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Venture capitalists flock to Bangalore as dot-com firms boom

Venture capitalists are flocking to India's IT capital Bangalore with stacks of cash to pump into Internet start-ups and dot-com firms despite the doomsday predictions buffeting global IT stocks.

Each fund manager is every day approached by an average of three or four aspiring IT companies and individuals who hope to set up new projects in Bangalore, analysts said.

"We are getting about three proposals a day," said Vijay Angadi, a partner in ICF Ventures which has invested about $ 10 million in IT firms in Bangalore.

"The entry-level barriers in India's Internet companies are very low compared to other countries. Labour is very cheap and some guys set up a company for Rs 500,000 rupees ($ 1,149) in the hope of selling it later," Angadi said.

"There is a rush and a bit of madness, though it is petering out. The venture capital industry in India is built on the backbone of the IT industry."

Bangalore is one of Asia's fastest growing cities and accounts for 40 per cent of India's software exports.

It employs 35,000 software professionals and companies such as Motorola, IBM, Texas Instruments, Sony Corp and Hewlett-Packard are among the 396 firms exporting software from Bangalore.

Internet portals have been mushrooming across India in the past two years. Most of them do not provide details of investments made and revenues generated, fuelling industry predictions of a shakeout.

All the players are vying for the 70 million Internet users estimated to be on line in India by 2003, as against two million by the end of this year.

Analysts said venture capitalists have accumulated investments of about $ 10 billion in the country.

"The best year for the venture capital industry was 1999 when entrepreneurship took roots in India. It was a very fertile year. The creative juices of many young people were let out and many of them wanted to enter the dot-com business," Angadi said.

"The best of the people who worked for brick-and-mortar firms found that working for start-up companies is fashionable," he said.

"India suddenly became a happening place and foreign funds moved in. The stock markets also accepted the high-technology companies. Along with that the venture capital industry began to grow."

Early this year, an Indian capital markets watchdog said it would attempt to regulate the industry. Finance Minister Yashwant Sinha shored up the infant sector by announcing tax concessions in his February budget.

"There is only one way for the industry to go. And that is up," said S P Kamat, a partner in Sivan Securities, which has set up a $ 5-million incubation centre for IT firms.

"There is rapid growth. India has the advantage of cheap and skilled labour and its software industry is the best in the world.

"For the moment the venture capitalists are looking at the IT industry and not at other sectors. Four to five people meet us every day with their ideas for setting up new firms," Kamat said.

Muneesh Chawla, senior vice-president of IL and FS Venture Corporation Limited, said that his company had already clinched 22 deals worth $ 55 million, which included five Internet start-up companies during last year.

"Earlier a large part of the money of venture capitalists was invested in development initiatives of the company and not in high-technology. The growth in the venture capital industry happened because of the IT industry," Chawla said.

"They also saw the possibility of using investments to grow a company from the start. Most of the IT industry was looking for seed capital and most of them went abroad to raise the resources. Now global and Indian players have set up base in India," he said.

Foreign players in India's market include names such as HSBC, ING Barings, Citibank, Walden Ventures and Schroeders Ventures Asia Pacific Fund.

"Everyone is here. About $ 1.5 billion are readily available for investment. Now foreign funds also see that they can get returns out of India," Chawla said.