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Venture capitalists level sights

For the Indian software entrepreneur, the trend is future positive. The venture capital arm of the Industrial Credit and Investment Corporation of India has set up a fund for software developers and with other venture capitalists getting into the act, the industry looks set to hit big time.

Software developers are traditionally placed in the 'high risk' category by banks and financial institutions. The common grouse is that most small software companies are unable to provide the collateral required to justify the loan.

Draper International is an advisor to the multinational venture capital company Draper Fisher Jurvetson. Abhay Havaldar, a partner in Draper International, told Rediff On The Net "The primary question is how to fund working capital. The Indian software industry is traditionally weak at creating demand, especially in a global market. Their expenses are front-loaded and they have a strong service orientation. Also, sufficient emphasis is not given to marketing their ideas which again is an impediment."

Steve Jobs, founder Apple Inc, famously proved that to start a software company you need bright young minds and bagfuls of ideas. These are not the stuff of which banker's dreams are made.

The Indian software scene is full of such hopefuls who have the ideas but lack the financial base to make it big. If the venture capitalists have their way, these software entrepreneurs can soon breathe easy.

The Technology Development and Investment Corporation of India has set up a venture capital fund aimed exclusively at the software industry. The TDICI is a venture capital company promoted by ICICI and the Unit Trust of India. The scheme has been dubbed the Software Fund.

S K Ganapathy, manager, TDICI, in a recent interview to a news magazine said "We made a survey on the financing options for Indian software companies and recommended the need for a special financing scheme for the industry. This is supported by the World Bank and the Ministry of Finance."

Ganapathy explains "The Fund will be rupee-denominated and we will seek returns by way of getting listings on the stock markets, which is when we will disinvest. We are keen to invite seasoned industry professionals from India and abroad to promote new India based ventures. Also, it must be clarified that there are no issues with nationality, location, principal market etc."

"The total amount available with us is Rs 537 million, and the investment range will be between Rs 20 million and Rs 50 million, with an investment horizon of 3 to 5 years. For start-up proposals the management's accomplishment and experience will be the basis of our decision making," concludes Ganapathy.

Two firms, in Bangalore and in Pune, have already struck deals with the TDICI and it is actively seeking further deals.

Says Ashok Samuel, vice-president, TDICI, "It is always better to target companies and go after them. We have some companies under consideration, but no deals have been struck yet, so I can't reveal details."

The government of India's Department of Electronics Secretary Shyamal Ghosh told Rediff "There are a lot of small software developers who are in need of capital. Being very conservative, financial institutions do not extend much wanted capital easily. This has not allowed the software industry to flourish. We would like to remedy this."

DoE firmly believes that software is the new wave in India. Joint Secretary O N Vaid, defending his department's decision to get on the software bandwagon, says "There is no question that the software industry has a big future in India. If you look at the production-exports records and the forecasts for the next five years, you will see its tremendous growth potential."

To overcome financing problems, the DoE is pushing hard to introduce the concept of 'sweat equity'. The country's bourses still have a system which needs shares to have a face value. This badly affects the introduction of sweat equity which requires laws to allow the buying of shares at less than their 'par' or face value.

At present, shares cannot be issued below par. DoE's Ghosh plans to change all this and allow promoters to hold more shares than their money's worth. For this the DoE is planning to petition the Company Law Board.

Often, in an organisation, one party provides the capital, and another, the technical know-how. The technical or mechanical contribution, while very real, is often difficult to value. 'Sweat equity' is a concept that will compensate the back-room boys for literally shedding the sweat off their brows.

Ghosh is gung-ho. "This concept is very popular in the West, particularly in the USA, where this system is used to reward the developer for his brain power. When the software company goes public, the software developer is allotted some shares at zero value. This encourages him and provides the motivation to improve the standard of the market."

The notion of sweat equity is entirely foreign to India due, in part, to some antiquated practices.

The system of issuing shares with a face value is a relic of the Raj. Its downside, however, is being keenly felt by software entrepreneurs. When starting a company, the venture capitalist provides a part of the capital but the entrepreneur is bound to provide a minimum percentage of the capital himself. The amount is linked to the face value of the shares he issues. If the entrepreneur cannot come up with that portion of the capital his project gets stalled.

Some companies, however, have neatly skirted this regulation by capitalising their assets in the USA. This brings them under the purview of US laws, which affords many advantages.

"Mastek, CBSI, and IMR are some companies which have taken this route" says Havaldar. "They are Indian companies which once competed with the Infosyses of this world, but have now grown many times larger. For one thing, they have listings on the NASDAQ, which allows them to issue stock options in the US. They are able to multiply at a fast rate."

The Indian corporate world seems to welcome this initiative of the DoE. "It can only be for the good of the industry and moves like these by the DoE should be encouraged," feels a senior Indian CEO. The DoE has also reported positive feedback from the software industry and the National Association of Software and Service Companies.

Says Havaldar: "The mindset of the Indian entrepreneur should change. They should move away from the 'breaking even' fixation and accept that the rate of growth is more important in this line of business. What is critical in the software industry is the time of marketing. As of now, there is an 8 to 10 week procedural delay to bring in capital even if you come in the 'foreign direct investment' way. In this business if I delay my product launch by even a few days it quickly becomes outdated. I needed my money yesterday."

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