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Global CXO & VCs Conclave-2007

"Technology, Innovation & Entrepreneurship"
th
27 April, 2007
Hotel Taj Mahal, Mansingh Road, New Delhi

Follow the tune of technology...

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THE ASSOCIATED CHAMBERS OF COMMERCE AND INDUSTRY OF INDIA

1, Community Centre, Zamrudpur, Kailash Colony, New Delhi - 110 048
Tel.: 46550555 (Hunting Line) Fax.: (SG Sectt.) : 46536437 Fax.: (General) : 46536481/ 46536482/ 46536497/ 46536498
Email: assocham@nic.in website: www.assocham.org
THE ASSOCIATED CHAMBERS OF COMMERCE AND INDUSTRY OF INDIA
 MESSAGE

I am extremely glad to note that the Associated Chamber of Commerce and Industry of India along with Gartner India Research &

Advisory Services Pvt. Ltd. is organizing the ASSOCHAM-Gartner Global CXO & VCs Conclave with the theme of “Technology,

Innovation & Entrepreneurship” on April 27, 2007 at Hotel Le Meridien, New Delhi.

While giving top priority to Agriculture, its allied sectors and irrigation, we are exploring the possibility of setting up of more and more

establishments all over Andhra Pradesh in Trade, Commerce and Industry to create employment to youth in particular and the rural

population in general. A separate department of Infrastructure and investment is created to promote infrastructure development

through Public-Private Partnership. We are striving to evolve new strategies and policy initiatives and minimize the cost of production

through technical efficiency and effective management in every sector. We have been striving to compete with global standards in

enhancing productivity both qualitatively and quantitatively.

I hope that the Conclave would focus its attention to bring about awareness among Business Leaders, Investors, Entrepreneurs and

officials of various departments about the huge investment opportunities as well as the infrastructure facilities in Andhra Pradesh

with regard to Information Technology and ITES, with main focus on its impact on Rural India. I also hope that the Conclave would

be a source of information for the entrepreneurs both within the country and abroad, and help the entrepreneurs to come forward

with huge investments in this fast-growing sector.

I appreciate the organizers for selecting the most useful theme and I wish the Conclave a grand success.
 Government of West Bengal

DR DEBESH DAS
IT MINISTER OF WEST BENGAL.

Message

I am pleased to note that Gartner and Assocham have jointly organised a Meet between CXOs, Venture Capitalists and

Entrepreneurs. While this will be a good forum for exchange of ideas, it will be an ideal opportunity of entrepreneurs who

have good project plan innovative ideas in mind but have requirement for capital. Globalisation is making the world flat

and I am sure as a result of such Meets more and more effective utilisation of funds will materialise through Indian

Entrepreneurs.

I wish this Summit a success.

Date: 24 April, 2007 DR DEBESH DAS

New Delhi
 The Associated Chambers Of Commerce And Industry Of India
1, Community Centre, Zamrudpur, Kailash Colony, New Delhi - 110 048
Tel.: 46550555 (Hunting Line) Fax.: (SG Sectt.) : 46536437
Fax.: (General) : 46536481/ 46536482/ 46536497/ 46536498
Email: assocham@nic.in website: www.assocham.org

Venugopal N. Dhoot
President, ASSOCHAM

Acknowledgement
ASSOCHAM popularly known as the 'Knowledge Chamber' is organizing the Global CXO & VCs Conclave 2007 on 27th April 2007.

The Conclave would be providing a common platform for a meaningful interaction between the leading technology Companies &

Global Venture Capitalists. In my opinion this is a landmark initiative undertaken by ASSOCHAM. I also understand that this initiative

would immensely benefit the Small and Medium companies and trying to understand the Venture Capitalists funding on the one hand

and on the other as to what role the Information Technology can play in making the Small and Medium enterprises globally

competitive. I am sure that this Conclave will also try to ascertain the future trends in Technology.

I warmly facilitate the Information Technology Companies and Venture Capitalists in extending the support and necessary inputs in

designing the Conclave.

I wish the Global CXO & VCs Conclave all success in achieving its objectives and would like to assure the participants ASSOCHAM

services.

Date: 23 April, 2007

New Delhi (Signature)

 The Associated Chambers Of Commerce And Industry Of India
1, Community Centre, Zamrudpur, Kailash Colony, New Delhi - 110 048
Tel.: 46550555 (Hunting Line) Fax.: (SG Sectt.) : 46536437
Fax.: (General) : 46536481/ 46536482/ 46536497/ 46536498
Email: assocham@nic.in website: www.assocham.org

D. S. Rawat
Secretary General, ASSOCHAM

Acknowledgement

The Information Technology sector's contribution to the phenomenal growth of the Indian Economy has certainly catapult India on
the Global stage.

ASSOCHAM completely acknowledges the role of this sector and it's future potential for the Indian Economy and his organizing the
Global CXO & VCs Conclave 2007 on 27th April in New Delhi.

Though the Information Technology sector is on the surge, however the kind of capital funding required for making the Indian
Information Technology companies truly global requires greater and innovative funding.

The first three months of 2007 have already witnessed Private Equity and Venture Capitalist activity worth around US $ 2.5 billion. The
overall level of Venture Capitalists is even more telling if one takes into consideration that in comparison with the more mature
American and European markets the level of Venture Capitalists activity in India, is still modest, leveling significant room for further
investment and growth.

