September 20, 2008

Outlook for Indian Corporate Venture Capital - By Sanjay Anandaram

While VC funds have played a critical role in the creation and sustenance of companies in the US, it would be a gross oversight to miss the role that US corporations, especially in Silicon Valley, have played in engendering and nurturing innovative startups. From hi-tech companies (e.g. IBM, Intel, Microsoft, Cisco, SAP, Motorola, Google) to bio-tech and healthcare (e.g. Dow Chemical, Johnson & Johnson, SmithKline Beecham, Pfizer) to publishing and media (e.g. Reuters, EW Scripps, McGraw-Hill, Disney, Sony) to aerospace and defense companies (e.g. Boeing, Lockheed Martin) to energy (e.g. Chevron, BP) have played an important role in furthering innovation in the US. According to PricewaterhouseCoopers and the National Venture Capital Association, in the first half of 2008, corporate venture capitalists were involved in roughly 300+ companies or 20% of VC deals signed and invested over $1 billion or 7% of overall venture capital dollars invested in US companies. Even the CIA spun out a venture capital fund called In-Q-Tel in Silicon Valley about a decade ago for investing in next generation companies!

Over the past couple of years, the funding environment for Indian startups has changed dramatically. There are funds across the entire chain – angels to early stage to growth and beyond. The ecosystem is becoming more and more developed and conducive for entrepreneurial companies. The one big missing link was the serious involvement of the Indian corporate sector. Therefore, Bharti Airtel’s recent announcement of the Rs 200 crore Airtel innovation fund aimed at fostering innovation and entrepreneurship in telecom was a long overdue and extremely welcome one. And as a poster-child for world-class entrepreneurship from India, it was only apt that Bharti Airtel be the one.

Of course, while companies like Infosys had incubated and spun-out companies like Yantra and OnMobile and HCL and Infosys had invested in the odd VC fund, there hasn’t been a formal investment and corporate development effort by Indian companies for gaining strategic advantage apart from financial returns. In recent times, Reliance Technology Ventures, Capital18 (the investment fund of the Network18 group) and the Future Group (brands like Pantaloons and Big Bazar are part of this group) have established formal programmes as well. These are very welcome initiatives and must be encouraged by all interested in the creation and growth of Indian entrepreneurs and innovation. The shifting of gears by the Indian economy and the consequent explosion in opportunities have, of course, played a great catalytic role in engendering change in the traditional mindset. The realization that constant innovation in a knowledge economy is critical for continued value creation is forcing companies to set up corporate development programmes.

The specific reasons are therefore straight forward: no one company can keep up with the rapidly changing market and technology scenarios; early investments in startups can provide interesting marketing, sales, channel, customer support, supply chain and technology insights; access to high calibre talent and innovative business models is another benefit; and of course, potentially attractive downstream M&A opportunities and financial returns. Startups, for their part, apart from having access to traditional VC funds now also can access corporate funds which provide advantages like access to customers, markets, technology, best practices, manufacturing, brands, and so on. Startups with corporate venture capital backing gain higher valuations at IPO than those without and also get higher takeover premiums in acquisitions according to studies in the US.

Startups should also be aware of the challenges of taking capital from corporations. A close relationship with a corporation might prevent other companies from associating with the startup due to fears of competition. The startup can end up serving only the custom needs of the corporation to its detriment since it may be ignoring a larger and more lucrative market opportunity that might not be of interest to the corporation. The startup should also take care not to be excessively close to its corporate investor as the corporation’s bear-hug might become suffocative.

Clearly, as the Indian economy and Indian companies continue to grow and mature, the premium on rapidly creating and delivering innovative solutions to customers will only rise. Innovative solutions require innovative approaches and insight. And innovation around the world is nurtured best in fast moving, high calibre startups. Hopefully therefore we’ll see more Indian corporate VC funds playing their part in the Indian entrepreneurial ecosystem.
What do you think?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.