The Deal Outlook 2009 by gruhashoba

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									www.vccircle.com February 2009

FOR DEALMAKERS

SHAKEN & STIRRED
Real estate industry has been in trouble. But experts believe the industry will stage a recovery of sorts by launching ‘affordable’ options. 15

RIDE OUT THE STORM
Hedge fund managers who lived through the carnage of 2008 say that there are brighter days ahead in India for those investors willing to ride out the storm. 14

CATCH-22: LIFE OF AN ENTREPRENEUR
An exclusive column by Mohanjit Jolly. He explains how a startup can deal with the chicken and egg problem of achieving milestones and raising the capital required to do it. 20

POWER SHIFT
We track the top level changes in private equity, VC and financial world. 24

TRENDMILL
Following the latest investment trends, deals and dealmakers. 2

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FROM THE EDITOR
A few weeks ago, a friend from a private equity fund wrote to me saying "2009 is the year of inflection". What he meant was: this is the year to push your company harder (and take it to greater heights when the good times come). 2009 will no doubt look very tough. Revenues may be hard to come by. Profits, even harder. But that should not stop you from building your company or distract you from the real thing. My investor friend, contrary to the prevailing view, is convinced that good days are ahead, if not in 2009, the year after. As the year confronts you with challenges that you haven't seen before (not in the lifetime of many of us), here is a 24-page special offering from VCCircle that should help you obtain deep insights into India’s investment economy. We have aptly titled it VCC Insight. The mini-mag debuts with a detailed survey on the deal economy based on the thought-provoking views of 33 top dealmakers in the country. Our talented editorial team led by Shrija Agrawal and Madhav A Chanchani conducted exhaustive interviews with the busy fund managers to know how the year will look like for dealmaking. This was no mean task given the high profile of the respondents. Yet, it was accomplished in a short span of two weeks. The key takeaways are: there will be fewer deals in the year; quality will prevail over quantum of deals; valuations will adjust even further, especially in the private markets; sectors like education, alternative energy and media will attract funding. I am not spilling all the beans here; turn to Page 4 for more. We also bring to you a special feature on the Indian real estate industry. Ruchika Sharma provides a detailed account of the ground realities governing the industry. Check this out on Page 16. Also remember to read Mohanjit Jolly’s column Catch-22: Life Of An Entrepreneur. We hope you will enjoy reading this special offering from us. Remember to send your feedback to sahad@vccircle.com.

TRENDMILL
Cricket And Celebs
Investor interest in the Indian Premier League (IPL) seems to be increasing in the run-up to its second edition which will begin in April this year. The growing interest in the IPL franchises is governed both by its popularity and investment opportunity. In keeping with this sentiment, film actress Shilpa Shetty and her friend Raj Kundra have picked a 11% stake in Rajasthan Royals, the team from Rajasthan that won the first edition of the IPL. The IPL franchise has been valued at $140 million. Manoj Badale, owner of the franchise, said the firm had seen a lot of private equity interest, especially since its returns on investment had nearly doubled in less than a year. Earlier, Deutsche Bank executive Anshu Jain bought a 15% stake in Mukesh Ambani's IPL franchise Mumbai Indians in late 2008. Hyderabad-based media company Deccan Chronicle has put its IPL franchise Deccan Chargers on the block.

AIMing At Promoters
Raising funds in London Stock Exchange’s Alternative Investment Market (AIM) may be easy, but maintaining the listed status and also handling the shareholders can get difficult. KSK Emerging India Energy Fund Ltd (KEF), a company that raised £100 million in June 2008, is a case in point. KEF was wound up on January 23, 2009, after an extraordinary general meeting of the shareholders held on January 22 tendered a resolution demanding their funds back. Although all details are not

Sahad P .V.

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available, the company has attributed the shareholder apathy to their own internal problems (caused by the global capital crunch). KEF, promoted by Hyderabadbased KSK Group, has not made an investment yet; that could make the liquidation easier. Another example of shareholder activism in AIM is that of a hedge fund shareholder demanding the removal of Raghav Bahl and Alok Verma as directors of the Indian Film Company. The company, promoted by TV 18 chairman and managing director Raghav Bahl, has apparently not delivered returns to shareholders commensurate with what the company has earned. IFC has released blockbuster movies like Jab We Met, Welcome, Singh is Kinng and Ghajini.These films have performed well at the box office, but not for the shareholders, Altima India Master Fund, the shareholder, alleged. Bahl has finally met with the hedge fund’s demand. Bottomline: If you are aiming for a listing on AIM, be prepared for hard questions.

Both the institutions have invested $150 million each in the fund, which has a final target between $800 million and $1 billion. This would be the first instance of an Indian fund manager raising a fund with a panAsia focus. Besides these two, IIML also closed its growth fund at $225 million recently. The fund has also made its maiden India deal by picking up a 5% stake in IL&FS Transportation Networks (ITNL) for Rs 130 crore. IIML has about $1.9 billion under management.

Family Businesses Into PE
Aditya Birla Group is one of the few traditional family business groups in India to set up an independent PE fund. The group is currently on road to raise a $250 million mid-market focused PE fund which will have external investors. Kumar Mangalam Birla (left), head of Aditya Birla Group, will be the anchor investor. He is expected to put in 20% of the corpus. The fund expects its first close at $100125 million in the second quarter of this year, according to Bharat Banka, MD & CEO of Aditya Birla PE. The Dabur group has also set up a fund. The Burmans (Gaurav and Mohit Burman, sons of Vivek Burman) are the chief promoters of Elephant Capital, an AIM listed PE fund with an India investment focus. The £50 million fund – earlier called Promethean India – was spun off as a separate entity some months ago. Last year, Chennai’s TVS family and the Shriram group teamed up to set up a PE fund – TVS Shriram Growth Fund – with a corpus of Rs 600 crore. Can we see more of such funds?

Pledge Shares, But Disclose
Indian promoters of listed companies have been pledging shares with financial institutions and banks to fund their own ventures or even to buy a personal jet or a private island. You can still do that, but now you need to tell your shareholders that you have pledged the shares to raise debt from institutions. Market regulator Securities & Exchange Board of India (Sebi) has made it mandatory for promoters to disclose the pledging of shares. Sebi’s action was in response to Satyam Computer Services’ former chairman B Ramalinga Raju’s revelation that he pledged almost all his shares in the IT company to fund his family’s real estate forays. After the Satyam scam broke out and the shares took a plunge, the institutions in possession of those shares started selling them.

IIML Scaling New High
IL&FS Investment Managers (IIML), the PE arm of IL&FS, has reasons to rejoice in these gloomy times. For one, only a couple of months ago, they closed a giant, $895 million real estate fund. In January, IIML announced the first close of its international fund at $568 million. The fund – christened Standard Chartered IL&FS Asia Infrastructure Growth Fund - is co-sponsored by IL&FS and Standard Chartered Bank.