My Colleague Mr. Ajay Sharma Joint Director, ASSOCHAM and the team including Mr. Varun Aggarwal and Ms. Anjali Narang have
done a commendable job of inviting the leading Information Technology Companies and the Global Venture Capitalists to this
Conclave. I would also like to thank the State Government of West Bengal (WEBEL), Corporate Partners, the Co-organizers, Media
Partners and the Knowledge Partner for supporting and guiding this Conclave.

I am sure that all the participants and the stakeholders are immensely going to benefit from this Conclave.

Date: 24 April, 2007

New Delhi (Signature)

 ABOUT ERNST & YOUNG
Ernst & Young, a global leader in professional services, is committed to restoring the public's trust in professional services
firms and in the quality of financial reporting. Its 114,000 people in 140 countries pursue the highest levels of integrity,
quality, and professionalism in providing a range of sophisticated services centered on our core competencies of auditing,
accounting, tax, and transactions.

Ernst & Young operates from 7 cities* in India (www.ey.com/india) with a work force of over 2400 people, who work
towards the firm's vision of being the trusted business advisor that contributes most to the success of people and clients by
creating value and confidence. Global Tax Advisory Services, Risk and Business Solutions and Transaction Advisory Services
are the core services offered by the firm. Transaction Advisory Services has four service lines - Lead Advisory, Valuation &
Business Modeling, Transaction Support and Business Advisory Services.

The Lead Advisory (LA) Practice has been consistently ranked as the No. 1 M&A practice in India. With over 100 dedicated
professionals in our Lead Advisory business, we offer a comprehensive, integrated solution to all M&A requirements. The
practice advises a number of companies by offering teams attuned to the market segment in question. These are
professionals who understand the nuances of smaller companies, the uniqueness of mid-size companies, as well as the
operating environment of larger organizations.

Contents
The strength of the LA practice rests in its diversified professional group, with experience beyond just traditional lead
advisory with hands-on experts working on complex deals and bringing that collective experience onto the next
transaction. The team also consists of specialists who have a deep understanding of capital markets and its trends in India.

"Indian PE/VC Market Firing on

The Valuations practice at Ernst & Young has one of the largest teams of professionals dedicated to providing quality
All Cylinders - Liquidity All round" 10
valuation and business modeling services in India. The team consists of personnel with varied skill sets and educational
1. Evolution of PE/VC in India 11
backgrounds including chartered accountants, management post graduates and engineers.
2. Current Players in VC/PE market in India 12
High process discipline and uniform application of consistent valuation principles and practices across assignments is one
3. PE/VC Investment Trends in India 13
of strengths of the Valuations practice. The team also provides a detailed analytical reporting of professional value
recommendation. Being part of the Ernst & Young's global valuation and business modeling network, enables the India 4. Key Technology Markets 14
practice to leverage on global expertise and knowledge. 4.1 Information Technology 14

The Transaction Support (TS) services provides accounting, financial, tax, and information technology due diligence 4.1.1 Key Investment Areas 14

assistance to investors and companies in all forms of transactions. It seeks to maximize the benefits of a contemplated - Telecom and Wireless 14
transaction, and identify exposures and risks that need to be managed.
- IT services and BPO 16

Business Advisory Services (BAS) extends Ernst & Young services to assisting clients in charting their strategy and aligning 4.1.2 Liquidity Events How Investors are 17
exiting in the IT / BPO domain
operational processes in order to create shareholder value. Our analysis provides a fact based perspective for resource
deployment and process alignment to optimize value. Our extensive experience across industries and organizations Key Exits 18
further helps us respond effectively to your specific needs. This service line effectively complements the other services
4.2 Biotechnology 19
provided by Transaction Advisory Services.
4.2.1 Investment in Biotechnology India 21
* Ernst & Young has offices in New Delhi, Mumbai, Chennai, Kolkata, Hyderabad, Bangalore and Pune.
4.2.2 Emerging Opportunities in Indian 22
bio-tech Industry

