’s largest family groups, such as the Birlas, Ambanis, Hindujas, Munjals, Bajajs, Godrejs and many others, all have followed a similar pattern, using their own internal resources to grow and prosper.
The rise of family groups is happening against a backdrop of very strong macroeconomic performance and trends in India. In other words, the country is generally ripe for foreign investment, for many reasons.
- Strong macroeconomic performance
After several decades of anemic growth, India has emerged as one of the fastest-growing economies globally. India’s GDP growth rate has averaged seven percent over the last decade, resulting in a doubling of real GDP and a two-thirds increase in per-capita real income. Driven by strong domestic demand, an increased pace of investment in until the now underdeveloped infrastructure sector, increased export competitiveness and favorable demographics, India’s growth seems eminently sustainable.
High capital efficiency
Driven by a historical scarcity of capital, Indian entrepreneurs have learned to be capital efficient. As the chart shows, Indian companies generate better return-on-equity (ROE) than their international peers.
- An improving regulatory environment
Anyone who has ever done business in India knows the complex regulatory regime can frustrate even the most seasoned international executive. The good news is that things
are improving. Over the past twenty years, Indian governments, led by both major political parties at the federal and state levels, have consistently implemented pro-business reforms in sectors starved for capital. Progressive business leaders are rarely satisfied at the pace of change—but it is happening. India’s largest private-sector companies, whether traditional, family conglomerates or first-generation entrepreneurs (e.g. Infosys, Airtel), have executed astonishingly rapid ascents across previously staid, highly regulated industries. These include IT services, telecommunications, power, insurance and real-estate development.
5 SECTORS RIPE FOR INVESTMENT/GROWTH IN INDIA
Any VC looks for those investments in starups that exhibit the following characteristics:
- Large market opportunity
Supportive regulatory structure
- FINANCIAL SERVICES
At a rural bank branch in North India, the smell of decaying paper infuses the branch with an air of stagnation, while the lack of electronic infrastructure all but ensures inefficient transactions. Urban banks looked quite similar only ten years ago. But over the past decade, massive investment in public and private banking infrastructure, and broader liberalization of the banking sector, has changed the urban retail-banking landscape.
Extending high-quality banking infrastructure beyond Tier 1 cities is the next challenge for traditional banking in India. Mobile technologies, alternative distribution of financial products and stronger, non-banking financial corporations, supported by experienced investors, all will play roles in expanding access to financial products for Indian citizens.
India’s financial-inclusion metrics, which remain low today despite a decade of strong growth, should also exhibit rapid improvement. Today, fewer than five percent of Indian households have life insurance. Fewer than 10% invest in equity markets, and fewer than 60% have access to the formal banking system. Over the next decade, as India’s gross-domestic savings quadruple and the country adds incremental financial savings equivalent to three to four times the total financial savings added since independence, the entire financial sector will see rapid growth.
As India is not a developed nation therefore the need for new road, power, housing and wate projects are still high on demand.
India needs more roads, railways, power, housing and water if growth is to continue at 7%+ per year. Migration into cities, and the increasing population density that migration brings, make infrastructure improvements even more urgent. The poor state of India’s infrastructure is a common complaint among visitors to India and among most Indians as well.
The good news is that state and federal governments have woken up to the need to strengthen India’s infrastructure. Recent electoral trends have shown that India’s voters are eager to reward good governance, and improving infrastructure is the most visible sign of good governance in India. Consequently, state and federal governments are liberalizing infrastructure sectors to increase foreign-fund inflows and private-sector participation. This has created a virtuous cycle of more rapid infrastructure development, positive investment returns and, thus, more investment. Analysts estimate that over the next decade, India should see infrastructure investments of INR 62 trillion, dominated by investments in power, roads, railways and irrigation.
- DOMESTIC CONSUMPTION
In India most of the population are from the middle class background and this large group is now fuelling India’s consumption boom. India’s domestic private consumption has grown at a 12% CAGR over the last two decades and is expected to more than triple to INR 115 trillion over the next decade. This would make India’s domestic- consumption economy, roughly the size of Mexico today, as large as that of France by 2020.
Also, as per-capita domestic consumption grows, the mix of the average Indian’s consumption basket will change; bare essentials like food and clothing will comprise a lower proportion of consumption, while the next level of economic essentials (healthcare, education, housing) and discretionary items (communication, recreation, branded foods) will rise in relative importance.
As overall demand increases, and demand patterns change, opportunities will emerge to:
- Sell newer products and services to the Great Indian Middle Class. Examples would be branded, edible oils in place of unbranded ones, or reliable, high-quality healthcare;
- Sell these products and services through newer retail formats, such as big-format/modern retail stores in addition to traditional, neighborhood “kirana” stores;
- Offer products and services through newer and broader channels. Marketers may address the rural and semi-urban markets instead of focusing only on urban customers, and explore Internet-based channels for traditionally offline businesses.
- THE AUTOMOBILE SECTOR IN INDIA-
Automobile Industry have been at an increasing rate as India has witnessed a major economic
liberalization over the years in terms of various industries. The automobile sector in India is growing by 18 %. The automobile sector in the Indian industry is one of the high performing sectors of the Indian economy. This has contributed largely in making India a prime destination for many international players in the automobile industry who wish to set up their businesses in India.