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THE DEAL OUTLOOK 2009

A survey of 33 investors and bankers show that dealmaking may slow down this year, but quality will prevail. BY SHRIJA AGRAWAL & MADHAV A CHANCHANI

Sudheer Kuppam MD, Intel Capital

Raja Kumar, MD, UTI Ventures

Gopal Srinivasan CMD, TVS Capital

Harsha Raghavan MD, Candover PE

Sarath Naru, MD, VenturEast

Sanjay Bansal, MD, Ambit Corp Finance

Yes, We Can! Dealmakers could perhaps borrow a nugget from the Obama wisdom to make the next 12-18 months worthwhile. An exclusive survey conducted by VCCircle based on interviews with 33 top dealmakers in the country indicates that far fewer deals may be seen in 2009 - coming from private equity, venture capital or M&A alike. The overriding sentiment is that despite all talk of corrections in the public market valuations, the private companies have still to adjust their expectations. Private equity investors find that an impediment to do further deals. However, the liquidity crunch and over-leveraged positions will eventually induce the promoters to readjust their positions. Exits this year are also likely to be few and far between with the IPO market drying up. Strategic M&As and consolidation-by-necessity will become the only routes to get out. Investment holding periods will stretch out for sure. The era of quick bucks, it emerges, is well and truly over. Many a fund - especially rookie fund managers -will find it difficult to do deals in this market, and some say a shake-out is on the anvil in the fund world. Those with high pedigree and sound background

will weather the tough times, while the others may simply disappear or lie low. But those funds that are looking to do deals in these times say certain sectors are undoubtedly appealing even today. Consumption -driven sectors like education and healthcare, and even alternative energy are the preferred destinations. Venture capitalists believe tough times like these are the best times to build great companies. Another point stressed by the survey participants is capital efficiency. There is no easy capital for companies that require lots of money to build their businesses. Corporate governance too is back in the investment lexicon. Our survey says that outbound M&A deals will come down as there is no capital to fund such acquisitions. We know how difficult it has been for Tata Motors to raise capital for the Jaguar Land Rover acquisition. The ticket size of deals will also go down drastically. We present the key findings of our interviews with 33 MD/CEO level functionaries of PE/VC funds and investment bankers. For easy reading, we have segmented the findings under three broad heads – Venture Capital, Private Equity & M&As.

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PRIVATE EQUITY
Slowing Deals
There is near unanimity on the pace of deal making in 2009. It will be slow. Almost all private equity fund managers that VCCircle spoke with see a slowdown in deal making this year. They say that going forward the deals may be available at even cheaper valuations. So, why do a deal now and regret later? For some, it may also be a question of not finding the right deals. "I would rather not do deals than being in an embarrassing situation," says Nitin Deshmukh, Senior Managing Director, Kotak Private Equity. Deshmukh has not made any investment till date from the $430-million fund that he raised in February 2008. He could stick by this plan through this year too. "If not, I would rather return the capital to my LPs," he adds. "The slowdown in transactions is not because of private equity funds' unwillingness to do the deal," says Shujaat Khan, Managing Director, Blue River Capital, "Rather, promoters are not willing to dilute at low valuations." The deals are also taking a longer time to close due to differences over valuation or because the investors are doing a more intensive due diligence now than ever before, especially in the wake of the Satyam scandal. "Deal cycles are definitely getting longer," says Aluri Srinivasa Rao, Managing Director, Morgan Stanley Private Equity Asia. However, the majority view is that the situation is likely to improve towards the end of the year.

Question Of Valuation
The dominant view among the investors is that the valuations in the private markets have not fallen in tandem with the public market valuations. "The expected slowdown in corporate earnings means that growth projections need to be realigned, especially for privately-owned businesses. There still remains a substantial gap between public and private markets," says Sameer Sain, MD & CEO, Future Capital Holdings. However, promoters may be forced to reduce their expectations as there are not many avenues to raise capital in this environment. "With banks not willing to lend, the IPO markets drying up, FCCB redemption pressures scaling up, and hedge funds going bust, promoters have realised the situation is not in their favour. Hence the only asset class that remains to be tapped is PE," says Sanjiv Kaul, Managing Director, Chrys Capital. Also, many companies are over-leveraged at the company or promoter levels. This situation cannot be sustained for long and private equity fund managers like Khan of Blue River Capital are hoping that cashstrapped companies will reach out to the funds to unwind a lot of this leverage. Harsha Raghavan, Managing Director, Candover Capital. disagrees: "There will always be entrepreneurs who either don't need the money or don't see the opportunity of coming out of this period of weak sentiment – they will instead hold out for the highest price at the cost of their business plans."

Who Will Get What
Although there is a view that the focus will increasingly be on promoters than sectors (the Satyam scandal has brought in a sense of fear among the fund managers), certain business sectors will continue to be more attractive than the others. For instance, asset and capital heavy businesses will be less preferred by investors this year. The bar will also become "incredibly high" for infrastructure-oriented sectors whereas the sectors that take the

DEEPAK SHAHDADPURI, MD, BCP ADVISORS

“WHAT WE ARE ACTUALLY SEEING IN THE MARKETS RIGHT NOW IS NOT DISTRESSED ASSETS BUT QUALITY ASSETS FROM DISTRESSED SELLERS.”
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cake are healthcare, education, alternative energy and media. "We are looking at energy generation side, and also cleantech. Education is a very critical part of the infrastructure segment," says Luis Miranda, Managing Director, IDFC Private Equity. Private equity funds in general will avoid the exports sector or businesses that are dependent on global demand, early stage businesses, and businesses that have heavy manufacturing facilities, and that require high capex. However, the domestic consumption story is still intact, according to the survey. "Sectors that will benefit from the domestic consumption at large and specifically consumer discretionary and non-discretionary-linked businesses like healthcare, education, alternative energy and media, would be preferred," says Sain. Joining him on this point is Gaurav Mathur, Managing Director, India Equity Partners. "We will prefer to invest in education, healthcare, waste management, water and railways. We would not look at commodities in 2009," he says. SMEs will also have takers. "We find SMEs very attractive right now as valuations have come down," says Achal Ghai, Managing Partner, Avigo Capital Partners. A few of the respondents also found specialty infrastructure and specialty retail as interesting areas to be pursued.

prises (PIPE) will likely take a backseat in 2009. A key reason being that PIPEs come with limited due diligence and rights, which is a cause of concern. There is a fear that more corporate frauds like the one concerning Satyam may surface in the coming months as more companies come under close scrutiny. The pressures from limited partners on general partners will also be difficult to handle. "LPs are demanding appropriateness of the 2 and 20 compensation structures if the majority of investments are in listed companies," says Raja Kumar, Managing Director, UTI Ventures. However, no one minds a good company if that comes cheap. Investors will prefer to take a majority stake and demand a board seat as things unfold differently in the public markets. Our survey revealed that the majority of PE investors would prefer to invest in a privately-held company though the liquidity events have a much longer horizon (4-5 years) now. But this is what classic private equity is about – engage in a long haul with the portfolio companies, build them up and then exit instead of getting into financial engineering. Firms will not make decisions that may haunt them for years. The majority of the PE investors believe that 2009 will see a return to the classic PE model.

