That’s how the investment scenario also goes today dot-com entrepreneurs versus venture capitalists—VCs aren’t funding those dot-coms.

There was a time when a well-presented e-business plan was a sure ticket to becoming part of a VC’s portfolio. Now that looks like the story of a crazy world that existed long, long ago. A world where the VCs were ready to dole out money and investors’ appetite too for such stocks never seemed to be satiated. The valuations kept on moving only in the upward direction). Of course, what was missing was an element of sanity. Or how could a dot-com company like Indiaworld with a revenue of Rs 1.5 crore be valued at a stupendous Rs 499 crore? And why would loss-making dot-coms be valued at 100 times over their brick-and-mortar brethren?

The reason was partly that VCs were flush with money, they still are, and were too eager to invest. For them, the strategy seemed to revolve around the law of averages. All they needed was a few multi-baggers among the numerous companies in their portfolio and they would strike gold. Moreover, Nasdaq’s tech stock seemed to be ever sky-rocketing and there was a never ending queue of dot-com IPOs. Not only did this create ever-expanding VC funds but also made Nasdaq the next stop for most dot-coms.

In India, we all know that barring Rediff, none of the other big dot-coms have made it to any IPOs, leave alone the Nasdaq, even after spending several crores on marketing and advertising.

Reality checks in

But all good things must come to an end. And so it happened with dot-coms. It seems that one fine day investors woke up and started talking about profits and long-term viability of the dot-coms. Earlier, entrepreneurs as well as VCs had believed that setting up a Web site meant a better business model just because they were selling online versus offline. Also, their value was really based on high growth expectations, assuming flawless execution without any competition in the next 4–5 years—a highly unrealistic scenario. And then it was like a house of cards. Suddenly the whole dot-com business seemed fated to collapse. Big, global names started to crumble as investors refused to part with more money without proof of profits. The scenario seemed to have changed suddenly. In order to stop bleeding, layoffs started becoming common among dot-coms.

Soon dot-coms were being shooed away from the investors’ portfolio. India’s lone dot-com listing on the Nasdaq, Rediff, had been oversubscribed by over 18 times and had peaked to $26 around June 2000. But since the dot-com meltdown, its scrip witnessed continuous new lows to reach its nadir of $2.5 by December last year. The current price—$4.6. So, while current dot-coms are scampering to find new revenue models and even newer VC partners, the VCs, after burning their fingers are licking their wounds and moving to catch up with other trends.

India still a viable option

The short-term good news is that VCs are still flush with money and India seems pretty high on their agenda. And the long-term good news is that they have become a lot wiser, thanks to the dot-com experience.

India, sans dot-coms, remains a priority for most of the VCs as it has the potential to give them the multi-baggers. Says Pravin Gandhi, director, Infinity Technology Investments, "Yes, India remains a key market for investments from venture capitalists and it is verified by the fact that a sizeable amount of investment has flowed towards tech-driven startups over the last nine months." India still has the basic components to bring in VCs in droves. First, there is an abundance of talent available in the country. Though a bit cliched now, the low-cost high-quality Indian workforce has brought in a comfort factor for the clients in the developed countries. This was further strengthened by the Y2K project work by Indian companies, which helped develop tremendous branding for Indian SW professionals. So, VCs are also more comfortable dealing with this brand. Second, there are a number of Indians in the Silicon Valley and with many in the successful entrepreneurial mode, VC money is again more comfortable in changing hands in India. Though the investments are still insignificant as compared to global VC and angel investments, the trend is rapidly picking up. According to Nasscom, the VC and angel investment in high-tech firms in India is going to from $20 million in 1996 to an estimated $1.2 billion by 2001 and could touch $10 billion by 2008.

VCs in India

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