The automobile industry in India is growing by 18 percent per year. The automobile sector in India was opened up to foreign investments in the year 1991. 100% Foreign Direct Investment (FDI) is allowed in the automobile industry in India. The production level of the automobile sector has increased from 2 million in 1991 to 9.7 million in 2006 after the participation of global players in the sector.
- IT – THE MOST PROMISING SECTOR OF THE 21st CENTURY
Scientific, technology and knowledge based ideas properly supported by venture capital can be propelled into a powerful engine of economic growth and wealth creation in a sustainable manner. In various developed and developing economies venture capital has played a significant developmental role. India, along with Israel, Taiwan and the United States, is recognized for its globally competitive high technology and human capital. The success India has achieved particularly in software and information technology of success against several odds such as inadequate infrastructure, expensive hardware, restricted access to foreign resources and limited domestic demand, is a pointer to the hidden potential it has in the field of knowledge and technology based industry. India has the second largest English speaking scientific and technical manpower in the world. Some of the management (IIMs) and technology institutes (IITs) are globally known as centres of excellence.
In Silicon Valley, these very Indians have proved their potential and have carved out a prominent place in terms of wealth creation as well as credibility. At least 30% of the start-up enterprises in Silicon Valley are started/backed by Indians. Back home also, as per NASSCOM data, the turnover of software sector in India has crossed Rs 100 billion mark during 1998. The sector grew 58% on a year to year basis and exports accounted for Rs 65.3 billion while the domestic market accounted for Rs 35.1 billion. Exports grew by 67% in rupee terms and 55% in US dollar terms. The strength of software professionals grew by 14% in 1997 and has crossed 160000. The global software sector is expected to grow at 12% to 15% per annum for the next 5 to 7 years. With the inherent skills and manpower that India has, software exports will thrive with an estimated 50% growth per annum.
FUTURE SCENARIO –IN CHANGING TIMES
In the past years for long the VC industry in India were used to invest in IT projects and the above mentioned sectors like infrastructure, automobile, domestic products, and financial services as there long term investments.
But in the future Venture capitalists (VCs) and private equities (PEs) are expected to invest over $8.5 billion in India in the next five years in at least five identified areas such as biotechnology and life sciences, logistics, clean technology, film production and education. This is because of the need for skill development in India has now increased the no. of institutes which are imparting the kind of technical knowledge demanded by the emerging and growing industries.
Pollution has increased the need for clean technology and declining resources has increased the demand for biotechnology.
Making the projection, a joint Assocham and Deloitte paper, “Indian venture capital — a future scenario”, reveals that VCs and PEs, have found huge investment opportunities in the five listed areas as regulatory regime in them is gradually disappearing.
Assocham President Sajjan Jindal said that India had large opportunities in biotechnology and life sciences on the lines of retail and real estate. This sector has been attracting specialist venture capitalists from global and domestic funds. The U.S. based Life Sciences Fund has recently invested about $20 million in a Hyderabad-based pharmaceutical company. Devices and diagnostics are other areas where investors are active. It is anticipated that biotechnology and life sciences alone will attract about $1.5 billion investments from VCs and PEs by 2012. Mr. Jindal said that logistics was another area in which VCs were expected to invest in excess of $2 billion in India’s maritime infrastructure and logistics as it strengthens cargo handling facilities to meet rising demand for exports and imports.
These funds are also looking at possibilities in ancillary businesses that support maritime trade such as warehousing and container freight stations. Clean technology is still another area where VCs and PEs would grow more and more active. In 2007, investors committed $290 million in 11 clean tech investment deals compared to $140 million in nine deals in 2006.
The other prospective areas include film production and education.
With the newly accorded status of industry and professionalism on film industry, it will emerge as the new venue for VCs. A global private equity firm, with $36 billion in assets, is planning about $200 million investments in the Indian education sector by taking up strategic positions in companies offering e-learning, distant learning, vocational training and the like, says the paper.
Venture capital (VC) is financial capital provided to early-stage, high-potential, growth startup companies. The venture capital fund earns money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology and IT. In India historically 5 sectors were Financial Services, Infrastructure, Domestic Consumption, Automobile and the most important was IT Sector. But with the change in times and keeping in view of the rising problems of people Biotechnology, Clean technology, Life sciences and the entertainment sector touching Film Production and Education sector is now grabbing attention of the investors and Venture Capitalists and the future lies in these sectors.
Vidya Ratan is a student at SSCBS, DU. The views expressed are his own based upon the analysis and research he did on the topic from various books, reports and web articles. He regularly writes for Corporate Monks as a research associate. The writer takes person responsibility for the ownership of the content shared and incase some sources have not been given credit, you can directly mail him at email@example.com
- Report of K.B. Chandrasekhar Committee on Venture Capital
- Bessemer Venture Partners – October 2010 Release –Investing in India: The Power, and Potential, of Family-Run Groups
- India Venture Capital and Private Equity Report 2013 Department of Management Studies, Indian Institute of Technology Madras Chennai 600 036