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Venture Capital and Innovation:

The Indian ExperienceB. Bowonder and Sunil Mani

Biographical Notes

Dr. B. Bowonder is Dean of Research and Chairperson of the Centre forTechnology 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]

Dr. 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]

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Venture Capital and Innovation:The Indian Experience

B. Bowonder and Sunil Mani

Abstract

This paper presents an overview of evolution of venture capital support for

innovation in India. There are three governmental supported schemes and a

large number of venture funds currently in operation. An analysis of venture

capital funding trends indicates that venture capital also has strong linkages with

innovation-based clusters. The paper also summarizes the support provided by

the venture funds to innovative firms. It has been observed that though they are

many 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. The

analysis shows that linkages between innovation, clusters and venture support

are becoming tighter. This has got immense importance in public policy arena.

Support for creating clusters and developing high-tech entrepreneurs are likely to

be the interventions that are effective.

Keywords

Venture capital, innovation, financing innovation and clusters

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BACKGROUND OF THE INDUSTRY

In the last decade, one of the most admired institutions among industrialists and

economic policy makers around the world has been the US venture capital

industry [Dossani and Kenney 2002]. The sensitivity of venture capital process

to government policies and other factors that influence entrepreneurship and

innovation was highlighted in a study by the US General Accounting office on

behalf of the Joint Economic Committee [Premus 1985]. Venture capital

entrepreneurship and innovation have been closely connected. Entrepreneurs

have long had ideas that require substantial capital to implement but lacked the

funds to finance these projects themselves [Gompers and Lerner 2002]. Venture

capital evolved as a response to this felt need. Venture capital represent one

solution to financing the high risk, potentially high-reward projects [Gompers and

Lerner 2002]. The experience of US, Taiwan and Israel show that technological

innovation and the growth of venture capital markets are closely interrelated

[Premus 1985]. It has been reported that capital markets overlook small

business 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 a

special form of venture financing. In the case of venture capital, the capital

market has to be conducive for supporting venture funding. At some level,

entrepreneurship occurs in nearby every society, but venture capital can only

exist when there is a constant flow of opportunities that have great upside

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potential [Dossani and Kenney 2002]. This study is a country overview of the

venture capital industry supported by a set of case studies.

Evolution of VC Industry in India

The first major analysis on risk capital for India was reported in 1983 [Chitale

1983]. It indicated that new companies often confront serious barriers to entry

into capital market for raising equity finance which undermines their future

prospects of expansion and diversification. It also indicated that on the whole

there is a need to revive the equity cult among the masses by ensuring

competitive return on equity investment. This brought out the institutional

inadequacies with respect to the evolution of venture capital. The role of venture

capital 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 India

The first origins of modern venture capital in India can be traced to the setting up

of a Technology Development Fund in the year 1987-88, through the levy of

access on all technology import payments [IVCA, 2000]. Technology

Development Fund was started to provide financial support to innovative and

high risk technological programmes through the Industrial Development Bank of

India. Subsequently, Government of India gave the procedures that can be used

for starting venture funding.

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The growth of VC in India has three separate phases. The first phase was the

initial phase in which the concept of VC got wider acceptance. The first period

did not really experience any substantial growth of VCs. The 1980s were

marked by an increasing disillusionment with the trajectory of the economic

system and a belief that liberalization was needed. The liberalization process

started in 1985 in a limited way. The concept of venture capital received official

recognition in 1988 with the announcement of the venture capital guidelines.

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 Government

of India to start venture funding was the World Bank. The initial funding has

been 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 that

venture capital funds received the benefit of a relatively low capital gains tax rate

which was lower than the corporate rate [Dossani and Kenney 2002]. The 1988

guidelines stipulated that VC funding firms should meet the following criteria:

technology involved should be new, relatively untried, very closely held, in

the process of being taken from pilot to commercial stage or incorporate

some significant improvement over the existing ones in India

promoters / entrepreneurs using the technology should be relatively new,

professionally or technically qualified, with inadequate resources to

finance the project.

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Between 1988 and 1994 about 11 VC funds became operational either

through reorganizing the businesses or through new entities and they are

given in Table.1.

All these followed the Government of India guidelines for venture capital activities

and have primarily supported technology oriented innovative businesses started

by first generation entrepreneurs [Verma 1997]. Most of these were operated

more like a financing operation. The main feature of this phase was that the

concept got accepted. VCs became operational in India before the liberalization

process 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 experienced

management, mandates to invest in certain states and sectors and general

regulatory problems. Many public issues by small and medium companies have

shown that the Indian investor is becoming increasingly wary of investing in the

projects of new and unknown promoters [Ramesh and Gupta 1995]. The

liberation of the economy and toning up of the capital market changed the

economic landscape. The decisions relating to issue of stocks and shares was

handled by an office namely: Controller of Capital Issues (CCI). According to

1988 VC guideline, any organization requiring to start venture funds have to

forward an application to CCI. Subsequent to the liberalization of the economy in

1991, the office of CCI was abolished in May 1992 and the powers were vested

in Securities and Exchange Board of India. The Securities and Exchange Board

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of India Act, 1992 empowers SEBI under section 11(2) thereof to register and

regulate the working of venture capital funds. This was done in 1996, through a

government notification. The power to control venture funds has been given to

SEBI only in 1995 and the notification came out in 1996. Till this time, venture

funds were dominated by Indian firms. The new regulations became the

harbinger of the second phase of the VC growth. The notification had the

following salient features:

The guidelines made it easy for both private and government firms to

enter 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 the

banks operating in India and the subsidiaries of the above, subject to RBI

permission 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 $2

million) was removed

the new regulations prohibited investment by venture capital funds in the

equity shares of any company or institution providing financial services

to promote early stage financing atleast 80 percent of the venture capital

funds shall be invested in the equity shares or equity related securities

issued by a company whose securities are not listed on any recognized

stock exchanges

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within the stipulation of 80 percent of the VCF investment, a venture

capitalist can invest in the equity share or equity related securities of the

financially weak company or a sick industrial company whose securities

may be or many not be listed on any of the recognized stock exchanges.

