Why India Doesn’t Have A Baidu – And May Not Ever


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Why India Doesn’t Have A Baidu – And May Not Ever

Feb. 17 2011 – 7:20 pm | 1,738 views | 1 recommendation | 0 comments

Posted by Rebecca Fannin

I remember venture capitalist Sumir Chadha telling me that he had just made his best business decision. That was back in 2006 when he merged his young firm Westbridge Capital Partners with the well-known tech investor Sequoia Capital.

The move certainly did jump-start his career as India’s premier venture capitalist. But now that Chadha and his core team of three partners have split from Sequoia Capital India to focus on investing in public companies, the break-up spells a new era not only for the Goldman Sachs-trained investor but also for venture capital in the subcontinent market.

India does not yet have a Baidu or Alibaba – two of the most successful among dozens of Chinese startups that have gone public. And the odds for India startups to fly high are slimmer now that one of the most experienced venture teams in India is shifting to PIPE (private investment in public equity) deals. Their reasoning? Why do venture when you can invest $10 million like Sequoia did in late 2008 in Nagarjuna Construction Co. and get $23 million in six months. Sequoia Capital India has made at least seven PIPE deals.

Venture deals in India take a much longer runway and only one startup has generated a return that could measure up to China – though the promise still remains. As five remaining managing directors take over at Sequoia Capital India, it’s not going to be business as usual at India’s leading venture firm and its portfolio of 94 tech, consumer, financial, healthcare, energy and outsourcing deals.

Could the same thing happen at Sequoia Capital China? Not too likely. But keep in mind that founding managing partner Neil Shen has trended from venture investments in startups to larger funds for fast-growth emerging companies. He’s also done some PIPE investments – just like the India team under Chadha’s leadership.

My reasoning why it won’t be repeated in China? Investment returns in China startups have far outperformed those in India, and many more young Chinese companies are set to go public this year.

Just this past August, India finally had its first major breakthrough when online travel portal MakeMyTrip listed on NASDAQ and scored a market valuation of $903 million. It was one of the top IPOs from Asia last year and by my records, the first venture-financed Indian startup to go public in the U.S. The long-awaited success of MakeMyTrip among Indian startups could be the door opener for several more to list in the U.S. Local search firm JustDial (a Sequoia deal) and mobile entertainment player InMobi (Kleiner Perkins) are among those poised to IPO in the U.S.

(For more background on the rise of entrepreneurial talent among Indian startups and the nation’s fast-expanding mobile communications and consumer markets, see my Forbes column: India-The Gap is Narrowing.)

Of 49 IPOs of Asian companies in the U.S. during 2010 – most backed by venture capital or private equity – 45 were from China and only one from India. China counted such high fliers as online bookseller Dangdang, video sharing site Youku and outsourcing startup HiSoft Technology. (See Forbes writer Gady Epstein’s recent piece on China IPO.)

Previous IPOs of Indian companies—aside from the major outsourcing players Infosys and Wipro—have been on domestic public exchanges. Over the past five years, these include five Sequoia deals—SKS Microfinance, eClerx, Edelweiss, Manappuram Financial, FirstSource, Idea Cellular—as well as a Kleiner Perkins deal, job site Naukri.

Acquisitions have proven to be another path to realize gains from portfolio companies in India. Sequoia counts at least four. Among them is Pearson’s acquisition of a 76% stake this past January in online tutoring site Tutorvista for $127 million. Plus, Sequoia made a 4x return when pharmaceutical software sales developer MatrixRX, Inc. was acquired by Cognizant Technology Solutions Corp. for $140 million in 2007, according to what Chadha told me back then.

India is on the rise, but compared with China, its venture capital market lags in deals and fund sizes.

Last year, India venture capital investments increased 14% to $895 million in 92 deals, while China leaped 59% to $4 billion in 262 deals, according to Dow Jones VentureSource. India fund raising declined 38% to $2.4 billion in 2010 (from a peak of $9.4 billion in 2008), while Dow Jones LP Source reports China jumped 78% to $11.4 billion last year—still short of the peak of $14.8 billion in 2008.

Only a handful of venture firms, including Helion Ventures, DFJ, Kleiner Perkins, IDG and NEA IndoUS, remain committed to funding startups in India. Battery Ventures departed in 2009 after losing money on Travelguru (also a Sequoia deal) in an acquisition by Travelocity for $12 million. Several others, including Accel and Norwest Venture Partners, have gravitated to funding both emerging and startup companies.

It seems unlikely that the new team at Sequoia Capital India will place a lot of bets on the kind of disruptive tech companies that the venture firm is known for in Silicon Valley. Sequoia Capital India has two funds for investing in fast-growing companies – $400 million raised in 2006 and $725 million in 2008.

Certainly, Chadha’s own investment strategy became bolder over the past decade. In 2009, the former Goldman Sachs and McKinsey & Co. executive moved to booming Mumbai from the Bay Area where he had started his Indian venture career in 2000 with a Westbridge fund of $140 million and a successor $200 million fund. Out of the first fund’s 18 investments, Chadha later told me that there were just three write-offs – not a bad track record for this pioneering market.

His deal making began with safer bets in areas where India had expertise, primarily outsourcing. Later, he turned to doing more deals among emerging tech companies: mobile gaming and social networking (Mauj) and Internet (Travelguru, TutorVista and Shaadi). More recently, the focus expanded to healthcare (MarketRX), software (AppLabs), retailing (Café Coffee Day) and even luxury brands (Genesis Colors).

How the new team at Sequoia Capital India handles the transition and charts its own journey will signal prospects for the evolution of venture capital in this key Asian market—the largest after China.

A whole group of entrepreneurs I’ve interviewed in India would like to become as rich and famous as Robin Li of Baidu and Jack Ma of Alibaba. Will the venture capitalists still be there to help them finance their dreams of startup glory?

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