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Norwest Venture Partners (NVP), a US-based venture capital firm, manages more than $1.8 billion in venture capital. Focussing on investments in information technology, including semiconductor and components, systems, software, services and consumer/Internet technologies, NVP has funded over 350 companies since inception.

Promod Haque, Managing Partner, NVP, has more than 15 years of experience in the venture capital industry. He has been ranked as a top dealmaker on the annual Forbes Midas List for the past five years. In 2004, Forbes named him number one venture capitalist based on performance over the last decade.

He was an early investor and a board member of Cerent (acquired by Cisco), Siara Systems (acquired by Redback Networks), OnDisplay (acquired by Vignette), Winphoria Networks (acquired by Motorola) and Extreme Networks.

His current investments include AmberPoint, Cast Iron Systems, FireEye, Open-Silicon, Persistent Systems, Sonoa Systems, Veraz Networks, Veveo and Virtela Communications.

In an e-mail interview, Pramod Haque shares his views on the Indian market. Excerpts:

As a venture capitalist how do you view the Indian market?

We prefer to invest in companies that target global markets, but (for example) with the spending and growth opportunities within the wireless industry (and other industries in India), new markets are being created and therefore, we believe India-focused start-ups (start-ups that serve the local market) will continue to attract funding.

In fact, we just partnered with Reliance Capital, Television 18 Group (TV18), and seasoned travel industry executives to form Yatra Online (www.yatra.in) , the first online and centralised travel services company for the India market. This was a direct investment in an Indian company focused in the local market, and we are extremely bullish on the company and this sector.

How many companies have you invested in, and what is the investment amount?

Our firm has already invested in more than 18 companies that are based in India or have a significant presence in India. These investments alone would probably equal somewhere around $150 million over the lifespan of the company. We also have other direct and `hybrid' investments in the pipeline that will be announced this year in India.

Where does India stand now compared to five years ago during the dotcom boom?

Let's look at the evolution of the IT industry in India from my perspective. The first phase began during 1998 and 1999 when a number of software companies provided Y2K services to corporate America — that was only the beginning. In the second phase, the IT bubble bust happened.

During this phase, the need for significant cost reductions prompted American companies to turn to India-based IT services companies such as Wipro to provide system implementation and services to corporate America.

Then came phase three, which is what we call the emergence of product development services. During this phase, US companies began doing software and hardware product development in India.

Today I believe we are in phase four — Product development and Product germination in India. We are seeing the rise of offshore development centres (ODCs) in addition to services and implementation services that we saw during phase three.

The Indian software industry is now providing core development work to both the US and Europe, and US venture capital-backed start-ups have begun to either sub contract product development to ODCs or they are setting up their own ODCs. The last part of phase four has also already begun in India, but it is still in its infancy. During phase four, product ideas will germinate in India. New companies will be founded in India, and from day one, intellectual property/products will be created to serve the needs of American and European companies. The OPD (Outsourced Product Development) sector is extremely important to India's IT evolution and a critical part of phase four. We just made a $13.8-million investment in the Pune-based Persistent Systems, an Outsourced Software Product Development company. The OPD space is estimated to be $11 billion by 2008, according to a recent Nasscom-McKinsey report.

What sort of changes do you see among Indian entrepreneurs vis-a-vis five years ago?

I think Indian entrepreneurs are much more experienced than they were five years ago. These entrepreneurs have been exposed to diverse outsourcing work and they truly understand global trends.

Also, the local market opportunity in India really did not exist five years ago. With the telecommunication infrastructure in place in India, there are huge investment opportunities and a chance for entrepreneurs to build new companies.

In the past, entrepreneurs had to have a strong relationship with the government to obtain funding. Today, the markets are more open, and there are more opportunities for entrepreneurs with good ideas and the right experience to attract funding.

What would be your advice to an Indian entrepreneur seeking venture capital funding?

We always look at the same parameters when evaluating companies and my advice to Indian entrepreneurs would be to consider these parameters when seeking VC funding: The size of the market. Does the company have a strong management team? Can this new idea create a standalone company? Is this a unique, breakthrough project with world-class technology?

Is this technology defendable and is there a unique value proposition to the customer? (ROI - does this solve a customer pain point)? Is the business capital efficient?

How do you rate the Indian entrepreneur, vis-a-vis Chinese or Americans?

Entrepreneurs in India tend to be more cash-conscious and capital-efficient. But in the product arena, they are less connected to their customers (particularly since the early adopters of technology are in the US and entrepreneurs often look for our help in getting them in front of these potential customers).

We help our Indian entrepreneurs with marketing, customer intimacy and product management functions when they are expanding their market to the US.

Which are the promising sectors in India for investment and why?

In terms of investment opportunities in India, we think there are a lot of opportunities in the local consumer markets (both Internet and mobile).

As penetration of broadband and wireless increases, we think the Indian market will mimic China.

There are also investment opportunities for mid-stage product companies in India, and of course, hybrid investments (as I mentioned we have approximately 18 hybrid or cross-border investments in our portfolio).

A SWOT analysis

From a VC point of view:

Strengths: Capital efficiency and availability of talent are key strengths in India. In addition, most of the businesses/technology sectors have the potential to become multi-billion dollar companies. In the long term we believe the companies with the right ideas could even exceed the market capital and revenue of the current top companies in India.

Weaknesses: In order for India to attract venture capital investments for early stage, groundbreaking ideas, India needs to replicate open business practices (that are implemented in the US) in all sectors such as telecommunications, media, and financial services. For example, there should be no restriction on the ownership held in Indian companies by foreign venture capitalists or foreign companies. Until this changes, I see this being a huge challenge for Indian start-ups and the growth of venture capital investing in India.

Opportunities: We believe early stage venture capital in India is still in its infancy. Investment opportunities in India are enormous, and they will continue to increase over time. Sustainable venture capital models take time and this is a process that will need to become more mature in the next three to five years. NVP is helping to create this ecosystem by making multiple investments in India. Also, while broadband penetration has greatly increased in India in the past few years, the rate of broadband adoption has a long way to go and will continue to rise significantly. The opportunity for additional broadband penetration, combined with a sizeable middle class with tremendous spending power, makes today's landscape very exciting.

Threats: Other low-cost outsourcing destinations such as Eastern Europe could be a threat to India.

Also, China could be a threat. I am a huge proponent of India and the US forming a tight alliance on the technology front to make sure we remain competitive in today's global market. In fact, NVP is working closely with US leaders on a US-India strategic alliance proposal.

Our goal is to create along-term strategic relationship between the US, India, and private industry to create a development infrastructure for next-generation technologies.

raja@thehindu.co.in

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