This condition is provided for supporting later stage and turnaround

financing by venture capitalists.

Venture capitalist can finance the companies which have already been

assisted in any of the categories mentioned above

Venture capitalist can invest the balance 20 percent of the VCF in any

listed companys securities viz shares and debentures or make inter

corporate deposit with listed companies or invest directly in R&D division

of listed companies

The second phase of VC growth attracted many foreign institutional investors.

During this period overseas and private domestic venture capitalists began

investing in VCF. The new regulations in 1996 helped in this. Though the

changes proposed in 1996 had a salutory effect, the development of venture

capital continued to be inhibited because of the regulatory regime and restricted

the FDI environment. To facilitate the growth of venture funds, SEBI appointed a

committee to recommend the changes needed in the VC funding context. This

coincided 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.

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Major recommendations of the VC committee:

The committee came to the conclusion that the venture capital industry in India is

still at a nascent stage. It also stated that with a view to promote innovation,

enterprise and conversion of scientific technology and knowledge based ideas

into commercial production, it is very important to promote venture capital activity

in India. The report prepared a vision, identified strategies for growth and how to

bridge the gap between traditional means of finance and the capital needs of the

high 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 as

internationally venture funds have evolved in an atmosphere of structural

flexibility, fiscal neutrality and operational adaptability

resource raising, investment, management and exit should be as simple

and flexible as needed and driven by global trends

venture capital should become an institutionalized industry that protects

investors and investee firms, operating in an environment suitable for

raising the large amounts of risk capital needed and for spurring

innovation through start-up firms in a wide range of high growth areas

in view of increasing global integration and mobility of capital it is

important that Indian venture capital funds as well as venture finance

enterprises are able to have global exposure and investment opportunities

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infrastructure in the form of incubators and R&D need to be promoted

using government support and private management as has successfully

been done by countries such as the US, Israel and Taiwan. This is

necessary for faster conversion of R&D and technological innovation into

commercial products.

A set of major recommendations were suggested that can help in the stimulation

of the VC industry in India, some of these are presented here

Eliminating multiplicity: There has been a multiplicity of regulations

relating to VC. There is a need for harmonization of regulations, as there

are three sets of VC regulations, namely:

SEBI (Venture Capital Regulations) 1996, Guidelines for Overseas

Venture Capital investments issued by Dept. of Economic Affairs (1995),

and CBDT Guidelines for Venture capital companies [1996]. To eliminate

multiple regulations, the committee proposed that SEBI should become

the nodal regulator for VCF so as to provide uniform hassle free, single

window regulatory framework.

Venture capital funds tax pass: VCFs are a dedicated pool of capital

and therefore operates in fiscal neutrality and are treated as pass through

vehicles. Once registered with SEBI, it should be entitled to automatic tax

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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 can

freely invest and disinvest without taking FIPB (Foreign Investment

Promotion Board / RBI (Reserve Bank of India) approvals but FVCIs have

to take FIPB / RBI approvals. It was suggested that atleast on par with

FIIs, FVCIs should be registered with SEBI and having once registered,

they should have the same facility of hassle free investments and

disinvestments without any requirement for approval from FIPB / RBI.

Augmenting the domestic pool of resources: The present pool of

funds available for venture capital is very limited and is predominantly

contributed 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 venture

capital funds should be neutral to firm structure. The government should

consider creating new structures such as limited partnerships, limited

liability partnerships and limited liability Corporations. The IPO norms of

three year track record or the project being funded by the banks or

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financial institutions should be relaxed to include the companies funded by

the registered VCF. Those companies which are funded by VCs and their

securities are listed on the stock exchanges outside the country, these

companies should be permitted to list their shares on the Indian stock

exchanges.

The second phase of VC growth was essentially a learning phase. The rapid

growth of VC during 1995 to 2000 made government examine the issues in the

light of the Chandrasekhar Committee. The second phase growth has been

mostly 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 phase

of VC growth in India.

Based on the recommendations of the committee and based on the budget

proposals 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 existing

regulations. Government considered these changes as far reaching, whereas

industry viewed this as marginal changes. The major changes brought about by

these are many fold:

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VCF is defined as fund established in the form of a Trust, a company including a

body corporate and registered with SEBI which as a dedicated pool of capital

raised in the manner specified under the Regulations; to invest in venture capital

undertakings in accordance with the Regulations. The minimum size of the fund

from 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 is

not to exceed 25% of the corpus of the fund. The new regulations allowed VCF

to participate in a companys initial public offering through the book building route

as a Qualified Institutional Buyer.

The new regulations allowed Foreign Venture Capital Investor to register with

SEBI. Also, SEBI registered Foreign Venture Capital Investors will be permitted

to make investment pursuant to the automatic route within the overall sectoral

ceiling of foreign investment without having to obtain the prior approval of the

Foreign Investment Promotion Board (FIPB). Along with this, with effect from

June 1, 2000 foreign investment in Indian securities is controlled by the

provisions of the Foreign Exchange Management Act 2000. This required that

an 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 Board

constituted 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 third

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phase of VC growth. Though the dot.com problem and global economic slow-

down affected VC funding, the software exports continued to surge. The growth

of IT exports over the year show that IT exports and VC growth has a strong

correlation. Unlike that in US, Government of India did not permit pension fund

to flow into VC. One of the basic differences between US SBIC and Indian pre

venture entrepreneurship has been that in that case of India there was no

relationship between entrepreneurship financing and VC financing. In the next

section a detailed analysis of VC trends are presented.