4.2.3 Outlook 23

5. Conclusions 24
 The Indian Private Equity (PE) and Venture Capital (VC)
market is getting hotter by each passing day, with almost all
the major global PE players already having a presence in
India. Recent research by Evalueserve indicates that there
are more than 40 US VC firms which have raised or are in the
process of raising capital in the range of US$40- 400 mn in
order to invest heavily in start-ups and early stage
companies in India. Total PE/VC investment in India reached
a record high of US$ 7.5 bn in 2006 as compared to US$ 2.2
bn in 2005. The first three months of 2007 have already
witnessed PE/VC activity worth US$2.4 bn across 78 deals.
This enthusiasm among investors to invest in India is on
account of overall growth in Indian economy (GDP 8-9%),
globalization, government initiatives in liberalizing
regulatory environment towards private investments,
stable and maturing financial markets (providing good exit
opportunities to PE's), India's population of greater than
1bn people (boost for consumer related business) and
growing appetite for innovation and entrepreneurship
across various industry verticals.
"Indian PE/VC Market Firing on
All Cylinders - Liquidity All round"
The overall level of PE/VC deal activity is even more telling if
one takes into consideration that in comparison with the
more mature US and European markets, the level of PE
activity, mainly on account of very modest Buy-Out
volumes, is still low leaving significant room for further
growth. During 2006 Buy-Outs accounted for only 5% of
total number of transactions and 15% of overall transaction
value whereas in mature Western Markets Buy-Outs
typically account for 75% - 80% of overall transactions value
and combined PE/VC funds raised. Obviously this is partially
driven by the rapid pace of development of the Indian
economy, creating ample growth opportunities for early /
mid stage ventures and late stage development capital.
However, it is also partially driven by regulatory aspects (e.g.
cumbersome delisting regulations) as a result of which
conducting public to private transactions is not easy.
Furthermore in Western markets Buy-Outs funds typically
raise any where between 50-80% of the overall deal value in
the form of loans ("leveraged finance") which is secured
against the targets balance sheet. At present raising this
debt on the targets balance sheet still faces some regulatory
10
issues in India, which can be partially circumvented, Pre 1995 Birth of PE/VC: The history of Private Equity and Venture Capital industry
however they do make it challenging for Buy-Out funds to
in India entwined with the liberalization of the country's economy, which began in
raise similar debt levels as in the West, which makes it more
difficult for them to compete on price with Indian strategic 1980's but gained significant momentum in 1991. Until the mid 1990s, the need
buyers Clearly as the Indian market matures further and
for private equity was met largely by development finance institutions such as
regulations become further aligned with Western practices
(which to a large extent is already the case) one would IDBI, ICICI and IFCI.
expect Buy-Out activity levels to increase significantly in the
coming years. However this does not mean that there will 1995-2000 Beginning of PE/VC activity: Several foreign PE/VC firms such as
not be simultaneous growth in VC activity levels, we foresee
Warburg Pincus, CDC Capital, Baring Private Equity Partners, Draper
VC activity levels to continue to grow significantly, however
since Buy-Out transactions typically tend to be much larger International, HSBC Private Equity entered the country. The PE/VC activity roughly
in size, as a percentage of overall activity level one would
started in 1996-97 and gained momentum in 1999 and 2000, on account of
expect Buy-Outs to become more important in the future.
overall boom in Information technology, Telecom and Internet sector.
After almost three years of downturn in 2001-2003, the
PE/VC market began to gain momentum towards the end
2001-2003 US recession and VC/PE activity declines: As a result of
of 2004. PE investors began investing in India again, but
unlike pre dot com burst this time investors have diversified economic recession in US and slowdown in technology sector, many of the PE/VC
their portfolio across sectors other than IT and Telecom
funds started towards the end of the nineties closed down their India operation
(although IT/BPO/Telecom sector continued to remain
1.Evolution of PE/VC in India
favorite among investors, attracting significant portion of during this time period. The remaining funds started to invest smaller amounts of
the investments). Late stage investments, which in India
money in more mature companies in order to minimize risk. This trend continued
mainly consists of what in Western markets would be
labeled "development capital for companies with longer (10 up till 2003.
year +) operating history", have also seen an upward trend
in terms of total quantum of investments. 2004 onwards India again on PE/VC radar screen: On account of sustained
Given the recent exuberance in the VC/PE market in India, GDP growth of 8-9% on a year on year basis and high growth momentum in
there could well be an excess of money in the market
certain sectors such as Information Technology, Telecom, high end
chasing a not so fast growing number of deals. This,
according to some market observations, in turn is resulting Manufacturing, Pharma, Retail and Financial Services, international investors
in stretched valuations for Indian companies. A well
renewed their interest back in India. As shown in the figure below, after 2000
rounded approach towards business/technological
innovation and entrepreneurship will be required to absorb there has been a continuous up tick in the total value of investments in India.
this significant surge of (early / mid-stage) money in the
Investments of US$ 1.67 bn in 2004 surpassed the previous high of US$ 1.16 bn in
market. In this paper we have tried to look at the PE/VC
market in India and have looked at the areas in the 2000. These investment reached US$ 2.2 bn in 2005 thus showing a growth of
technology sector (Information technology and Biotech)
38% on a y-o-y basis. However the real quantum leap came in 2006 which saw a
where PE/VC investors are seeking opportunities to put
their money at work in India. record investment of US$ 7.5 bn, thus showing a growth of around 300% over the
previous year.
11
 Percentage of Value of deals by PEs in various vertica;s
3. PE/VC Investment Trends in India
PE/VC Investments In India 2004 2005
8000 Ÿ According to Venture Intelligence, Private Equity firms invested a
Amount (US$ Millions)
7,474 TMT* 51.9% 20.1%
7000 Medical 10.8% 14.4% record US$7.5 bn across 302 deals in 2006, this is well over three
6000 Manufacturing 9.7% 14.6% times the investment of US$ 2.2 bn in 2005
5000
Utilities/Leisure & Ent 4.6% 3.4%
4000
3000
Infrastructure 4.6% 3.4% Ÿ First three months of 2007 have again seen a sharp growth in
2,200 Transportation 4.4% 11.5% VC/PE activity with about $2.4 bn invested across 78 deals
2000 1,629
1,160 937 Services-Non Financial 3.4% 1.5% compared with $1.4 bn across 69 deals in the same period last year
1000 250 500 590 507
20 80 Textiles and Clothing 2.8% 3.1%
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Retails 2.7% 3.1% Ÿ Major deals like Idea Cellular's pre-IPO placement and the KKR-
Source: Venture Intelligence Financial Services 2.2% 14.9%
Flextronics Software buyout contributed significantly to the total
Travel/Hospitality 0.0% 2.7%
pie in 2006
Others 2.8% 5.2%
*computer-related, information technology, media, and telecom Ÿ The year witnessed several large global PE firms - with appetite for
Source: The Asian Venture Capital Journal
large deals making their first investment in India
In contrast to earlier years, PE investment expanded beyond IT/BPO services after 2004. This is primarily due to the fact that Indian
Ÿ In 2006, IT/BPO continued to retain its status as the favorite sector
economy is witnessing growth in other sectors as well such as Bio-technology, Healthcare, Manufacturing, Real Estate, Infrastructure,
among investors, with approximately 87 deals worth of about US$
Financial Services and Retail. As shown in the table below the % of deals value in the technology space has dropped from 51.9% in 2004 to
1.5bn. Major deals included FSS buyout by KKR, Olympus capital
20.1% in 2005.
investment of $100mn in Quattro BPO and General Atlantic
investment in Hexaware Technologies
2. Current Players in VC/PE market in India
The various PE/VC players operating in India can be broadly classified as follows: Ÿ Other sectors which gained traction from investors are
Fund Category Fund Type Major Players Investment Comments Manufacturing, BFSI and Healthcare & Life sciences