No Quick Bucks Here
2009 will not be a good time for exits, the survey reveals. The chance of exits through IPO continues to be very bleak. There could be a few exits in the form of M&As though. However, with even good companies being cash conservative, both M&A and IPO seem distant options.

Back To Classic PE Model
The stock markets are at levels more attractive than last year but private investment in public enter-

SAMEER SAIN, CEO & MD, FUTURE CAPITAL HOLDINGS

“THE EXPECTED SLOWDOWN IN CORPORATE EARNINGS MEANS THAT GROWTH PROJECTIONS NEED TO BE REALIGNED, ESPECIALLY FOR PRIVATELY-OWNED BUSINESSES. THERE STILL REMAINS A SUBSTANTIAL GAP BETWEEN PUBLIC AND PRIVATE MARKETS.”
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SANJIV KAUL, MANAGING DIRECTOR , CHRYSCAPITAL

“WITH BANKS NOT WILLING TO LEND, THE IPO MARKETS DRYING UP, AND FCCB REDEMPTION PRESSURES MOUNTING, PROMOTERS HAVE REALISED THE SITUATION IS NOT IN THEIR FAVOUR. HENCE THE ONLY ASSET CLASS THAT REMAINS TO BE TAPPED IS PE.”
"With equity valuations crashing so soon, companies can't really use stock as a currency to do deals," says Mukund Krishnaswamy, Managing Director, Lighthouse Funds. However, most of the PE fund managers believe that exits may happen through secondary sale to another PE fund. PE funds that are facing difficulties in doing deals themselves could buy existing deals from some other funds. Such an exercise becomes an exit option for one fund and a deal for another. Much of this has not been seen in the previous years. adds that this will be "the first time and last time funds for many". The majority of PE funds anticipate a slowdown in the number of funds coming into the market in 2009. The fund raising environment is extremely difficult and there are about 78 India-focussed funds on road to raise $24 billion, according to Preqin data. It remains to be seen how many of them can close this year. "Already many of the hedge funds and sovereign wealth funds that posed severe competition in 2007 and 2008 are gone. A number of PE firms are also going slow or downsizing their global funds under management, and focusing on portfolio companies. The market is rationalising and this is healthy," adds Raghavan of Candover. Experienced fund management teams with an established track record should be able to sail through in this environment, points out Raja Kumar, MD, UTI Ventures. However, emerging markets are still thought of as a call option on world growth. Given the underlying drivers of emerging market growth, the institutional fund managers will not do the mistake of abandoning a strategic asset allocation to private equity at a time of maximum stress.

Diamonds In Quicksand
The majority of PE funds believe that distressed asset sales will not happen in 2009 unless the global economic scenario weakens further. On an average, Indian corporates are not too over-leveraged to make distressed asset sale so compelling. However, a few believe there will be more distressed asset sales across hedge funds and PE funds, particularly during the latter half of 2009. Distressed investing becomes a vehicle of choice for realising the value of financially troubled companies. "We can say that valuations have come down and so have expectations in many cases. Distressed asset sales typically happen after prolonged downturns. We have not reached that stage yet," says Gopal Srinivasan, Chairman and Managing Director, TVS Shriram Growth Fund. Adds Deepak Shahdadpuri, MD, BCP Advisors, "What we are actually seeing in the markets right now is not distressed assets but quality assets from distressed sellers."

Time For Buyouts, Perhaps
Buyouts will increase this year, say PE investors. "We are on an upward track as far as buyouts are concerned. But private equity in India is still a growth capital deployer," says Kaul of ChrysCapital. "We are seeing a huge surge in offers for sale of controlling stakes. We foresee this trend increasing as many

Funds Shakeout?
Some of the fund managers polled were of the view that there will be a shrinkage of funds in 2009. So the industry is preparing for a shake-out. Taking the point further, Deshmukh

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LUIS MIRANDA, MD, IDFC PRIVATE EQUITY

“WE ARE LOOKING AT ENERGY GENERATION AND CLEANTECH. EDUCATION IS ALSO A VERY CRITICAL PART OF THE INFRASTRUCTURE SEGMENT.”
promoters realise that the easy money days are over," adds Raghavan. Sudhir Kamath, MD, 2i Capital, seconds this view on buyouts. But such deals may also need innovative restructuring, points out Anmol Nayyar, iC2 Capital. However, not everyone buys that line. Sarath Naru, Managing Director, VenturEast, one of the oldest VC funds in India, says: "Availability of debt to finance buyouts is still scarce in India. Also, Indian companies are largely promoter driven where the promoter is both the shareholder and the management – more often than not promoters are against ceding control."

VENTURE CAPITAL
Few venture capital firms like Intel Capital, Norwest Venture Partners and Matrix Partners are not looking to do lesser deals, but the industry as a whole is likely to do fewer deals as what matters will be quality. Cautious optimism is the way forward.

Quality, Not Quantity
The majority of the VCs feel there will be a slowdown in dealmaking this year as the bar for deals is raised. But there are people looking to make the best of the opportunities presented by the current economic climate. "We could see our investment pace increasing in 2009 because there are a lot of interesting companies out there looking for funding," says Promod Haque, Managing Partner of Norwest Venture Partners. The firm recently invested $4.2 million in Bangalore-based Appnomic Systems. When asked if there will be a slowdown in deals, Intel Capital's Sudheer Kuppam said: "Not for us. This is one of the best times to invest and we are really looking forward to making some exciting deals.” They are looking at later stage, growth and PIPE deals in India in 2009. Intel announced $23 million investment in three firms in January alone. Samir Kumar, Managing Director of Inventus Capital, which raised a $125-million early stage fund last year, says: "Inventus has made just one investment in 2008. We will see a significant increase in investing activity in 2009."

PE-Backed Transactions To Go Up
There will be a significant increase in PE-backed acquisitions. Growth is going to slow down significantly in the coming years and PE funds are looking at growing their companies which in turn are looking to acquire other weaker companies. We are already seeing such developments. For instance, Blackstone-backed Nuvizeedu Seeds recently acquired two seed making companies for Rs 35 crore. The majority of PE funds expect such PE-backed acquisitions to grow.