VC Trends in India

Initially, only Indian financial institutions were operating VC funds. Then off-shore

funds came into VCF. In 1997, Government of India supported a quasi VC fund

Technology Development Board. After the entry of offshore VC funds, the VCs

started evolving. This along with IT boom made innovative entrepreneurial firms

to evolve. The growth of VCs occurred, mostly, in selected clusters.

Growth Trends: Prior to 1988, in the absence of an organized venture capital

industry, individual investor and development financial institutions have hither to

played the role of venture capitalists in India. Initial response was poor but by

1995 the VC industry picked up. The SEBI initiated interaction with industry

participants and experts in the early 1999 led to a series of changes. Strictly

speaking the results of the earlier years and current growth are not comparable

because of the difference in capital investment requirements. In 1996-97, the

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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 the

earlier year. Though 2001 was a relatively bad year investments in VC continued

at the same level. There has been increased interest in off-shore VC funds to

invest in India. Nearly 70 VC funds were operating in India, and they have an

asset 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 VC

disbursement 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 Table

2. China supported only 11 ventures where as India supported 91 ventures. The

growth of VC has been phenomenal in the Asian region [Varma 2002]. Till

recently firms were mostly obtaining license ensured profits in India. Hence, both

home grown VCs and entrepreneurs have minimal risk evaluation skills. Capital

is 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 to

security in what essentially a risky venture (www.vcline.com). The regulatory

stance in India continued to be rigid. India would have attracted much more if the

context was less control oriented.

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Distribution of VC units: It is observed that 75 percent of the investments have

been placed in five states such as Maharashtra, Tamil Nadu, AP, Gujarat and

Karnataka. VC activities have been weak in most of the northern states. This

partly represents weak entrepreneurial spirit and lesser emphasis on governance

indicating that economic situation and innovation have a strong correlation. Out

of the 728 units that has been reported in 1998 about 540 units were located in

the top five states, as shown in Table.3. A comparison of the earlier trends

indicate 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 innovation

based funds have been found to be clustered in six locations in an independent

study [Bowonder 2001]. The distribution of R&D centres of global firms and

innovative small firms are clustered in the same locations as shown in Fig 2 to

Fig. 5 [Bowonder 2001]. FDI in R&D has enormous spill-over effects. Locational

decisions are mostly based on cluster advantages and specialization. In US as

well, the venture firms have been found to be distributed around certain locations

[Lerner 2002]. In the recent years the clustering effects are becoming dominant

and clusters are driving innovation. The relationship between VC and clustering

is intensifying and local linkages are becoming important. The earlier policies of

deliberate dispersal is likely to be ineffective. Local factors and specialization is

becoming important for innovation.

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VC Investment in Stages: An analysis of VC investments in 1998 in various

stages is presented in Table 4. It has been reported that nearly all VCs are

hesistant to invest in startups with inexperienced business personal or in firms

with unclear scalable business model, consequently seed funding in total

disbursements is only 15 percent in 2000-01. It has increased to a higher level

compared to what it was in 1998, indicating increased risk bearing attitude. The

total amount disbursed over expansion and late funding grew to about 41 percent

of the total, indicating VC preference to continue funding ventures that had

demonstrated success in their enterprise. The behaviour is similar in other

countries, but in India VC is a new phenomena and start-up accounted for 41

percent of the total disbursements. Because of the same reason, the third stage

funding is negligible. Also in India VCs did not have any preference for

turnaround investments. In US and Hong Kong this was prevalent to the extend

of 16% and 23%, as shown in Table 5. As per an earlier analysis VCFs

preferred investing in early stage ventures (70 percent of the disbursement). Till

recently, VCFs did not provide any of the following types of assistance to

industrial enterprises namely:

expansion capital

buy-out finance in the form of management buy out or leverage buy-out

acquisition finance and

sick company rehabilitation finance.

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One of the first large management buy-out occurred in Oct 4, 2002. Satyam

Infoway (SIFY) is the largest Internet Service Provider (ISP) in India. Two

venture capital funds acquired 33.4% stake of SIFY for US $20 million. The two

venture 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 a

management 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 is

given 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 followed

by consumer products, as shown in Table. 7. In India, electronics and telecom

have 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 and

software started picking up. The reason for the shift has been that revenue

generation 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 in

Table. 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 funds

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did not have any prior experience, as indicated in the Table. 10. Most of foreign

funds came after 1998. One of the major triggers that changed the complexion

of the venture funds in India has been the entry of Intel. Intel Capital has used

very systematic criteria for screening the candidates and they have extensive

experience in assessing VCs. Most of the Intel supported VCs are well managed

firms and they acquired capability to manage business due to the support

provided by Intel Capital. External corporate venturing has been a model used by

many firms [McNally 1997]. Intel has been aggressively using this model. The

entry of external corporate venturing is a relatively new phenomena and most of

the firms supported by them are innovative firms. This phenomena enhances the

managerial expertise for assessing and supporting innovative firms.

TECHNOLOGY DEVELOPMENT BOARD

Government of India initiated a major fund for supporting innovations in 1995.