Goverment Funds VC SIDBI Venture cCapital Limited RVCF, APIDC, Capial vailable is in the range Ÿ On account of booming Infrastructure and Real Estate sector,
Canabank Venture Capital Fund Limited, IFCI VC $500K; Lower cost of capital
funds limited, Rajasthan Asset Management Co. therefore these are more Engineering and Construction companies also gained significant
Private Ltd, KITVEN, SBI, IDFC etc. attractive to enterpreneurs. traction from PE investors

Company Funds VC Intel, Cosco, siemens, Motorola, Nokia Growth
Partners, SAP Ventures and IDG ventures and some
Indian coglomerates and financial companies such as
reliance capital, Religate (owned by Ranbay),
Unitech and Piramal etc.
Non US Based Funds VC/PE Chryscapial, Actis, ICICI Venture Funds, HSBC
Private Equity Management, Baring Private Equity
Partners, 2i Cpaital Private Limited, IL%FS, GW,
Information Technology Venture Enterprise Limited,
Softbank Asia International, Kotak Mahindra Finance
Limited etc.
US / Globalbased Warbug Pincus, General Atalantic Patners, Carlyle, 3i,
PE's PE Temasek, Kohlberg Kravis Roberts, Blackstone,
Goldman Sachs, Providence Equity Partners,
Macquire, Francisco Partners etc.
Helion, Indivision, Nexus India, Inventus Cpaital
Partners, Inc3, Silicon Valley Bank, Venrock
New entrants Associates, Lifhsped Venture Partners,
raising/have raised VC/PE Diamondhead Ventures, Sierra Ventures, Globespan
funds to invest in Capital, Storm Ventures, Shastra Ventures, Outlook
India Ventures, Greylock Ventures, Evolvence India, Tano
India, Gaja Capital etc.
Early to mid stage investments in
Comapnies Operating in their
respective industries with a long
term view of potential acquistion
Number of these funds are early
mid-stge VC whereas other are
genealists PE also investing in
Late-stage development capital
and buy-outs.
Late stage and PIPE investments.
These groups and primarily US
based VC's who are kean on
India exposure or recent local
VC's/PE start-ups
Ÿ Inspite of certain mega record size deals in 2006, the bulk of the
investment occurred in sub US$25 mn bracket
Ÿ In particular VC investors are investing in large number of small
deals as implied in the figure , with around 40% of the deals below
$10 mn
Ÿ According to Venture Intelligence research, VC/PE investment in
2006 showed growth across all stages when compared to
2005.On the back of increased pre-IPO placement the number of
late stage deals increased over PIPE deals during 2006
Ÿ VC investment (early and growth stage) contributed 35% of PE
deals in 2006 , which is almost the same as in 2005
Ÿ Venture intelligence research suggest a significant increase in
buyout deals in 2006 (14) as compare to 2005 (6) and 2004 (2).FSS
buyout by KKR contributed significantly to the overall buyout value
in 2006

Source: Evalueserve and E&Y Research Ÿ Considering the high returns that VC/PE's which were early
Recent research indicated that there are more 40 US firms which have raised or are in the process of raising capital in the range of US$40-400 mn in entrants in India, have generated, the Global VC/PE funds have put
order to invest heavily in start-ups and early / mid-stage companies in India. Furthermore as can be seen from the table above a comparatively large India on their radar screen. They accounted for 57% of the
number of funda are focusing on VC investments, whereas the number of PE funds focusing on late stage investments and in particular Buy-outs is
Investments in India (in terms of volume) in 2006. The investment
comparatively small. However in the last couple of years some of the largest global PE (Buy-Out Funds) have started to actively look at and conduct
transactions in India. size of Global VC/PE funds (US$ 5.2bn) was also double as
compared to India dedicated funds (US$ 1.7bn) for year 2006