Focus On Capital Efficiency
"Businesses that are not capital efficient will be hard to scale in a liquidity constrained environment," says Mohit Bhatnagar, Operating Partner, Sequoia Capital India, which manages $1.8 billion in four funds. Of the 13 venture capital fund managers polled, eight said their due diligence process will remain the same, while the others said the time they take to close a deal will be somewhat longer now. "The investment decision making process will be scrutinised much more and the process may take 5-6 months unlike in the past," says Mohanjit Jolly, Executive Director, DFJ India. VCs are now making their evaluation process much more stringent with a focus on capital effi-

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ciency and short-term validity of business. "We will spend additional time on understanding the time period needed for making a business cashflow break even," adds Bhatnagar. There are further reasons why VCs will take longer to close deals. They are now spending more time with their portfolio companies and relatively less time toward chasing new deals. Also, many of the VCs who started operations a couple of years ago now have significantly large portfolios to manage. Valuations: Growth Vs Early Stage In the last three years, valuations had gone up significantly due to which many VCs have abstained from doing deals. But all the respondents of this survey felt that valuations have corrected significantly - mainly for growth capital and series-B/C deals rather than for early stage or seriesA investments. "There is already an impact on series B/C valuations by up to 50%. Series A valuations don't seem to have much scope of falling," says Alok Mittal, Managing Director, Canaan Partners. His fund has made early stage investments in iYogi and techTribe, and late stage investments in BharatMatrimony and Cellcast. "Not just valuations but also other investment terms will become much more investor friendly," remarks Kuppam. So other investment conditions like number of board seats, tag along rights and ratchet clauses are also likely to be in favour of investors. The downward trend in the valuations is likely to continue right through the first half of current year. But the majority of entrepreneurs are yet to completely readjust to their valuations. "Entrepreneurs are more likely to lower their expectations due to the need to raise funds. This will result in realistic valuation-driven deals getting done in 2009," says Gautam Patel, Managing Director India, Battery Ventures.

Exits Unlikely, Rollups Likely
The exit markets are expected to be completely shut-off this year, especially the public offer window. Nine of the 13 VCs polled have said they expect the IPO market for exits to mostly remain shut through the year. Exits for venture capitalists will take place through M&As, but they will not be big ticket or meaningful exits. M&As will primarily involve companies 'being sold' rather than 'being bought', says Jolly. "In other words, these will be part of the triaging that VCs may do this year to package their underperformers or non-performers and try to recover what they can," he adds. Venture capitalists may now look to trim their portfolios to include just manageable winners, and focus on their growth. "Exits will happen in fewer numbers but we can see more of sector consolidation, roll-ups, and M&A," says Patel of Battery. Rollup is a technique used by VCs where multiple small companies in the same market are acquired and merged. Four VCs said most of the M&As will lead to consolidation. Many companies can look at acquiring their smaller rivals. "What you might see is large companies buying assets opportunistically at pretty cheap prices," says Avnish Bajaj, Founding Managing Director of Matrix Partners India. Most companies raise venture capital funding for 18-24 months, and then they expect to go for the next round or eventually public offering. Venture capitalists invested some $928 million in 80 deals for entrepreneurial companies in India during 2007. In 2006, this figure was around $349 million in 36 deals, according Dow Jones VentureSource. The data for 2008 is ex-

AVNISH BAJAJ, FOUNDING MD, MATRIX PARTNERS INDIA

“WHAT YOU MIGHT SEE IS LARGE COMPANIES BUYING ASSETS OPPORTUNISTICALLY AT PRETTY CHEAP PRICES.”
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ment, and infrastructure. However, ad-revenue based models are losing their flavour with VCs. "We would be less interested in a seed stage Internet company in India with an exclusively ad-funded model," says Haque of Norwest.

Lower Risk Appetite
The risk appetite of the VCs also seems to be dying down in 2009. Eight of the VCs polled say they will prefer to do mid/ late stage deals. While some like Matrix, Battery, Intel Capital and Norwest are heavily focusing on growth capital deals this year, others are looking for a mix with early stage deals. "There will be a bias towards risk aversion. Therefore, VCs are expected to go after ventures that are fully backed with customer validation and those that have reached the initial milestones. Besides, valuation should be attractive too," says Jolly. But some other VCs are sticking to their early stage focus as they believe it's a good time to be on that side. "This is a good time to do early deals, since such deals take about a year or two to come to market, by which time we can expect the market downturn to have ended," says Kumar of Inventus.

pected to be around $750 million invested across 125130 deals. Most of the companies that raised funds in 2006 and 2007, and have not raised subsequent rounds, will be looking to raise their next round this year. But subsequent rounds will be tough this year and VCs may pull the plug on deals that are not working out. "We reserve significant capital for our portfolio companies and are in a position to put follow-on capital in deserving companies," says Canaan's Mittal.

Education Scores High
Though technology and telecom continue to remain the old favourites of VCs, the education sector seems to be emerging as the new favourite. Eight of the 13 participants said education is a sector they will look to invest in 2009. Also, this space has started getting some traction with DFJ investing in online education firm Catura, Matrix Partners in pre-school firm Tree House and more recently Intel Capital and Helion Ventures investing in vocational training firm Global Talent Track. SAIF Partners has already funded English language training chain Veta and accounting training firm ICA Infotech. Mobile, IT/ITES and consumer internet remain the favourites with 10, nine and seven VCs, respectively, saying that they will invest in these sectors. Healthcare and cleantech seem to be emerging as the new niches as they got four votes each. Some funds are also eyeing sectors like financial services, media & entertain-

Good Time To Build A Business
Many VCs believe that this is the best time to start a business, and build strong fundamentals and efficient coststructures. When asked if the current economic environment would impact the entrepreneurial activity, 10 of the respondents said that it's unlikely to have an impact, though there are those who somewhat differ this, People need a positive sentiment for them to leave a comfortable job and start a business, says Bajaj of Matrix. But all the VCs surveyed agree that nothing will stop the hard-core entrepreneurs. Also, there are other factors that some VCs believe will

PROMOD HAQUE, MD, NORWEST VENTURE PARTNERS

“WE WOULD BE LESS INTERESTED IN A SEED STAGE INTERNET COMPANY IN INDIA WITH AN EXCLUSIVELY AD-FUNDED MODEL.”
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ALOK MITTAL, MD, CANAAN PARTNERS

“THERE IS ALREADY AN IMPACT ON SERIES B/C VALUATIONS BY UP TO 50%. SERIES A VALUATIONS DON'T SEEM TO HAVE MUCH SCOPE OF FALLING.”
help entrepreneurship in this environment. "We are seeing an increase in the number of NRIs with product management experience returning to India. Some of the alpha engineers and the returning NRIs will turn their creative energies into starting up new ventures," says Rajesh Srivathsa, Managing Partner, Ojas Venture Partners. Also, the current markets provide an opportunity for entrepreneurs. "This is the time to build revenue relationships with customers that include low marketing cost but high skin-in-the-game contracts. The upside of these contracts in the good times to come will be the key differentiator," says Patel. Haque of Norwest says they are being approached by entrepreneurs whom they backed before. "Many of the entrepreneurs are using this downturn as an opportunity to innovate, capitalise on new prospects and address the market needs," he adds. ability of leverage options would restrict the M&As to only select companies with substantive real cash assets." However, there is also a counterview. "Outbound deal activity should be of high interest from domestic acquirers who have cash and are looking at acquiring brands/distribution networks/assets overseas," says Shyam Shenthar, Managing Director, o3 Capital, a Mumbai-based investment bank. There were 196 outbound deals in 2008 aggregating to $13.19 billion, according to Grant Thornton.

