Venture Capitalists Tighten Norms For Dotcom Funding

The indiscriminate funding of dotcoms by venture capitalists till earlier this year is now history. Venture capitalists have begun to tighten the noose around dotcoms as they get ready for their second round of funding. Most of the larger VCs have already issued an informal diktat to the companies they have funded so far: show a sustainable revenue model, else consolidate or close shop. As Bipin Shah, vice chairman of Indus Venture Management, says: "The hype of investing in dotcoms has died down with venture capitalists becoming cautious with their money. We will study the internal valuations of dotcoms before funding them further." His colleague Sharad Dalal adds that most of the proceeds from the first round of funding were used by the dotcoms in media expenditure and advertising rather than in developing the websites. "We found when we checked the websites that the infrastructure was so bad that the site itself was not functioning properly," he adds. With the criteria for funding changing from "bring us a novel idea" to "show us the profitability models", venture capitalists have demanded that dotcoms create a brand identity in order to attract traffic. This in turn should be translated to revenues, they add. Pradip Shah, chairman of IndAsia Fund Advisors, which has invested in several dotcoms, says his company has decided to fund only those dotcoms which boast of a "robust business model". Mergers and acquisitions will be name of the game in the next two-three months in this ever-burgeoning Indian dotcom industry. As Shah puts it, "Proposals for mergers have been pouring in with CEOs of portals realising that they would be able to rake in the required funds." Recently, Chrysalis Capital had initiated a merger of planetcustomer.com and productorium.com, both of which focused on consumer care. With this merger, the new entity was able to consolidate its customer base enabling it compete with its rival, apnaguide.com. Edelweiss Capital's Shriram Iyer says mergers are inevitable as "it's all a game of customer acquisition". His VC funded iCleo.com, a women's portal, which has recently merged with another portal targeted at the women called smartbahu.com. Iyer admits to have been approached by several other womens' portals for further merging. However he adds, "It doesn't make sense for venture capitalists to fund sites in the same space. We are trying to salvage the investments that we have already made." The main players such as Rediff.com, Satyam Infoway's sify.com and Indiainfo.com are looking to acquire smaller dotcoms which would fill the gaps in their corporate structure, VCs say. For instance, Rediff.com has made a start with footforward.com, a women's portal, which was a welcome move for the latter due to its inability to secure funds. Satyam, on the other hand, bought Indiaworld.com, a portal which focuses on selling local goods to the vast Indian diaspora.