12 13
 Given the increasing amount of money which PE/VC funds
want to deploy in India we see this trend towards larger / later
stage transactions continue. However as mentioned earlier,
given the stage of the Indian economy (high growth) and the
relative challenges in doing Buy-Outs in India, although for Buy-
Outs the party has just started and they are likely to grow
considerable in terms of overall PE/VC transaction value, in our
view it will take considerable time before Buy-Outs will account
for the level of deal value (80%) which they account for in the US
/ Europe. Hence for the next couple of years, also taking into
account the large number of VCs which have entered or are
entering India, VC activity (early, mid-stage and development
capital) will continue to account for a comparatively large % of
overall PE/VC activity in particular in terms of overall number of
transactions.
4. Key Technology Markets
Consumer Internet and Web2.0 - Given the vast India population and growing internet penetration, VC's are betting heavily
4.1.1 Key Investment Areas
on the consumer internet space. VC firms are looking for areas where the Internet has had disruptive effects in US which is the
Unlike in the late 1990's when PE/VC bets in India were all over the
place, this time around VC's investments are in the key niche case for travel, classified advertisements, games, jobs etc. So they are betting that this will be replicated in India. This is where the
emerging sectors such as consumer internet companies like consumer internet companies come into picture. India has less Internet users than mobile subscribers but given the broadband
classified advertisements, online travel, online and mobile gaming,
online portals, mobile and mobile value added services (VAS) boom and improving telecom infrastructure, the internet penetration is growing fast. This when coupled with the fact that there
companies and telecom (including wireless) technology solution is a boom in tourism, jobs and real estate, creates a large opportunity for online B2C solutions. Some of the recent investments in
companies . In addition to that Indian IT industry have also seen late
stage PE investments in IT services and BPO sectors with niche this domain are shown below:
market focus. To put the PE/VC investments in perspectives we have
segregated key investment deals across three defined domains
Telecom and Wireless, Consumer Internet and IT Services and BPO
Month/ Investee VC/PE Amount Investee Profile
Telecom and Wireless- Key focus areas are Year
Mobile VAS, WiMax (wireless broadband), Wireless infrastructure
product companies.
Apr-07 Apnaloan.com Sequoia Capital India 2.2 Lead Generation Company for financial Products

Mar-07 Games2Win Clearstone Venture Partner 5 (series A) Online Gaming Company

Technology continues to be a favorite sector for investment India has more than 130 million mobile subscribers and this number is SVB Financial Group
purposes. Hence below an analysis of activity levels and main expected to reach greater than 300 million by 2010. The local wireless
emerging trends in key technology areas in India. market is of world scale and the fastest growing in the world. Therefore, Dec-07 Tutor Vista Sequoia Capital India, SVB 23.5 Online Education and tutoring company
many companies based in India and catering to India mobile market are Financial Group, Lightspeed
? Information Technology
considered attractive by PE/VC. In the light of declining ARPU's Nov-06 Travel Guru Battery Ventures, Sequoia 15 Travelguru is a hotel and airline ticketing
? Bio-Technology (Average revenue per unique user) , mobile VAS provides a new avenue Capital consolidator in the B2C space
for telecom operators to increase their revenues, as a result of which
4.1 Information Technology investors tend to be bullish on this market. Oct-06 MakeMytrip.com Helion Venture, Sierra And
SAIF Partners
10-15 Online Travel Company

Key deals that have happened in wireless sector are shown in the
table below: Sep-06 Bharat Matrimony Cannan Partners and Yahoo Inc 8.6 Online matrimonial portal

Jun-06 ClearTrip.com Kleiner Perkins and Sherpalo 2-3 Online Travel Company
Ventures
Month/ Investee VC/PE Amount Investee Profile
Year Nov-06 Sulekha.com Norwest Venture Partners 10 Indian online community portal
Apr-07 Telsima Coporation NewPath Ventures, New Enterprise 50 (Series D funding) Telecom equipment company that
Associates, CMEA Ventures, JAFCO develops equipment and solutions Oct-06 Guruji.com Sequoia Capital India 7 Indian-focus Search engine
Asia and other unnamed strategic for WiMAX based broadband wireless Mar-06 Shaadi.com Westbridge Capital 8 Online matrimonial portal
investors access (BWA) and mobility solutions
Source: VC circle, public sources
Apr-07 One 97 Communications SAIF Partners and Silicon Valley Bank 8-10 (Series A funding) Mobile VAS players; Technology
(founded in 2000) player with focus on Voice services
on the lines of On Mobile

Mar-07 Ziva Software Nadathur Holdings & Investment Ltd 1.7 (Series A funding) Mobile VAS player; provides mobile
content search service which is
accessible by WAP/GPRS

Dec-06 Tejas Networks Mayfield 12 Optical networking product company

mainly caters to domestic companies
such Railtel and Tata teleservices

Oct-06 Idea Cellular Providence Equity Partner, Chrys 950 Telecom Operator
Capital Citigroup, Sequio Capital,
Spinnaker and Macquarie bank

Sep-06 On Mobile Goldman Sachs and other investors 35 Mobile VAS player with focus on
voice/IVR

Sep-06 Bubble Motion Sequoia Capital 10 (Series B funding) VAS Player- world's first voice short
message service providers; It has
developed a technology called Bubble
TALK, a 'Click, Talk and Send' short voice
messaging service that works across
operators and networks

Aug-06 JiGrahak Mobile Solutions Helion Ventures 2.5 (Series A funding) Mobile Payment and Commerce player.
The company owns a mobile payment
platform called NGPay, which users can
download on to their mobile phones

Jul-06 IMI Mobile Pequot Ventures 10 (Series B funding) developer of wireless VAS technology
platforms and content aggregation
services for mobile operators