Inbound Deals May Rise
The inbound deal activity is expected to see an increase as compared to the outbound activity. "Inbound should show interest as India valuations will be attractive for global companies to invest in," says Uttamsingh. Senthar of o3 Capital supports this view: "There are cash rich overseas acquirers who want to get access to the Indian/Chinese markets which are the only growing markets now." There were 86 inbound deals in 2008 with an aggregate value of $12.55 billion.

MERGERS & ACQUISITIONS
Deal Activity
The survey of leading bankers shows that M&A deals will see a pause until the second quarter of 2009. Uncertainty is very dramatic in this period of time and even more dramatic in cross-border situations. "Outbound deals will decline and it will be very tough to do deals," says Vikram Uttamsingh, Executive Director, Transactions Advisory Practice, KPMG. This view was echoed by Sanjay Bansal, Managing Director, Corporate Finance, Ambit Corporate Finance, "There is a desire for outbound deals but with cash crunch it looks tough." Taking the point further, Ajay Arora, Partner, Ernst & Young, adds, "A lot of outbound M&A activity over the recent years was driven by highly leveraged LBO structures. Non-avail-

Domestic Activity
On the domestic M&A front, the deals will be driven more by distress as opposed to desire to sell. In these tough times, when growth slows down significantly, the pressure on margins will force companies to focus on deals which add to cost savings as compared to those which add to the topline. "Increased debt burden and low demand will force troubled companies to align with larger, stronger players creating a perfect marriage of sorts," wrote CG Srividiya, Partner, Specialist Advisory, Grant Thornton, in the firm's Annual Deal Tracker.

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SANJAY BANSAL, MD, AMBIT CORPORATE FINANCE

“THERE IS A DESIRE FOR OUTBOUND DEALS, BUT WITH CASH CRUNCH IT LOOKS TOUGH”
Pharma Leads The Pack
Pharma has emerged as one of the most active sectors for deal activity. In 2008, there were 57 deals in the pharma, healthcare and biotech sectors with an aggregate value of $5.57 billion, just a little short of the telecom space which saw the highest value of deals of about $5.78 billion. Pharma will maintain the momentum this year too. There's not much juice left in telecom, says Bansal of Ambit Corporate Finance. According to Uttamsingh, the sectors expected to see consolidation are IT/BPO, power, transport and healthcare. The sectors which have taken maximum hit in the current liquidity crisis are expected to see less deal activity. For instance, there will be more distressed opportunities in real estate. Infrastructure enablers like power and industrial equipment, and the sectors which are reasonably unaffected by the slowdown like education, and healthcare are expected to see more deal activity, according to Arora. via FCCBs are unlikely to see them being converted. They will need to be refinanced," says Uttamsingh. You may also see more distressed assets on the block, especially from the promoters of companies who had pledged their shares to raise funds. They may be off-loaded in the stock market or other strategic buyers in case the promoters fail to meet their obligations. As liquidity worsens and companies hold on to as much cash as possible, there will be a shift towards buying companies in stock deal than cash deal. However, there is a flipside to it since one tends to overpay in stock deals in a volatile market. The avenues for leveraging have dried up significantly. With lower leveraging ability, promoter contribution becomes more important and banks may require additional comforts from acquirer. "This would significantly reduce the highly leveraged LBOs. The maximum debt levels are likely to be in the region of 2.5 – 3.0 X EBITDA (post acquisition) vis-à-vis levels of 4-5 X which were being structured through multiple levels of senior, subordinated, quasi and unsecured debt instruments," says Arora. On the whole, the days of billion dollar deals are over and and the average ticket size of a deal is likely to be in the range of $20-100 million.

Necessity Of Consolidation
It is expected that people will hold on to their companies as much as possible as valuations will be poor for deals. However, 2009 will see people moving away from the luxury of consolidation to the necessity of consolidation as a lot of companies will see their revenues and profitability decline and being forced to either sell out or merge. Besides, one can see the refinancing of foreign currency convertible bonds (FCCBs) going up in the coming year. "Some companies which have raised funds

Acknowledgement VCCircle expresses its gratitude to the following dealmakers in India for their insightful views on the deal outlook for 2009. Sanjiv Kaul, MD, ChrysCapital Harsha Raghavan, MD, Candover Advisors Sameer Sain, CEO, Future Capital Holdings Gopal Srinivasan, CMD, TVS Capital Funds Gaurav Mathur, MD, India Equity Partners Aluri Srinivasa Rao, MD, Morgan Stanley Private Equity Luis Miranda, MD, IDFC PE Shujaat Khan, MD, Blue River Capital Achal Ghai, Managing Partner, Avigo Capital Mukund Krishnaswamy, MD, Lighthouse Funds Sudhir Kamath, MD, 2i Capital Nitin Deshmukh. MD, Kotak Private Equity Raja Kumar, MD & CEO, UTI Ventures Hari Buggana, MD, Evolvence Lifesciences Fund Anmol Nayar, Founding Partner, ic2 Capital

Deepak Shahdadpuri, MD, BCP Advisors Alok Mittal, General Partner, Canaan Partners Mohanjit Jolly, Executive Director, DFJ Gautam Patel, MD India, Battery Ventures Sudheer Kuppam, MD, Intel Capital Samir Kumar, MD, Inventus Capital Suvir Sujan, MD, Nexus India Capital Rajesh Srivathsa, Managing Partner, Ojas Venture Partners Avnish Bajaj, Founding MD, Matrix Partners India Kumar Shiralagi, MD, NEA-IndoUS Ventures Promod Haque, Managing Partner, Norwest Venture Partners Vijay R. Ranganathan, Assistant VP HITVEL , Sasha Mirchandani, Sr Inv. Director, Blue Run Ventures Sarath Naru, MD, VenturEast Vikram Uttamsingh, ED, Transaction Services, KPMG Shyam Shenthar, MD, o3 Capital Sanjay Bansal, MD, Ambit Corporate Finance Ajay Arora, Partner, Ernst & Young, India

