Easier Norms For Venture Capital Funds Urged

The India-based US venture capital firms have pressed for a less stringent `ownership claim in company equity by Indian infotech firms for funding their projects.

A call to this effect has been given to the Manufacturers Association of Information Technology (MAIT), the apex-body of the Indian hardware IT industry, by big names of the venture capital industry.

Venture capital (VC) firms have also asked MAIT and National Association of Software and Service Companies (Nasscom) to create a `pool of funds for offering venture capital to IT industry.

They have also told MAIT members to adopt a `softline over retaining majority stake in companies in view of the high risk involved in funding IT projects.

 

VC firms are shying away from financing IT projects in India for fear of high rate of obsolency and owners refusal to dilute stake below 51 per cent, they have told MAIT.

The Indian outfit of the San Francisco based Draper International has urged MAIT members to rethink over their insistence to retain not less than 51 per cent of stake at all costs.

Outlining the problems faced by venture capital firms in India, Draper International (India) Pvt Ltd managing director Kiran Nadkarni said, VC firms in the country are `concerned over ownership claim of 51 per cent by Indian IT companies. This is peculiar to India, he said, at a MAIT meet on venture capital here.

If you dont put cash in, your stakes might get diluted, he said. He told MAIT members that the fear of losing less than 51 per cent of ownership is preventing Indian IT companies from receiving funds.

He urged the members to follow the example of Infosys. The software firm was able to grow from a Rs 10 crore company to Rs 150 crore within a decade by reducing equity substantially to meet finance, he said.

Gripped with the fear of losing majority ownership, entrepreneurs tend to negotiate endlessly with venture capital firms, he added.

VC firms Draper and TDICI also feel that `unrelated diversification undertaken by Indian firms is another serious issue. Setting up of multiple companies in unrelated areas posed high risks to VC firms. There should be an `alignment between the stakes of a company and a VC firm, they insisted.The high rate of obsolency in Indian IT industry also worry the venture capital firms. VCs in India dont understand IT industry, Nadkarni said. Lack of transparency from companies is another problem they face in India.

Failure in preparing an effective `business plan also turned away VC firms.

VC firms also feel that they are impeded in raising funds in India because of several hurdles including legal.

According to A J V Jayachander, president, TDICI Ltd, out of Rs 673 crore of venture capital investments in India, the value of funds received by IT sector was 19 per cent. About 20 per cent of TDICIs portfolio was on IT industry, amounting to Rs 69 crore, he added.

Companies without resilience and seed and start-up ventures fared poorly with VC firms, he said. Lack of disinvestment strategies and problems of technical management with poor commercial orientation were other issues worrying them in India, he said.

Lack of long term competitive advantage in original brand manufacture is another weakness of IT industry, he said.