Source: VC circle, public sources

14 15
 Month/ Investee VC/PE Amount Investee Profile
Indian IT/BPO exports continue to show major Year

double digital growth over the years, which given the Apr-07 Cambridge Solutions Carlyle Group 170.0 BPO
Arp-07 Spanco Telesystems Chryscapita, UTI Ventures 28.0 Networking and System Integration
continuously increasing base is a key achievement.
Mar-07 Manthan System IDG Ventures India 2.0 Business Intelligence and analytics software product
According to NASSCOM, India IT/BPO market has company
grown from US$ 16.7 bn in FY2004 to US$ 30.3 bn in Mar-07 KPIT Cummins Cargill Ventures 9.0 IT Services company
FY2006, thus showing a CAGR of 35%. Indian IT/BPO Mar-07 Zylog Systems UTI Ventures, Argonaut 10.0 Web application, mobile computing and enterprise
infrastructure management
market is expected to continue to grow at rate of
Jan-07 Adventity Norwest Venture 20.0 Financial Services KPO
approximately 30% on a y-o-y basis for the Sep-06 Newgen Imaging Systems Carlyle Group 20.0 Integrated solutions provider across the spectrum of
foreseeable future. Offshoring is now a proven publishing and data services

formula, which has enabled in particular Tier 1 (TCS, Sep-06 Quatrro BPO Solutions Olympus Capital 100.0 BPO
Aug-06 Microland Ltd Intel Capital, Trident Capital, 11.0 IT Infrastructure Management and
Infosys and Wipro) but also Tier 2 Indian players to Cargill Ventures and Jafco Consulting Services
grow at a much faster pace than their global peers Aug-06 PharmARC Analytic Baring Private Equity 10.0 Global sales, business intelligence and
(e.g. IBM, Accenture, EDS, CSC, Fujitsu, Cap Gemini Solutions Partners India marketing analysis company with a pharmaceutical focus
Jul-06 Allsec Technologies Carlyle Group 17.0 Pure play, third-party BPO Company offering both voice and
and Atos Origin). As a result Indian players having non-voice services on a blended delivery
been gaining market share at expense of Western Jun-06 AppLabs Technologics Sequoia Capital India 10.0 Software Testing
based players. Over the years most of the Indian IT May-06 Global Consultants Inc Oak Investment Partners 30.0 IT Professional services, outsourcing IT services IT offshore
services, information technology consulting firms, QA &
Testing
Apr-06 Induslogic West Bridge Capital 12.5 Offshore Product Development
Partners, New Enterprise
Associates (NFA) and Draper
Apr-06 Flextronics Software Kohlberg Kravis Roberts 900.0 IT Services company with focus on telecom
and Co (KKR) Sector
Arp-06 Geometric Software ICICI Venture Funds 10.0 IT Services Company with focus on
Solutions Co. Ltd. Management Company Ltd. CAD/CAM/CAE

IT Services and BPO Mar-06

Mar-06
Redington India Ltd.
Hexaware Technologies
Chrys Capital LLC
General Atlantic Partners
15.1
67.5
Supply Chain Management
Specialised ITS and BPO Provider
Feb-06 Cybernet Software Softbank Asia Infrastructure 22.5 Offshore Product Engineering Specialist
Solutions (CSS) Fund (SAIF)

Source: Bloomberg, Vccircle, Public Sources

Services and BPO players have been moving up the
value chain and in most cases are integral to the
business of the client. Considering this positive
outlook towards Indian IT/BPO service industry,
PE/VC investors are looking at investing in these
companies to be part of India growth story.
4.1.2 Liquidity Events How Investors are exiting in the IT / BPO domain
According to Venture Intelligence research, across all sectors VC/PE firms obtained exit routes for their investments in 37 Indian
companies during 2006, including 19 via IPO's. For 2005 this figure stood at 41, including 17 via IPO's. Obviously exits are always
lagging investments and given that as little as 2 years ago total PE investments was well below 100 per annum this by and large explains
the big difference between total number of investments in 2006 and total number of (disclosed) exits.
Of these 37 disclosed exits in 2006, Information Technology saw the maximum number of exits witnessing 10 exits as shown in the table below:
Selected VC/PE exit in Information Technology (2006)

Besides investing in main stream companies, Date of exit VC/PE Investee Amt (Uss mn) Exit Startegy Buyer

Investors are increasingly looking to invest in Jun Barring Private Equity Partners Mphasis BFL Software 170.0 M&A Exit/Open Offer EDS

companies with niche focus such as Flextronics Mar Citigroup Progeom 115.1 Buy back Infosys Technologies

Software System (specialized IT services in telecom July Warburg Pincus LLC WNS Global Services 30.0 IPO -

domain), Geometric software (engineering services Jan Baring Private Equity Partner Cybernet Software 21.0 Buy back SAIF
C AD/C AM/C AE), Applabs (sof tware testing), Solutions & Support
Quattro (BPO firm focusing on new offering such as Nov ICICI Venture Fund Mgmt Ltd Info Edge 17.8 Strategic Deal Fidelity International
legal outsourcing, analytics, clinical data April IL&FS Investment Managers Ltd Secova e-services n/a - -
management etc). Some of the key deals that have Aug GVFL Ltd Parsec Technologies n/a Trade Sale Baring Private Equity
happened in this space are shown below: Partner
Dec GVFL Ltd Scicom Technologies n/a Buy back Employees
Dec IL&FS Investment Manager Ltd Tejas Networks N/a - -
Dec IL&FS Investment Manager Ltd Sasken Communications n/a - -