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Hedge Funds

RIDE OUT THE STORM
India-focused hedge funds need to prepare for the long haul, writes HUNG TRAN
It’s no secret that emerging markets hedge funds, specifically those focused on India, fell from their apex last year and took a beating along with the rest of the industry. Funds of all strategies and sizes dropped between 28% and 88% during the course of the year. However, hedge fund managers who lived through the carnage of 2008 say that there are brighter days ahead in India for those investors willing to ride out the storm. Nowhere To Hide Ridaa Murad, co-founder of the Veda Multi-Strategy India Fund, a fund of hedge funds which was launched in September 2008, said managers who suffered the most last year were the ones with the large side pocket investments because “when the liquidity crunch came, they were in no position to do anything with those (side pockets).” Real estate was also a tough space to be in and quite a few funds with either direct exposure to land acquisitions or to publicly-listed companies suffered drawdowns, according to Murad. more hybrid private equity/hedge fund products for endowment type investors. For its part, Murad said the firm isn’t making any changes to its portfolio, which houses direct lending, debt lending, convertible arbitrage and distressed debt. It is also keeping its fees the same—1% for management and 10% for incentives. The fund has a one-year lockup with quarterly liquidity thereafter. Up to onefifth of the fund can be invested in non-liquid assets. Buy & Hold “We told our investors that if they’re not looking to invest in India for three years, they shouldn’t put money there at all,” said Murad, who admitted that finding new investors is very hard because they have lost faith in the region and are sitting on the sidelines. Gautam Prakash, founder of Bethesda, Maryland-based Monsoon Capital, echoes Murad’s sentiments. “India was more the flavour of the day for these investors in previous years and they tended to buy high and sell low when they should have been doing the opposite,” said Prakash. “Looking at month-tomonth returns in India may not be wise. We remain bullish on the 10-year picture of where India’s going.” Prakash declined to comment on Monsoon’s performance but said export-oriented companies and infrastructure firms generally fared poorly last year. The firm runs a liquid PE strategy, a real estate PE fund, and a hedge fund. “The Indian mid-cap market was down some 75% in dollar terms last year, so almost everything was down,” said Prakash. “The other factor impacting the firm’s performance was the rupee’s depreciation against the dollar.” This year, Prakash said Monsoon is taking a more defensive posture by reducing its gross exposure to export-oriented companies, focusing more on liquid names in the mid-cap space.
Hung Tran is Editor, FINalternatives, a global hedge fund tracker

Another strategy that fared poorly was PE investment in the public markets (i.e. having long-term investments in public companies), which worked really well in 2007 but was hammered because holdings that were not listed on the index and could not be hedged were sold without any regard for valuations.

‘MANAGERS WHO SUFFERED THE MOST WERE THE ONES WITH THE LARGE SIDE POCKET INVESTMENTS. WHEN THE LIQUIDITY CRUNCH CAME, THEY WERE IN NO POSITION TO DO ANYTHING WITH THOSE (SIDE POCKETS)’

Murad’s own fund lost 26.52% through December, compared to the BSE 500 Index, which was down 68.8% for the year. Firm co-founder Bradford Matthews said while the firm is not happy about the negative returns, given the market dislocation, he believes the fund has done what it set out to: give investors returns from multi-asset classes while experiencing 50% less of the downside volatility than the index, while at the same time capturing a disproportionate amount of the upside volatility. Changes? Going forward, Murad foresees an increase in Indiafocused long-biased funds for investors who want index-plus exposure, more long/short portfolios geared toward typical hedge fund investors, and

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Real Estate

SHAKEN & STIRRED
A mix of macro-economic downtrends and flawed investment strategies has stalled the Indian real estate industry’s dream run. But all is not lost. Experts believe the industry will stage a recovery of sorts by launching ‘affordable’ options even as the Government eases the credit crunch. BY RUCHIKA SHARMA

Circa May 2003: Unitech, then a nondescript Delhi-based real estate company, traded at an average Rs 40.00 on the bourses. Circa April 2006: Unitech captured the fancy of investors with its stock scaling the Rs 6,000 level. A 15,000% appreciation in stock value since May 2003, which was emblematic of the unprecedented Indian real estate boom in the New Millennium Cut to January 2009: The same scrip hit a rock-bottom Rs 30 or so, down from its 52week high of Rs 432 (the stock was earlier split 1:10).

A host of real estate companies turned trailblazers in the euphoric times, hitting new highs in the capital markets. Take the case of another Delhi-based real estate player Anantraj Industries whose stocks rose from an average Rs 15.60 in 2005 to a high Rs 816.2 in less than 12 months. Today, the same stock is lying at Rs 57.25. The sharp gyrations in the stock prices of these companies give a clear sense of the roller coaster ride taken by the Indian real estate sector in the last five years. The real estate boom was largely facilitated by the spectacular domestic GDP growth, rise of a large middle class with increasing disposable income and higher

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‘2013 WILL BE ANOTHER BOOM TIME’
Lalit Kumar Jain, Chairman, Kumar Builders, a leading Pune real estate developer
What is your reading of the real estate industry now?

People are scared to buy property due to the cash crunch and the media reports urging them not to buy. The interest rate hike had also affected the sales but there is now some respite on that front. However, the developers are starting to sell at whatever prices that attract new customers.
Would you say the 5-year boom has ended?

Real estate is a cyclical business with a price correction every five years. There is excess stock in the market. Once this is addressed, the sector will bounce back.
Are we likely to see some consolidation in the industry?

More than consolidation there will be a lot of private equity and other funding activities in the industry.
Is affordability the key factor going forward?

aspirations, growing demand for commercial and institutional space, broader financing options and liberalisation of land-use norms across states. Shobhit Agarwal, Joint Managing Director of real estate consultancy Jones Lang LaSalle Meghraj adds that India’s emergence as a global investment destination also contributed significantly to the domestic real estate uptrend. The fundamental strengths however failed to stay put in the face of a global economic slowdown, the early warnings of which were sensed in late 2007 itself. The sector somehow enjoyed an extended stint of good times until mid-2008 but when the reality of an economic recession loomed large, the companies began to fall off the edge causing a crisis of sorts in the markets. Buyer sentiment, already weakened by slackening disposable income, was further hit by the high interest regime and the general unwillingness on the part of banks to extend credit. The consequent high cost of funding of real estate projects induced many an investor to exit the space. Excess inventory of high-end properties and the lack of a defined strategy to jump-start affordable housing left the real estate players with few options to press on with their growth plans. The ensuing liquidity crunch did little to enthuse the real estate players of all hues. Earlier, the developers had used the customer's cash (by pre-selling houses) to buy up land and launch projects. But they could barely garner additional financial resources to complete the projects in the face of the economic contraction and credit squeeze. Gaurav Dalmia, Chairman of Landmark Projects, told VCCircle in an interview in June 2008: "You have to watch the fun in the next two

Working on such options calls for a particular mindset which may not suit all players. The focus will be on cost control and low-margin businesses which few would settle for.
Has the government done enough to revive this sector?

No. In India we tend to administer medicines only after the person is dead. I think the government is waiting for this industry to die.
With steel and cement prices coming down, has the pressure eased on the developers to some extent?

Cement prices have not come down, while steel prices have come down. So, in real terms there are no gains.
What are the likely trends in 2009?

The supplies are rather limited in the market. So I expect a revival post June.
Do you see 2009 as the turnaround year?

You can say that some pain will be gone. We are on the revival path but I am sure 2013 will be another boom time.

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years. People will be out there with begging bowls."
What is your assessment of the state of the industry?