This is a quasi-venture capital fund. It supports high opportunity projects by

providing equity or loan. It is a revolving fund. Government of India operated two

more similar funds. These are smaller in scope and of limited coverage. In the

case of TDB loan or equity till the project is commercialized there is no

repayment needed. After commercialization of the venture interest has to be paid

back. The Technology Developed Board invests in equity capital or gives soft

loan to industrial concerns and other agencies, attempting development and

commercial application of indigenous technology or adapting imported

technology to wider domestic applications. Though the support could be in the

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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 Fund

has been one of the most successful government initiatives for supporting

innovations. The success rate has been more than 80% as the selection is based

on both commercial and technical feasibility. A similar fund is envisaged for

biotechnology. This scheme has produced many firsts in India. The Fund is going

to be enlarged in scope in the near future. The Board came into existence

through a separate legislation. The technology development assistance provided

by the Technology Development Board during the last five years is given in

Table .11. Transportation sector is the top category. Health and medical services

has come as the second largest category. Two good examples of TDB funded

cases are that of electric car and hepatitis B vaccine development. Details are

given in the case study section.

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Case Studies on VC assisted Firms

A number of VC assisted firms were visited by one of the authors. The following

are the firms covered in the study. After interviewing the Chief Executives of 26

firms, nine firms were selected and studied in detail. The firms visited and

executives interviewed are given below:

Name of the company Persons interviewed

Vinciti 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. Madhyastha

Icode 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. Karunakaran

Mistral Mr. A. AhmedGlobal 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 Executives

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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 solutions

in the telecommunications and optical networking arena. Tejas Networks was

founded in 2000. Tejas Networks developed software differentiated optical

networking products that provide high price / performance in their class, enabling

carriers to maximize revenue generating services while optimizing their overall

network costs. Tejas Networks also partners with leading third party equipment

vendors 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. He

had experience in working with Synopsys, Viewlogic Systems and Cadence

Design 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.D

from California Institute of Technology. Arnob Roy is the third co-founder and

earlier he worked with Synopsis India. The Tejas team consists of outstanding

professionals with a wealth of experience in deploying carrier class optical

networks in India and USA.

Origin of the idea: Mr. Nayak and Dr. Sivarajan decided to create something new

for self-actualization. The wanted to create a world class product company, as

they wanted India to develop innovative telecom products. Mostly, Indian firms

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were in software services. They wanted to create products from India. This urge

made them seek venture capital as they had innovative ideas.

Venture Investors: There were three venture investors for Tejas Networks in the

first 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 round

Mr. Deshpande, Intel Capital and ILFS invested US$ 6.7 million. Intel Capital is

the 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 optical

core to access. Innovation in optical networking requires high levels of software

and hardware integration capabilities. Tejas has undertaken the design and

deployment of optical networks. Through innovation and learning Tejas is able to

compete with global firms like CISCO, Nortel and Lucent. Tejas combines the

cost advantage of India and the innovative strength of its founders. The optical

products are based on the dense wave diversion multiplexing and optical

amplification 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.

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Tejas Networks India Ltd, an optical networking start-up launched its intelligent

optical access product in India in less than year after its start. Intel Capital

announced funding after the product was announced. The nine month company

got immediately its first customer, Tata Power to deploy the TJ-100 access

product. This is the first intelligent optical network in India. The system leverages

the capacity creation of DWDM technology and innovative networking software.

With the Internet infrastructure market growing at about 20 percent per annum

Tejas Networks hopes to market its TJ 100 family of products in the global

market. Venture funding and value addition: Tejas Network is a knowledge

integrator. The firm essentially develops network software and markets

Sycamores optical networking products in India and the Asia Pacific. It also

develops some regionally specific networking products: The venture capital firms

supported Tejas in a number of ways:

The name of Deshpande added reputation and acted as a non-traded

externality 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 GENOMICS

Strand Genomics is a bioinformatics company, that develop innovative

algorithms and solutions in the field of bioinformatics. Stands vision is to

accelerate the drug discovery process by developing a suite of products for

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genomics, proteomics and in silico-biology. Use of the state of the art knowledge

management solutions allow nuggets of knowledge to be extracted from a large

pool of data generated by high throughput technology. Though it is a new firm, it

has been able to get contract research from many global firms. It is likely to get

its second stage funding. The exact amount has not been announced.

Founders: A group of scientists and engineers from US and in India came

together to become a world leader in bioinformatics. The founders were

computer 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 that

leverages unique high-end computational skills.

Venture Funding: UTI Venture Funds picked up a 17.5 percent stake for an

undisclosed sum. UTI Venture funds picked up a 17.15 percent stake in strand

after a thorough assessment. The second stage funding is by Westbridge, an off-

shore fund.

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Product: Strand Genomics had launched two products Soochika is a micro-array

knowledge management tool and sphatika is an image classification software.

The objective is to provide a tool box that addresses the most common problems

faced by drug discovery scientists. The company has a total solutions approach

to 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 and

building out a suite of products called Oyster to improve the productivity of the

drug discovery process. Strand uses a service model that provides revenue on a

continuous basis. For example, Strand entered into a partnership with Gladstone

Institutes to analyze complex microarray data. Strand will use its proprietary data

analysis techniques to analyze microarray data sets generated at Gladstone

Institute from experiments using Alzheimers disease related mouse models to

identify certain genes and associated regulatory networks. Strand also entered

into partnership with Automated Cell which is a disease phenotype driven drug

discovery company. Strand provides advanced algorithmic skill sets and software

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engineering skills to develop products and solutions for Automated Cells drug

discovery platform which quantifies in vitro disease phenotypes for target

prioritization and validation and lead optimization in oncology and immune

disease.

Strand is a unique company with skill sets normally not available. The senior

team consists of a group of scientists and problem solvers encompassing the

areas of computer science and biology with the requisite skills for drug discovery.

