Hunting for Deals

What would be the market entry strategy of a VC entering India?

With the plethora of VC funds coming into India one question that I have been mulling over is what would be the market penetration strategy? Obvious answers would include business plan competitions, entrepreneurship seminars and entrepreneur camps.

Another potential idea is corporate-venture capital partnerships.

Indian companies are cash rich. An analysis carried out by ET of balance sheets of over 1,000 companies for ‘04-05, shows that at least 100 companies have over Rs 1,000 crore each lying ‘idle’, pending utilization. Newspaper headlines scream of foreign acquisitions. In the the first 10 months of 2006, Indian companies cut more than $10 billion worth of cross-border deals, up from about $1 billion in all of 2000.

Will some of this money go in funding new ventures? There are two broad models of corporate venturing. The first model is that of Cisco, GE and Intel where the corporate runs a venture capital fund on its own. The second model is that of Nortel. From 1998 to 2001, Nortel invested in approximately 100 external start-ups through it's partner venture capital firms, acquiring usually from 5 to 20% of each venture. Nortel maintains close ties with and invests through 7 to 8 carefully selected VC firms, focused on the telecommunication space.

There are several advantages of this model with each entity bringing in specialized skills and focused expectations to the table. I think there are various ways this model can work in India. One obvious way is for corporates to participate with the VC in deal screening in areas of their interest and providing operating expertise during venture development. The trick about this is that often corporate executives do not have the necessary skill sets to work in an entrepreneurial environment. Another possible model is that corporates would probably set up an Innovation cell and seek out ideas within their organizations by asking the question: “what if we started new?” and “what would it need to get disruptive advantage?” This would help in idea generation and identification of possible entrepreneurs. Some of these could be incubated in-house and then spun off as new ventures with VC assistance.

If I were a VC in India, I would be seeking Indian companies promoting innovation as strongly as I would be seeking independent business people.