Software product firms are hot favourites of VCs

Indian software product companies, which are planning to raise venture capital (VC) funding, will have to ensure that their domestic and emerging market focus is sharp.

Indian IT start-ups, which are introducing software products, have better prospects of availing VC funding, according to many VCs.

It has always been difficult for start-ups in the software product space to compete with the global software giants, even in the domestic market, they note.

This is a reason why many Indian IT start-ups in the product space are specialising in areas such as fraud detection, mobile VAS and e-commerce portals to address the local business problems.

"There is a large emerging domestic market, though the competition is more global. The question for the IT firms today is "" Do I want to be a small player in a large market or a dominant player in a small market? For us, the solution for a large market is a critical segment," says Srini Vudayagiri, managing director, Lightspeed Venture Partners India.

Sudhir Sethi, founder CMD, IDG Ventures India, concurs: "A strong India focus, to my mind, is very desirable. Many of the companies we have invested in India including the Manthan Systems and Kreeda have a very strong domestic market focus."

These are not lone cases. For instance, of the $20 million that IDG Venture Capital has invested in India so far, $15 million has gone to IT companies, which are in the product space.

Recent examples indicate that the VC community is showing a lot of interest in Indian companies, which are in Internet and mobile value added services (VAS) space.

Lightspeed Venture Partners, a Silicon-valley-based VC firm with about $1.5 billion fund under management, recently announced a $10 million funding to a Bangalore-based start-up Four Interactive, which runs a search portal Asklaila.com, exclusively focussing on the Indian cities.

DGB Microsystems, a mobile device design and manufacturing company headquartered in Bangalore with specific thrust on rural and new markets, has secured a $8.5 million funding from SIDBI Venture Capital and Clearstone Venture.

FlightRaja, a travel portal that provides services to domestic travel industry, has raised $5 million from NEA-IndoUS Ventures in June this year.

"Today anyway between 30-40 per cent of our investment we are planning to make in India, we are looking at Indian companies who are domestic market oriented. We are very excited in looking at domestic entrepreneurs based in India and targeting the domestic market," said Srini Vudayagiri.

"The reality is still that the big buyers of most technology products are in developed markets. In India, the buyers of technology products want to buy from Fortune-500 companies for running their enterprise. However, for unique India related issues such as tax-filing, value added services in the context of mobile telephony, companies operating in India would want to buy solutions which understand the local laws, regulations and language," said Ashish Gupta, MD, Helion Ventures.

Helion Ventures which manages $140 million fund, is looking at investing in Internet companies and mobile value added service companies, focussing on local market.

Industry sources say during the first 10 months of the current year, venture and private equity firms have jointly invested around $10 billion in the domestic market. Of this, ventures early stage funding (Series-A) is estimated to be about 25-30 per cent.