16 17
 ? In large M&A exits, one transaction which grabbed
attention was the acquisition of 52% stake in Mphasis-
BFL by EDS for ~ US$ 380 mn. Baring Private Equity
4.2 Biotechnology
Partners realized about US$170 mn by selling a 23.38% Although clearly much smaller in size than the IT/BPO sector, the Indian biotech sector is witnessing
similar growth and growth prospects. For instance during FY 05-06 the Indian biotech sector closed in on
stake in the company (it continues to retain a 15% stake
the US$ 1.5 billion mark and grew by 35 per cent for the second year in a row.
and Baring Private Equity Partners is estimated to have
made 25x return on its investment)
Segment 2005-06 2005-06(% 2004-05 2003-04
? Another trade sale which attracted quite a bit of (USA mn) Share) 2005-06% Change (USD mn) (USD mn)
attention was the US$ 250 sale of Office Tiger to RR
Bio Pharma 1,046.2 72.0% 31.88% 7933 611.6
Donnely which enables RR Donnely to significantly Bio Services 160..0 11.0% 69.29% 94.4 61.1
increase its BPO / Document management exposure Bio Agri 132.9 9.2% 81.21% 73.3 28.9
Bio Industrial 83.3 5.8% 17.19% 22.2 17.8
? US$ 224 mn IPO of WNS global services (India based BPO Bio Informatics 26.7 1.8% 20.00% 22.2 17.8

Total 1,449.1 100% 37.42% 1,054.4 772.2

Source: ABLE Bio spectrum survey, 2005-06

Key Exits Bio pharma, the largest segment, grew by 32 per cent to exceed US$ 1 billion. Exports were at US$ 763
million, and accounted for 52 per cent share of total industry revenues. Bio-pharma accounted for 75 per
cent percent of the total exports and 70 per cent of domestic sales. Agri-biotech and bio-services are
registering the fastest growth. Investments in the sector have crossed US$ 360 million in 2005-06,
growing 36 per cent over the previous year. The Indian Bio-tech industry is expected to reach US$ 5 bn
mark by 2009-10 (source: ibef.org - India Brand Equity Foundation)

service provider) on NYSE was the largest PE backed IPO

during 2006. Warburg Pincus acquired 68% equity in
WNS in 2002 via partial buyout of British Airways stake.
Indian Bio-Tech Industry Market Projections
? In the form of exit where one PE/VC sells to another 6.0
5.0
PE/VC, Baring Private Equity Partners exited from 5.0
Cybernet Software System and its subsidiary Slash
4.0

USD billion
Support by selling it stake to SAIF for US$ 21 mn
3.0
? In a large buyback exit route, Citigroup sold its 23% stake
2.0
in Progeon (BPO service provider) for US$ 115 mn to its 1.1
0.5 0.7
1.0
parent, Infosys. Citigroup invested US$ 20mn in 2002,
thus making a return of about 5.7x on its investment 0.0
2002-03 2003-04 2004-05 2009-10
over 4 years.

18 19
 India has more than 300 biotech firms focusing on different aspect of the value chain, however about half of the revenues are concentrated
4.2.1 Investment in Biotechnology India
with the top 10 companies. Focus areas of certain leading companies in India as shown in the table below suggest that vaccines and bio-
generics are the common areas of interest among leading biotech companies India. Investment in the Biotech sector in India has been booming, as companies successfully tap investors for cash. While some are clearly driven by
speculation, investors with medical backgrounds and an appreciation for the fundamentals are also active. In part, the increased activity
reflects growing investor confidence, stemming from India's booming economy and stable government. The sector has attracted funding
from international agencies such as the World Bank. The international finance corporation, the Banks' VC/PE arm, has committed to US$ 4
million in the APIDCs Biotechnology fund. Some of the recent India related a PE/VC deal that has happened in bio-tech and related sectors
Company Focus Area
are shown below:
Bharat Biotech Vaccines

Biocon Biogenerics and monoclonal

Dr. Reddy's Lab Biogenercis

Month/ Investee VC/PE Amount Investee Profile
Panacea Biotech Vaccines, Antibodies and Biogenerics Year (USD mn)
Serum Institute Vaccines Apr-07 Avesthagen Jacob Ballas Capital 10 Bitechnology Company
Shanta Biotech Vaccines
Mar-07 Med Plus iLabs 5.2 Pharma Retail Chain
Wockhardt Bio-generics and vaccines
Jan-07 Avestha Gengraine Fidelity International, Groupe Limagrain and 32.5 Biotechnology
Zydus Biogenerics Deninvest of Groupe Danone, besides the
newspaper group Bennett, Coleman & Company
Source: E&Y Research
Oct-06 Paras Pharma Sequoia Capital India 12 OTC and Personal Care

Jul-06 Emcure Pharma Blackstone 50

Jun-06 Manipal Health Systems IDFC Private Equity 20 Healthcare

Jun-06 Siro Clinpharm Barings Private Equity ND Clinical Research

India's evolving biotech industry can be looked at from phases/acts of growth as shown in the table below.
Mar-06 Claris Life Sciences Carlyle Group 20 Indian drug maker
Act 1: Services Act 2 : Products Act 3 : Global Expansion
•Research Source: VC Circle, Public News
•Clinical studies
•Clinical data processing
•Manufacturing

DRIVERS DRIVERS DRIVERS

•Pricing pressure •Improving Patent Regime •Domestic Innovation
•Labor force •Domestic R&D •Competitive Pricing
•Increasing demand •Viable Business Models

India's “first act” of services based on life sciences services is expected to ramp up over the next few years. The country can offer international
companies valid data from good clinical studies at substantial savings in cost and time. On the back of its advantage in information
technology, access to inexpensive and well trained human capital, India is well positioned to become the hub for managing and processing
clinical data. Increasing time pressures and data intensive clinical research is fueling this growth. While working on its first act, India is also
preparing for its “second phase” of growth which is expected to build upon the product theme. Many of the current research should lead to
future products in the fields such as biogenerics, vaccines, biochemicals, nuturaceuticals and therapeutics etc. India's “third act” of
emergence will involve Indian companies entering the overseas market. This will be driven by domestic innovation, competitive cost and
viable business models that have already been tested in India.

