Capital efficiency will be the new mantra for venture capitalists this year. Yesterday, we carried in the paper the overall outlook for Indian venture capital in 2009. Starting today, we bring you a ten-part series of interviews with VCs investing in India, their individual investment thesis for 2009, sectors of interest and what they look for in a start-up. This interview with Promod Haque, managing partner, Norwest Venture Partners, is the first in the series.
Norwest set up its India office in late 2007 planning to accelerate investments. It has added three India partners - Niren Shah (previously with eBay and Baazee) and Sohil Chand (previously with Goldman Sachs) in Mumbai and Mohan Kumar (previously with Motorola) in Bangalore. But has made only one investment since then, in services company Suvidhaa. Managing partner Promod Haque, who looks at India investments out of the firm's Palo Alto, California headquarters describes the current market conditions as a "forest fire" that only good companies can survive.
What are your main concerns for the next year?
The recession will continue to make it difficult for companies next year. That's why we're working closely with our own portfolio companies to manage their cash during the downturn (as we've done during previous downturns). We're advising our portfolio companies to be extremely cautious. Based on past experience, we know they will experience a spending squeeze as we have already started to see this year. It takes longer in this economic climate to reach a meaningful exit - M&A or IPO, and the IPO window hasn't opened yet. Therefore, conserving cash and finding a way to reach cash flow breakeven is critical for these companies.
What sectors will you focus on in 2009 compared to last year? Will you do fewer deals?
In 2009, we will look more heavily at growth equity opportunities in a variety of sectors. The correction in valuations has created a more viable option for PEs to invest in India, particularly in the coming year. Also, given the public markets are on hold for IPOs, it is likely that companies who need money will turn to private equity. They can't keep their expansion plans on hold, and we believe that there are tremendous growth equity opportunities across a wide range of sectors in India, including telecom, technology, financial services, infrastructure and manufacturing. We hired a managing director in our Mumbai office earlier this year to focus on these growth equity opportunities.
We continue to believe there are significant opportunities in the local consumer markets (both Internet and mobile) in India. In 2009, we will seek out appealing businesses in these sectors, but the bar is extremely high on new investments. We are beginning to see the maturity of the second-generation services (in) IT-ITES outsourcing. We could see our investment pace increasing in 2009 because there are a lot of interesting companies out there looking for funding right now.
What are the key factors you will look for in a company while funding?
Our criterion hasn't changed in this area. We look at several factors when making investments. We analyze the size of the market (is it large enough?) and we determine whether or not the company is considered to be a breakthrough project with world-class solutions that are highly differentiated. We also look closely at the domain expertise of the founders and engineers (do they have a proven track record?) and do the entrepreneurs have the true passion and vision to build the company? Lastly, we need to be convinced that the differentiation is defendable, sustainable and offers a unique value proposition to the customer (customer validation, ROI and traction are critical). Lastly, as I mentioned above, the business must be capital efficient-particularly in today's economic climate.
What will you and your portfolio companies do differently in 2009?
Nothing has really changed. We will continue to work closely with all of our portfolio companies. I do think there will be an even heavier emphasis on cost control in the midst of this challenging economic climate. We're telling our companies to conserve cash, focus on their core competencies (not the second or third tier projects in the plan that require more funding and are less impactful in this market environment), find a way to "extend the runway" as long as they can, avoid hiring extra headcount (in the short term), lower the cash burn, and find a way to get to cashflow breakeven as soon as possible.
What do you expect your average deal size to be in 2009?
Our average deal size could be anywhere from $5 million USD to $30 million USD depending on the opportunity.
What sector(s) are you less keen on because of the market slowdown?
I think too many consumer Internet companies with exclusively ad-funded models were funded over the last few years. Some investors looked at "eyeballs only" and funded the company solely based on how much traffic came to the site. Too many companies were funded on the belief that they will "learn" how to monetize users later. Those that raised small amounts of money burned (or continue to burn) a lot of cash, and I don't think all of them will survive-they can't. We are starting to see another shakeout in this area.
The consumer Internet companies that we believe will survive offer a unique and valuable service that its audience is willing to pay for. Overall, we're still in the early days of online advertising. There is definitely a movement toward quality, uniqueness, accountability and guarantees. Companies that offer a guarantee for ad performance will prevail. This is more than just banner ads being paid on CPMs alone. There are still opportunities for innovative winners to emerge here. We are more pessimistic on the remnant, second tier banner ad network companies that we think have been over funded.
Where will valuations go in 2009?
I think they will continue to decrease in the first half of 2009 and then we'll see an up tick when the market begins to recover. Just a guess- Nobody can know for sure.
We were disappointed in the extremely high, over inflated valuations over the past few years. We are now starting to see a much needed correction in the industry. Companies that haven't performed and haven't been able to conserve cash will not survive. It's like a forest fire- It's healthy for the long term, but it's not fun to be in the middle of it in the short term. Long term, it is a healthy process, and we believe good companies can emerge during a downturn.
How many of your portfolio companies are looking to raise funds in 2009? Would you be willing to negotiate deals at lower valuations than you took them on?
A number of our companies will most likely raise funds in 2009, but we are encouraging each portfolio company to conserve as much cash as possible in this tough economic environment. Whether or not we are willing to negotiate deals at lower valuations depends on the company and the situation. We take things on a case by case basis.
Will you look at doing more syndicated deals?
We've always believed it is important to syndicate with strong partners with deep pockets, who will continue to fund companies with strong fundamentals-particularly during a downturn.
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