He couldn’t have been more prophetic. Many a small developer is getting out of business while the larger developers are having to downsize their projects and slash the prices to attract customers. A case in point is JP Wishtown, a high-end residential project in Noida, in sub-urban Delhi. The promoter company has slashed its apartment prices by 25-30% to tap buyers seeking "affordable" options. A well-equipped four bedroom apartment is now available for Rs 65-70 lakh compared to Rs 1 crore plus less than a year ago. Land Banks: Losing Ground The real estate promoters, swayed by the factors driving the economic boom, failed to note the downside risks of intensely speculative activities. They channeled the bulk of the accruals from the property transactions for building land banks instead of completing the projects that had been launched. As the economic slowdown set in, the value of such investments plummeted leaving the builders with little funds to complete their projects. Aashish Kalra, Managing Director of Trikona Capital, a real estate fund with over $1 billion under management, amplifies this point when he says that "all Indian developers, for some bizarre reason, thought of land banking as the only way to grow in the real estate industry. No one thought of land as a potential burden on the cash flow. They all just focused on purchasing more land and creating asset bases." ‘Affordable’ Tag: Sole Saviour So, what will drive the real estate business now? Experts say that affordable housing will be a big draw in these hard times. Most of the housing projects announced recently are evidently targeting the middle

I think the industry is going through its natural cycle. People were fixated on land and entered land banking without any regard to cashflow. You cannot build assets in thin air. Assets need cashflow to support them. Fundamentally for business models to be based on cashflow, you have to be selling the right product at the right price to the right people.
We see a lot of small and mid sized developers wanting to liquidate their land and incomplete projects by selling them to bigger developers or PE players, often at lower valuations. Are we then seeing a necessity of consolidation rather than the luxury of consolidation?

I think we are moving to a necessity of cash flow. The developers were focused on land aggregation. Land was a store of value. But now if they were to sell land, even if at a lower price, how many large developers would have the funds to buy? And how many private equity funds are interested in such deals?
Do you think the Government's second leg of stimulus package will work for the industry?

I honestly don't understand how people believe that they can change their business models and businesses every quarter based on the flavour of the month. The important thing is to understand how to generate your cash flow and how do you generate it fast enough. It's about velocity. Because in these markets your margins are thin, you have to generate velocity for earning fast.
With such policy initiatives, government's recent measures like steel and cement prices coming down, which make it affordable for developers to launch projects, do you see this as a time to innovate too?

A lot more needs to be done. We need to have clear titles on land; for that we need computerised land registry and more importantly, you need a well functioning court system. And if you are trying to promote low income or middle income houses, the land cost has to be commensurate. You need to have infrastructure and lastly, if your permissions don't arrive in time, you cannot make money.

‘PEOPLE WERE FIXATED ON LAND BANKING’
Aashish Kalra, Co-Founder and MD, Trikona Capital

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income group with prices in the range of Rs 15-35 lakh a unit (of sizes from 600 sq ft to 1,200 sq ft). Jones Lang LaSalle's Agarwal says: "The projection of India needing approximately 22 million units still holds true, so the demand is there. Affordability in housing will help tap this demand." Agarwal points out that most developers had ignored the low income segment during the boom. "Affordability has to come to suburbs nearer to the central business districts to convert this demand into real transaction," he says. Some of the developers are already acting on this opportunity. Ansal Properties and Infrastructure Ltd plans to invest about Rs 500 crore for the development of 10,000 affordable homes in the next 18 months. The houses are expected to be priced between Rs 2.5 lakh and Rs 9.5 lakh. That is at the lower end of the affordable housing spectrum. Trikona Capital plans to invest $120-160 million in the low budget homes. Likewise, Mir Realtors, Puravankara Projects, the Lodha Group and Hyderabadbased Aparna Constructions and Estates plan to invest in this segment. A Mint report (Jan 29, 2009) says that Delhi-based Omaxe Constructions plans to invest Rs 80,000 crore (did we read it right?) over the next three to five years in developing one million affordable housing units in tier II cities such as Indore, Raipur, Rohtak and Sonepat. Transit-Oriented Development The other focus area for development would be the transit areas such places near IT parks. Ashish Bhalla of Millennium Spire (MSL), a

Delhi-based real estate investment firm, says, "We find that development of offfice complexes and IT parks in the transit corridors and such areas make much more sense. So, we are increasingly going to transit-oriented developments. The quality and the nature of such developments will improve." Liquidity Easing The negative newsflow on the sector has not ebbed but a ray of hope has been sighted since the Government began to ease up the credit squeeze with a series of rate cuts and liberalised borrowing norms. For instance, the Reserve Bank of India has recently relaxed the norms for external commercial borrowing (ECB) to allow developers of integrated township and NBFCs to borrow from abroad. The Government has also removed the interest rate cap on ECBs. Earlier, the all-in-cost ceilings for ECBs, in case of both automatic and approval routes, for average maturity period of three to five years and more than five years, were six month Libor plus 300 basis points and six month Libor plus 500 bps respectively. These ceilings have been removed now. Hence, the sector will be able to access foreign funds at easier rates and thereby tide over the liquidity problems that confront them. The Government has also reduced the interest rates to 7-8% for home loans in the range of Rs 5-20 lakh. Although critics say it may not help boost the demand in a big way, it's an indicator of things to come as far as interest rates are concerned. According to Agarwal, shorter development cycles can also be seen

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as the success mantra for the developers. "In times to come we will see the acceleration of the industry through smaller and shorter cycles. People will plan projects which can be conceived and completed in a much shorter duration." However, Bhalla disagrees. He says that one should no longer look at short gestation cycles. “We can't take a risk on projects that are to be completed in 12 months. If in the past we looked at a 2-3 year turnaround, now we are looking at a 5-6 year turnaround. So, invest in and work with projects that are better planned." He adds: "To expect your money to double in 6 months would be a gamble but it would be fair to expect 1520% returns." The Outlook For 2009 It's a mixed bag of answers on whether the industry will turn the corner this year. While Aashish Kalra of Trikona Capital feels that 2009 will be a "terrible year" for most of the real estate investors in India, Lalit Kumar Jain, chairman of Pune-based developer Kumar Builders, feels that the conditions would get normal by mid 2009. Kalra, while insisting that 2009 would not be a prof-

itable year for most of the real estate investors, says, "I believe India remains a place that will generate far superior results in the medium to long term because of its demographic nature. We have a young economic population that will urbanise." Bhalla says, "Though we have a positive outlook, a quick turnaround is unlikely. I think it's a good time to be an end user. It will take at least 24 months for the market to reach the levels it ruled in the good times.” Jain's view is that a recovery will be seen as there are genuine buyers in the market. He says, "The home loan interest rates will come down substantially as the rate of inflation dips and there will be pressure on banks to reduce the interest rates. I see sales picking up post June 2009. You may also see a little bit of upward correction in real estate in tier II and tier III cities." Jain is also convinced that the boom will revisit the industry in about four years. "I am sure 2013 will be another boom time. Today we are seeing the real estate stocks at their lowest prices. By 2010, we will see the vibrancy returning to the market along with an uptick in the industry. This will reach its pinnacle around 20122013, resulting in another peak." So brace for the Unitech stock reaching four digits in another four years.

India is known as a market for private equity with limited or minority stakes. But, due to the credit crunch, family houses and entrepreneurs are focusing on their core strengths and shedding non- core assets. I see a huge potential for private equity in India to get to the next level - controlled transactions. If this credit crisis had not happened, it probably would not have surfaced for another two to three years.
Do you think that promoter expectations have come down?

begin to happen at a lower level.
Many real estate developers are seen to be working in a stressed if not distressed environment. Would you be looking at such opportunities?