Strand focuses on solutions that have resulted in huge improvements in both

productivity and interpreting knowledge from genomic data. The solutions that

strand provides are cost effective and scalable and hence an unbeatable

combination. Strand Genomics Cofounder Dr.R.Hariharan is in the Technology

Review TR100 list in 2002. The service oriented and long term partnership

relationships make Strands model a fast growth and low risk model. The second

stage funding was announced recently.

AVESTHAGEN

Avesthagen is a fully integrated biotechnology and bioinformatics company setup

primarily to promote research and development services world wide making use

of proven latest high-throughput technologies and supported by a well trained

research team. The vision of the company is to improve the productivity in

agriculture and develop agro-technologies that would lead to value addition in

food and pharma products. Avesthagen focuses on contract research for global

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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 was

awarded a Ph.D in 1993 in plant molecular biology from the University Louis

Pasteur, France and work experience at University of Ghent, Belgium. She

founded 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 by

per at TIFR through the funding from Rockefeller Foundation. Avesthagen raised

US$ 2 million as venture funding from ICICI Ventures, Global Trust Bank and

Tata Industries Ltd. The dream of Dr. Patell was to invent edible vaccines and

new 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 Ltd

ICICI is one of the foremost investor and stakeholder in Avesthagen. GTB has

offered a loan, which was later, converted into Avesthagen equity. Tata

Industries picked up a stake in Avesthagen.

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Avesthagen has engaged Kotak Mahindra and KPMG as investment bankers to

facilitate 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 has

an income of US$ 1.5 million and it hopes to breakeven this year and reach a

revenue of US$ 10 million in five years.

Products and services: Avesthagen focuses on both products and services. This

business model is basically more robust, as services provide for a regular base

revenue. Avesthagen essentially provides four services:

providing user friendly database application and management for life

science companies

providing new tools that allow the prediction of complex sequence at the

gene 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, namely

standard cDNA libraries, normalized and subtractive cDNA libraries

Avesthagen was recently awarded a US patent on a segment of rice DNA

sequence. 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 a

plant food product so that it can administered easily and in a cost effective

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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 business

model for its robustness.

ITTIAM SYSTEMS

Ittiam is positioned in the fastest growing segment of the core technology space:

Digital Signal Processing Systems: DSP Systems. The DSP chip market is about

US$5 Billion in the year 2000, growing at 30%. The market for DSP software and

system 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 Texas

Instruments India Ltd and six colleagues decided to create a world class

technology company in India. The drive to come together was the passion to

create a world class technology company. Seven people with 15 to 25 years of

experience came together. The challenge was to create the worlds best DSP

Systems Company. Mr Srini Rajam was the head of TI India Ltd. TI India was

one of the most innovative companies in India as it topped the best companies

operating 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 from

Global Technology Ventures. GTV is an investment arm of Sivam Securities and

has an investment from Bank of America. After that in the second round the Bank

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of America Fund offered US$ 5 million for another 6.6%, a price which value this

start-up at a staggering $75 million.

Products: Within a year of their start, Ittiam has developed multiple products in all

their target domains. This includes video imaging and audio speech products in

multimedia in addition to wireless and wireline products in communication. Ittiam

also announced its wireless products, which are IEEE 802.11 based wireless

LAN. Ittiam has developed solutions for both 802.11b standard which has a

bandwidth of 11MBPS and orthogonal frequency division multiplexing.

Ittiam will lead the new wave of global product companies from India. The

company represents the collective aspiration of the team to lead the new wave of

Indian technology products thriving in the global arena. Ittiam is singularly

focussed 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 key areas-

business, technology and people. In business, Ittiam has chosen to go beyond

the traditional service model and has committed itself to products, both

customized and off the shelf technology. In technology, Ittiam selected

integration as its strategy-algorithm, software to the actual reference board that

resides in the end equipment. On the people front, Ittiam works with the

fundamental belief that the company is co-owned by all who work and share the

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dream-irrespective of the function. The company gave shares to all its

employees.

Ittiam is one of the most innovative firms operating in India with high quality

intellectual property. DSP solution is implemented on a generic platform. Ittiam

has system focus and not chip focus. The platform integrate all the interrelated

domains. The company has a full fledged marketing group and it has entered into

a strategic partnerships for overall solutions. In other words, Ittiam is a unique

niche player with the ability to innovate. There were no technologies companies

in India and Ittiam positioned itself as a technology company. The core

competence of Ittiam is its capability to identify good windows of opportunity. The

five 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. LTD

Mindtree is one of the fastest growing software companies operating in India.

Mindtree was selected as one of the best places to work in Information

Technology. 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. It

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focuses on state of the art technologies and high level reusable intellectual

property.

Founders: A number of highly experienced persons from some of the best

companies got together and worked out a plan to start a new firm. The mission

was charted out as: deliver business enabling solutions and technologies by

creating partnerships with our customers in a joyous environment for our people.

The logic of their getting together was that many of todays software services

companies 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 positioning

Mr. Krishna Kumar was the chief Executive of Electronic Commerce Division,

Wipro. Mr. Anjan Lahiri, who was working with Cambridge Technology Partners

is the Second Partner. Mr N.S. Parthasarathy General Manager, Wipros

Technology Solutions is the third partner. Rostow Ravanan worked with Lucent

Technologies and prior to that in KPMG. Mr Ashok Sootha who was the chief

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Executive of Wipro is the Chairman of Mindtree. Kamran Ozair who worked with

Cambridge Technology Partners was another founder. Scott Staples was also

with Cambridge Technology Partners. Mr. Kalyan Banerjee who worked as the

head of Wipro Technology Solutions Division also joined the founding team.

Vision of 2005

The company set up a very ambitious and aggressive target:

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 was

US$ 14.1million and this was by:

Global Technology Ventures

The founders

Walden International

Capital International and

Franklin Templeton Fund.