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 Even as the Indian Industry is advancing in key competitive
niches, market trends are creating more growth
opportunities. The country's old patent regime fostered a
skilled generics industry and many Indian firms are well-
positioned for the coming waves of patent expirations.
Action so far has been in pharmaceuticals, but several
biologic drugs are expected to go off patent soon,
including such blockbusters such as Epogen, Novolin and
Humulin. Indian biotech companies are gearing up to
garner outsourced drug manufacturing contracts and
companies such as Biocon, DRL, Wockhardt, Panacea
Biotech and Shantha Biotechnics are already preparing
generic versions of
Biotech drugs. The focus on this sector would be primarily
in product categories such as-EPO products, Human
Insulin, Interferons, G-CSF.
India is also investing aggressively in the stem-cells sector.
Reliance Life Sciences is investing in an animal facility to
conduct toxicology and pre-clinical efficacy studies for
cell-based therapies. Leading institutes such as LV Prasad
Eye Institute, National Center for Cell Science and the
Indian Institute of Science are at the forefront of stem-cell
research. Companies such as Reliance Life Science and Life
Cell are developing umbilical cord blood cells banks.
The national government is interested in creating stem cell
clusters some of which maybe based on the public private
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partnership model. India's booming IT services industry and
the rapid convergence of IT and biotechnology provide
promising growth opportunities. The Indian Bioinformatics
industry is projected to grow rapidly with several Indian
companies investing aggressively. Tata Consultancy
Services won a contract for drug discovery from Italian
biotech company Congenia. Indian firms such as Strand
Genomics, Scinova, Macson and Ocimum Biosolutions
offer forward integration of IT systems and drug
development and also help implement clinical trial programs
at lower costs with shorter timelines. Three broad
opportunity areas that have emerged in the areas of Bio-
Informatics are: Integrated research application services,
data based services and discovery software services.
4.2.2 Emerging
Opportunities
in Indian
bio-tech Industry
Another growth opportunity is vaccines, traditionally a
source of stable revenue for Indian Biotech forms.
Recently, the strategic emphasis has shifted to developing
new vaccine delivery systems for example in August 2005,
Serum Institute of India and Shantha Biotechnics
launched 4-in-1 vaccination techniques designed to
protect children against Diphtheria, tetanus, Pertusisis,
and Hepatitis B, these new delivery system has made
these more affordable and hence helped it expand its
reach.
India's Biotech Industry is making the right moves. The
government is undertaking much-needed policy and
regulatory reforms to unleash competition and growth.
Domestic companies are partnering to find strategic
opportunities and niches. Challenges remain, such as
continuing to make progress on IP enforcement and
developing human capital. But the country is already
well-positioned to leverage emerging opportunities,
from bio-generics to stem cells. With continued focus,
there
is every reason to expect that India will be a major
stakeholder in the global Biotech industry and this should
4.2.3 Outlook
provide good opportunity for investors to invest for future
profits. However, we believe that funding biotechnology
startups is still difficult and a key bottleneck is the
uncertainty around valuing emerging companies in this
sector. Finding suitable benchmark in Indian biotech
sector is often a challenge, and a rapidly changing
regulatory and policy structure adds to the problem.
Venture capitalist is often deterred by the lack of
knowledge of biotech, more than by high risk. But seed
money to fund startups will be critical for the growth of
India's biotech sector, and therefore government
incentives and initiatives to spur seed capital are the key.
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 PE/VC investors are highly bullish on India because of overall growth in Indian economy (GDP 8-
9%), globalization, government initiatives in liberalizing regulatory environment towards private
investments, stable and maturing financial markets (providing good exit opportunities to PE's),
India's population of greater than 1bn people (boost for consumer related business) and growing
appetite for innovation and entrepreneurship across various industry verticals. Furthermore,
given the significant increase in the number of VC's actively looking at India one would expect
continued growth in early / mid-stage & later stage development capital. As such India is foreseen
to continue be one of the most active VC markets across the globe in times to come. However
with global PE's / Buy-Out funds now also actively looking at India, in combination with the
continued liberalization of the capital market, one would also expect Buy-Out activity levels,
which at present are rather limited compared to the West, to significantly increase in terms of
overall deal value potentially surpassing VC activity in the coming years.

5. Conclusions

Clearly this increase in VC/PE activity level will bring many benefits to the Indian economy. Similar
to many other locations in the world, whether it will also bring investors the returns which they are
looking for remains an open question. On the one hand the economic fundamentals are strong
which should boost returns but on the other hand due the substantially increased amount of
funds investors are looking to deploy in India competition for early and late stage (Buy-Out)
transaction is intense and could potentially increase entry valuations to a level where it will be
challenging to meet target returns. In this regard it might also be a wise investment strategy for
PE/VC investors alike to further diversify their portfolios and not over-expose themselves to
current preferred sectors such as IT/BPO, telecom and internet, but increase their exposure to
emerging sectors in India such as biotech, real estate and infrastructure, travel & tourism, medical
tourism and entertainment and media. This broader based investment strategy will further boast
overall innovation, entrepreneurship and economic growth across sectors and will augur well for
India.

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