IDG Ventures seeks to find its niche in a crowded VC market.
Venture Capital companies invested $340 million in 51 investments in the first six months of this year, with more than half of this amount being invested in IT and ITES companies. While there are several VCs with multiple funds invested in the booming Indian market, one of the latecomers to this party, IDG Ventures, with over $3 billion invested globally, believes that its focus, on early stage investments, is yet a sparsely-populated (and potentially lucrative) niche.“We want to be the first professional investor in a company,” says Pat McGovern, Chairman, IDG Ventures. “Early-stage investments are more risky than late-stage opportunities favoured by our competitors.” While IDG Ventures already operates a $150-million fund in India, it is finalising a second $300-million fund here to leverage the growing number of early stage investment opportunities here. “The Indian VC market has developed much faster than expected. Entrepreneurship is no longer seen as a career gamble here,” says McGovern.
While early entrepreneurs focussed primarily on software services ideas, he believes the market has expanded in the last couple of years. “Technology is no longer just IT for Indian entrepreneurs. Now it covers medical electronics, semiconductors, software products and engineering,” McGovern explains.
The expansion in focus also means that the IDG Ventures team is swamped by up to 100 proposals every month, but only a tiny fraction is worth a second look. “We will finalise maybe 10 of these companies and invest in just a couple of them,” he says. To sieve this torrent of proposal, IDG Ventures relies on a few metrics to identify ideal investment opportunities. “There are a lot of dream concepts out there without adequate research to back up their ideas,” says McGovern.
Instead, IDG Ventures needs to see a company that will be disruptive in its field, have a “special secret sauce” that distinguishes it from its rivals and must have a viable (and scalable) business model to investors.
McGovern points to 3DSoc, a provider of 3D compression solutions (and part of this magazine’s Hottest Start-Ups listing this year; see issue dated May 18) to explain this trend. “3D modelling is a tough market, but what makes it stand out is its compression technology, which is streets ahead of the competition,” argues McGovern.
Given its early stage focus, IDG Ventures acts as something of a mentor to its portfolio, say executives, with top managers spending up to 25 per cent of their time making customer introductions to their portfolio. “We have diverse operating backgrounds ranging from IT to consulting and we can use our experience to guide new entrepreneurs,” says Sudhir Sethi, Founder, Chairman and Managing Director of IDG Ventures India. He argues that well-established VCs have graduated from (smaller) early stage investments and moved on to managing multiple funds in later tranches, often involving $20 million or more pumped into each company. “This has left the early stage market relatively quncluttered with just five or six VCs to focus on a rapidly emerging niche,” Sethi says.
Despite IDG Ventures’ bullishness on the Indian market, there could be trouble on the horizon for the industry. As the global economy slows, investors like IDG Ventures are being made to wait longer for viable returns and some options (IPO and leveraged buyouts) may have reduced or closed all together. “We don’t see a slow down in the market, only slower returns.
We have even launched funds in other markets, including a $150-million one for Eastern Europe,” McGovern contends. Actually, that’s not surprising. Unlike public equity investors, VCs invest for the long haul.