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Products and Services: Mindtree is essentially a services company. It operates in

six 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 to

prescribe tools and architectures which will work for specific business models

and industries. The collective experience, coupled with the creation of Mindtree

Labs, 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. Mindtree

developed a set of intellectual properties to complement the product realization

service offering. These technology building blocks reduce the product design

cycles and may be licensed as individual reusable components. It has a

multiplatform, multivendor approach to application development. Mindtree

established its own software engineering methodology namely: Distributed Rapid

Architecture Development with quality. This methodology encompasses clear

processes and measurement criteria and captures organizational learning at all

the stages of product development, from concept to life cycle ownership. In three

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years time Mindtree evolved into a multicultural and multinational organization.

The word Mindtree appears in ancient Indian literature, written in 4000BC

meaning a source of eternal intellect and wisdom for all who came in contact with

it, because it springs from the mind.

In the interview with one of the founders he indicated that companies fail

not because of market, but lack of experienced teams. Mindtree has one of the

best teams with strong business leadership. The focus of the company has been

on intensive learning. It works global firms and mostly on difficult projects and

newer state of the art areas. The main contribution of venture capitalists has

been the refinement and sharpening of the business plan.

NETWORK SOLUTIONS

Network Solutions was a Venture funded company. It focuses on convergence

solutions to network problems. It has become the preferred vendor for many

firms 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 HP

for sometime. Subsequent to this he implemented a number of independent

projects in Asian countries such as China, India, Singapore and Thailand. While

working on these projects he started a networking service firm for the

multinationals operating in Bangalore. The main focus was designing networks

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that are cost effective and reliable and identifying network architectures that are

reliable, 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 revenue

after 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 the

company. This has 800 people working. It is Indias largest vendor independent

network and telecom infrastructure solution provider. CISCO, Nortel, HP

Cabletron are its major clients. The growth of revenue of Network solutions is

given in Fig. 6. Network Solution is a unique company as it is the largest vendor

independent network infrastructure solution provider. It has become the preferred

solution provider for the large banks as well as the stock exchanges in India

though it is started by a single entrepreneur.

The uniqueness of the firm is that none of its customers have deserted it. The

company has a prudent debt planning policy and cost management system. The

firm 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 call

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centre support. It is one of five fastest growing IT companies in India according a

survey conducted by Computer Today. It maintains its revenue through services

and retaining its client base. One of the value added services it provides is

software integration. The essence of learning has been collaborative learning.

The learning has been hierarchical as shown in Fig. 8. The venture support by

Intel Capital helped Network Solutions in enhancing the reputation. The support

provided was mostly financial in nature.

REVA The electric car company

Reva 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 in

environment friendly urban transportation by offering the best value and highest

quality electric vehicles in the world. Recently they have been able to get an

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 precision

products for the auto industry to electric "in-plant" material handling equipment,

from granites to abrasives and international trading. Sudershan Maini nurtured

the idea of a small car for India for 30 years but the idea conceptualized and took

a form only after Chetan Maini, his son joined Amerigon an U.S. based company

to work as a program manager on an Electric vehicle project. Chetan Maini who

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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 3rd in the world solar challenger in

Australia. He was also the project leader for the hybrid electric car project at

Stanford University. Before taking charge as Managing Director of REVA Electric

Car Company (P) LTD has worked for General Motors (USA) and Amerigon Inc.

(USA). Chetan Mainis experience with Maini precision products, his core

business, which produces high quality parts for OEMs in India and overseas

came very handy. The group got its first taste of electric powered vehicles at

Maini materials movement, which manufactures high tech equipment to transport

material people across shop floors. The company is committed to make available

facilities, which offer the customer maximum comfort at a minimal cost and make

Reva the vehicle of the future generation.

Origin of the Idea: Though the first electric vehicle was built in 1834, it was the

internal combustion engine that gained popular acceptance. Gasoline driven

vehicles were faster and cheaper with a greater range. Ready availability of

petroleum products resulted in a further drawback to the growth of electric

vehicles. 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 enhanced

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the interest in Electric vehicles. Mr. Maini wanted to eliminate urban air pollution

and he looked for new technologies that can be cost effective. His dream was to

develop the first electric car in India. The REVA project was started in 1994.The

first Reva proto type was ready in mid 1996. It was internally funded. This

prototype was displayed in Bangalore in 1996-97 after extensive testing at the

ARAI, Pune.

Evolution of the idea: RECC is a joint venture between Bangalore based Maini

group and Amerigon electronic vehicle technologies (A.E.V.T. Inc.) of U.S.A.

Reva has built its reputation on leading rather than following technological

change. In line with their motto to introduce technology ahead of the world to

consumers in India the company has technical collaboration with world-class

companies. The company has collaboration with the following companies

Amerigon Electric Vehicle Technologies Inc., specializes in bringing

aerospace technology to the automobile industry.

Curtis Instruments Inc., USA, is a manufacturer of instrumentation, controls

and integrated systems for electric vehicles of all types. This has developed the

motor 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 specially

manufactured 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, is

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now being made in India through a technical collaboration agreement they have

with the Maini Group. The main contribution of RECC is designing, developing

and 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 delays

and zero inefficiencies - the Group has crafted a unique quality image for itself,

both in India and abroad. The Maini groups recognition for quality and reliability

include the ISO- 9000 Certificate for 3 of its group companies. All the

components of Reva are thoroughly inspected and only after due verification are

forwarded 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 several

International collaborations that include General Motors U. S. and Bosch

Germany.

