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The government wants to become a venture capitalist in a bid to provide early-stage financing to firms, particularly high-technology companies. That’s because reforms over the last two decades in the IT and telecom sectors may have resulted in the creation of global services brands such as TCS and Airtel, but India is still looking for its own version of product companies like Microsoft and Apple.
Therefore, the proposal by the National Manufacturing Competitiveness Council to set up a venture capital fund with a billion-dollar war chest is an interesting move. The fund will select a few consortia, predominantly comprising Indian-origin scientists and technologists. The full cost of the startups, from conception to proof of concept and manufacturing, will be met through equity infusion. This is based on two assumptions: that the private sector provides insufficient capital to new firms, and that the government can identify firms where investments will yield high social returns.
Similar initiatives in the US, for example, show that when implemented right, such programmes have helped. According to a paper by Josh Lerner for the National Bureau of Economic Research, a public venture capital initiative, the Small Business Innovation Research programme, provided over $6 billion to small high-technology firms between 1983 and 1995. Some of the most dynamic technology companies received support through this programme, including Apple Computer, Compaq and Intel.
Over the past two years the Indian government has tried a number of initiatives, including a policy to give a fixed procurement quota to technology products made in India. But so far these have not attracted investments. This has led to a situation where India is heavily dependent on imports.
The move to float a venture capital fund could, therefore, be relevant but the key question is whether the Indian government, plagued by crony capitalism, will function like a professional venture capital firm? While the proposal to rope in prominent VCs such as Vinod Khosla, Sam Pitroda and Gururaj Deshpande to be part of the investment fund may help, past examples of project execution do not infuse much confidence. The failure of entities such as the Centre for Development of Telematics and the Indian Telephone Industries Ltd point to the fact that earmarking a billion dollars may not be enough to meet the aspirations of a billion people.
Corporate Editor
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