R & D Strategy: The Maini group has always viewed technology and innovation

as the main driver of growth and profitability. The group has always focused on

innovation, technology, quality and reliability. The group has 2 in-house R&D

Centers, recognized by D.S.I.R. (Dept of Scientific and Industrial Research, Govt

of India). Reva has a 25 strong R&D team which is constantly striving to improve

the quality of product it is working to come out with a new car by the year-end.

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The company is also working on an enviable project of drive system for General

Motors. Keeping in trend with the international standards REVA spends almost

8% of its turnover on R&D. The R&D efforts have resulted in innovative

technologies that are patented. Apart from its design Reva deploys the following

3 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 available

except for few sophisticated machines. This battery could be charged using a

220-volt, 15-amp power source. 227-kg is the payload. Reva was developed as

a completely indigenous car for India. Unlike conventional internal combustion

engine car which has more than 7000 components Reva has only 1000

components and more than 95% of these components are indigenously

manufactured. Few examples where RECC used their manufacturing philosophy

innovatively are use of color-impregnated panels to eliminate any painting at the

assembly stage. This construction method reduced capital costs by 40%. Opting

for a thermo-formed (rather than injection-molded) instrument panel, dispensed

with curved glass and winding windows it selected conventional lead-acid

batteries rather than new-generation lithium types. The car is shown in Fig. 9.

Institutional support: Reva received commendable support from the Department

of Information Technology, IISc. Bangalore. Reva also receives support from

Maini Info Solutions, a subsidiary of the Maini Group. On the financial front Reva

received financial support from Technology Development Board (India).

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According to the company Government support for electric vehicle industry is not

adequate. It is appropriate that this venture receives the support of the

government, since the technological performance of the Electric vehicle largely

meets 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 whole

new concept in city mobility non-polluting, noiseless, affordable personal

transportation for all ages. The company has targeted to sell 1,500-2,000 cars in

2002-2003. According to Mr. Maini ,Electric cars are appropriate in city

environments due to increased mobility, zero pollution, less parking space and

quiet operation and it is particularly tailor-made for countries like India due to low

running and maintenance cost. The feedback shows that for most buyers, Reva

is their second car, which they prefer to use in-city, while their regular vehicle is

used for long-distance trips. The company is also working on a platform for larger

electric cars.

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The deluxe version is expected to be launched by the end of this year while AC

version, with 15-20 per cent lower range than present 80 km, is also in the

pipeline. 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 the

Reva platform by launching another vehicle by year-end. In the five years since

its inception, the Reva project has cost US$20 million, with an additional US$5

million 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 driving

conditions.

Learning from the case study: The case was aimed at understanding the electric

vehicle industry in general and Reva Electric Car Company in particular. This

study on Reva gave an understanding as to how a company could leverage

technology to indigenously develop world class products. This innovative creation

from the Maini group was tremendously helped by Chetan Mainis previous

experience in electric vehicular technology. This is one of the biggest funded

projects that is supported by TDB.

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SHANTA BIOTECHNICS PVT LTD.

Shanta Biotechnics is engaged in the development, production and marketing of

biotechnology based human health care products. Shanta Biotechnics developed

Hepatitis B Vaccine. This is named Shanvac. Shanta Biotechnics was the first

Indian company in to use recombinant DNA to create a pharmaceutical product.

It is the first indigenously produced vaccine for Hepatitis B. With an estimated 42

million Hepatitis B Vaccine carriers a whopping four percent of the countrys

population 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. Then

he started a battery making unit for supplying high power batteries to the Indian

Airforce. He had the urge to do something for India and also the urge to be an

entrepreneur. Mr. Varaprasad Reddy wanted to start a new industry that is more

challenging. Both innovation and entrepreneurship were his dreams. When Mr.

Reddy went to US people suggested that he should focus on biotechnology as

there are many new opportunities emerging. When he attended a workshop in

Europe someone mentioned about the need for vaccines in developing countries.

This immediately became a trigger for action, and he worked relentlessly. His

dream was to introduce affordable products that can have significant impact.

Venture capitalists: Mr. Reddy was looking for a venture capitalist. The Foreign

Minister of Oman H.E.Yusuf Bin Alwai visited Shantha Biotech when he came to

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Hyderabad. He liked the project and invested USD 1.3 million as an angel

investor. Then the project took off. In the meanwhile Technology Development

Board gave a loan of INR 85 million (USD 1.7 million), as the first stage and SBI

Mutual Funds invested US$11 million and acquired 6.9% stake in Shanta

Biotechnics. Subsequently TDB again gave a load of INR 180 million. In 2002

Shantabiotech achieved a sales turnover of INR 300 million (US$ 6 million).

Product and services: Shantha has a state of the art facility is equipped with

sophisticated instrumentation for industrial R&D in modern biotechnology.

Shantha Biotechnics is the largest bitotechnology company in India in the private

sector. Shanta developed Indias first genetically engineered r-DNA Hepatitis-B

Vaccine after five years of intense research. They developed Indias first

genetically engineered Interform alpha 2 b shanferon. Vision of shantha

Biotechnics is: to achieve breakthroughs in modern biologicals leading to

development of products and services that address critical healthcare needs at

affordable cost. Shantha Biotechnics has a strength of 376 people out of which

75 are R&D personnel. Shanta Biotechnics will be commencializing streptokinase

in the last quarter of sept 2002. In the next 2 years Shantha will commercialize

recombinant Erthyropoeitin, insulin G-CSF and, GM-CSF.

Shanta Biotechniques has a joint venture with East West Labs, USA for the

development of novel therapeutic monoclonal antibodies for the treatment of

different types of cancer. The targets that are being planned are

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non small cell lung cancer

breast cancer

pancreatic cancer

colon cancer and

melanoma

Shanta 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 drug

discovery cycle, through intensive learning. Shanta Biotechnics has three

technological alliances that facilitated learning, namely

Shantha Marine Biotech has a joint venture with ABL Technologies to

focus on marine biotechnology products.

Shantha Biotech has tied up for Pfizer for marketing shanthas products

locally in India and in future in the global markets

Research alliance with International vaccine Institute, Korea for the

technologies for Typhoid vaccine.

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

they are building the product pipeline. For manufacturing Shantha Biotechnics

has 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 TECHNOLOGIES

Kshema technologies was founded in 1997. It is one of the Indias first venture

capital funded software solutions companies. With an annual rate of more than

125% since inception, Kshema is the countrys fastest growing software

companies and has clients predominantly from global 1000 companies.

Founders: Kshema is promoted by A.R. Koppar, A.Mutalik and L.B. Joseph who

came together to realize a dream of creating an employee owned organization.

The first two are engineers. They earlier worked at Wipro at senior levels. The

dream 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

Citibank

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

Corporation Ltd 12.69%, Citibank holds 4.61%. The software revenues in 2002

was 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 clients

from the Global 1000 (Business Week) firms.

Kshemas mature software development is backed by years of experience in

delivering software solutions in a global environment. The services are based on

object technologies, web technology, wireless solutions and automation.

Automotive embedded software, in-vehicle multimedia systems, embedded

technologies 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 in

this 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 platform

Kshema has started providing bioinformatics services recently. Stimulation of

metabolic pathways using databases, datawarehouse application for genetic

sequencing etc are some of the applications. Kshema has recently developed a

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image enhancing and spot identification system to map coordinates of the protein

shots for robot excision.

Kshema has strong motivation systems for inducing learning. Kshema operates

on a customer centric virtual extension business model that ensures value at

every 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 into

operation as one of the venture capitalists provided the necessary

infrastructure.

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CONCLUSIONS

The venture capital industry has started creating innovative firms in India. During

the last five years many new entrepreneurial firms have ventured into new

product development and contract research for global firms. Till then Indian firms

weak in new product development. Firms like Avesthagen, Strand Genomics and

Bharat Biotechnics have achieved high revenue levels through revenue from

contract research as well. Firms like Tejas Networks, Reva and Ittiam have

become product developers for the global market. Mindtree and Kshema have

grown rapidly by focusing on new high technology business segments. A

summary of the firms covered are presented in Table 12. Venture Capital

assisted firms are still in its infancy. Management buyouts and external corporate

venturing have started emerging indicating that off-shore funds are started

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 innovation

and entrepreneurial growth. In India, this is catalyzed by the rapid growth

in information technology. There is a strong need to enhance availability of

venture capital in developing countries as most of these risk averse but

awareness about the role of venture capital has been very limited. There

has to be systematic initiatives for simulating entrepreneurship through

use of venture funds. The distortions in the capital market due to over

regulations and multiple controls are also a problem that is hindering the

growth of VCs.

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2. Expertise needed for managing new ventures and managing venture

funds is yet to evolve in India. Most of the off-shore Funds have a strong

experiential base that is absent in local institutions. Off-shore Funds have

been able to provide support and business contacts. From the personal

interviews it is evident that off-shore funds are able to add more value to

the venture assisted firms through the provision of help in preparing

reliable and precise business plans. Entrepreneurs generally focus on

technical aspects and not on business success. Venture capitalists brings

the balance between business and technology so that innovation becomes

a commercial success.

3. Most of the new ventures have benefited from venture capital, especially

those supported by the off-shore funds. Three aspects of support provided

by 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 positive

correlation. Foreign direct investment, starting of R&D centres, availability

of venture capital and growth of entrepreneurial firms are getting

concentrated into five clusters. The cost of monitoring and the cost of skill

acquisition are lower in clusters, especially for innovation. Entry costs are

also lower in clusters. Creating entrepreneurship and stimulating

innovation in clusters have to become a major concern of public policy

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makers. This is essential because only when the cultural context is

conducive for risk management venture capital will take-of. Clusters

support innovation and facilitates risk bearing. VCs prefer clusters

because the information costs are lower. Policies for promoting dispersion

of industries are becoming redundant after the economic liberalization.

5. An analysis of venture assisted firms clearly shows that the factors

contributing to the success of innovative firms are essentially three fold,

namely

strong experiential base

vision and urge to achieve something and

a realistic business plan.

6. Bank operated venture capital funds are relatively risk averse and they

have a weak experiential base. Local funds are focusing on software

services and retail business but not innovative products. The real growth

of 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 a

prerequisite for the success of venture firms in a location as it can

provided high quality manpower. In the case of Bombay, Madras,

Hyderabad, Bangalore and New Delhi the presence of research

institutions have facilitated the growth of venture supported firms.

8. One of the untraded externalities that stimulates venture growth is idea

entrepreneurship. Idea moves faster and evolves quickly in clusters.

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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 be

necessary to start public venture funds. Public venture funds can act as

seeds of entrepreneurship. Special attention may be essential for this so

that commercial and technical perspectives are integrated. In developing

countries public policy should support and evolve institutional systems for

stimulating public venture funds. The government supported quasi-venture

fund, namely Technology Development Board has been effective in

stimulating innovations in India. Good corporate governance of venture

funds is one of the critical success factors that has helped Technology

Development 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 stimulate

entrepreneurial firms that focus on high-tech innovations. Though most of

venture funds state that high technology is their priority only firms started by

experienced persons find support by VCFs. Capability for assessing venture

projects continues to be a weak area in the case of developing countries such as

India because of the lack of prior experience.

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