Although the real estate sector has taken a beating due to higher home-loan rates, IL&FS Investment Managers Ltd (IIML) which recently raised a $895 million real estate fund, remains confident of delivering an IRR of 25% to its investors as it sees this to be the right time where developers are showcasing some of their best jewels. VCCircle talks to Archana Hingorani, Executive Director, IIML. Excerpts: What are the perceptible investment trends in the face of the current credit crunch?

I would agree that promoter expectations are coming down but it will take another quarter before people realise that the bounce-back will not happen so soon. Then, transactions will

I am not too comfortable saying that I want to look at stressed or distressed assets. What we want to rather look at are transactions where you have a developer who knows what he is doing, who has the execution skillset and is offering a better piece of his portfolio. Those are the transactions we are seeing now. If a developer who has a land bank, and is trying to give it to me at the cheapest valuation, I would not take on that project because I also need to worry about how it would get executed.

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JOLLY’S VOLLEY

CATCH-22: LIFE OF AN ENTREPRENEUR
A startup is often expected to have achieved certain milestones but the entrepreneur needs capital to achieve those very milestones. BY MOHANJIT JOLLY
Over my career as a VC, investment banker and advisor, I have heard thousands of pitches from entrepreneurs, some good but most not so good. The key issue that keeps popping up (and it doesn't matter if it concerns a Silicon Valley entrepreneur or one here in India) is one where the entrepreneur is constantly faced with the circular dilemma, most often referred to as a catch-22 situation (I don't think Kurt Vonnegut knew how much that phrase was going to be used in the entrepreneurial lingo). More specifically, this has to do with the fact that during the fundraising process, a startup is often expected to have achieved certain milestones (especially in an environment where VCs tend to become relatively more risk averse), but the entrepreneur needs capital to achieve those very milestones. What should an entrepreneur do then? Well, let me lay out some specific concerns and practical solutions in this regard: Managing Risk First and foremost, realise that you are asking a VC or an angel investor to part with either their own or their Limited Partners’ (LP) money. Though such a request may seem unreasonable to you, it is one that is completely justifiable since the VC will have to explain to their LPs when asked "why in the world did you invest in a raw startup?" excited about the idea/vision, but he/she has to also evaluate a startup relative to others on his/her desk at that given moment. Since the key resource that a VC has is time (i.e. bandwidth to manage the portfolio), he/she may opt for a potentially less risky smaller play than a risky big play depending on the number and quality of ventures that he/she is evaluating at any given time. What's worse from a startup's standpoint is that the risk profile for a particular VC continues to shift over time. As an example, a fund may be prone to doing early stage risky deals towards the beginning of its fund's investment cycle, and less risky later stage deals towards the end of the fund's lifetime. With the above as backdrop, let's address the catch-22 scenario directly: Proof Of Concept Take comfort in the fact that this is not a dilemma unique to you. This is a fact of startup life that is faced by most, if not all, at some point as they launch their initial venture. But there are specific steps that you can take to address the risk (either perceived or real) that a VC may indicate. I call this series of steps, the "credibility continuum" (CC), which in other words, is a spectrum of risk reduction parameters. On one end, there are high margin, high value paying customers (low risk) and on the other is a raw core team of firsttime entrepreneurs with nothing but an idea and a small font 40 slide PPT (high risk). The VCs would ideally like the startup to be on the "paying customer" end while reality is usually closer to the other side of the spectrum. There are key risk reducing techniques that don't cost a

Also, realise that you are competing with other startups for the VCs’ time and capital. Even though you may think your idea is superb, there may be another scrappy startup that has more traction, a clearer message and a more believable trajectory to growth and profitability. So, believe it or not, timing may have something to do with how excited a VC gets about your business. The level of excitement is a combination of both relative and absolute metrics. In absolute terms, a VC may get

‘BELIEVE IT OR NOT, TIMING HAS SOMETHING TO DO WITH HOW EXCITED A VC GETS ABOUT YOUR BUSINESS. THE LEVEL OF EXCITEMENT IS A COMBINATION OF BOTH RELATIVE AND ABSOLUTE METRICS’

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lot and also enable the entrepreneur to slide in the right direction on the CC scale. The key risk often hinges on two key areas – can the team execute on the potentially grand vision and will the "dogs eat the dogfood" (i.e. will the customers be willing to pay for a product or service). A highly successful approach that a seed startup can deploy is "credibility through association". What that means simply is that since you as a raw startup don't have paying customers to truly validate the idea, you can gain credibility (and therefore reduce risk) by getting a certain calibre of people associated with the startup, who bring a high level of brand equity and credibility with them. Ideally, if you can get people to join as early employees or senior executives, it sends a very strong signal to the potential investor on two fronts – that you can sell your vision to get seasoned executives to come on board even though there may not be anything tangible in terms of a product or service currently available, and the fact that people are willing to give up their well-paying jobs to join your startup means that the idea is potentially very interesting and valuable. In some cases, the individuals may decide to invest in addition to joining a company. Rule of thumb – cash, by any legal means is usually a positive indication to a VC (cash from customers, from investors, from lenders). Who Is Your First Customer? Further down the CC are directors and advisors. Again, getting seasoned people from the industry to lend their brand and time to the startups gives a level of comfort to investors. Recently I was looking at a seed stage startup where the single biggest plus in my mind was addition of a 35 year veteran from a specific industry as an advisor, who indicated to me that over the decades she had been approached by many companies for advisory roles, but this one company's value proposition was the most compelling that she had come across in her years in the field, and that's the reason she came on board. Getting friendly companies to try the product or service for a fee as beta customers or conduct a product or service pilot can help. Again, the preference should be to get some cash rather than give the product or service away for free. Obviously, if there is a marquee name,

and the only way to get them to lend their logo to your slide 5 of "key customer engagements" is by giving away your product, then do it. Having Tata as a free pilot is better than not having Tata. Beg-Borrow-Steal-VC -I often tell entrepreneurs that VC money is the most expensive capital they can get. My fundraising ladder goes something like this – revenues - grants - beg - borrow - steal - VC (some may choose to put stealing after VC). Do not take VC money unless you have to. And often at the earliest stage, a small amount of angel investment might be a good starting point. Angels are a big part of the overall entrepreneurial supply and demand chain that has made Silicon Valley buzz. The angel community along with so many other aspects of the startup ecosystem is in its formative stages in India. Mumbai Angels and the Indian Angel Network are a couple of groups that have gotten somewhat institutionalised. Development of seed stage investing ecosystem will take time, but I am very encouraged by the progress made by angels and VC firms in doing their part to catalyse the process. It's not a question of "if" but a question of "when" the system will become self sustaining. Bottomline: The catch-22 exists. And the entire life of an entrepreneur is filled with them. But complaining about it doesn't help. My advice is "to suck it up", or in other words, deal with it. Worry about things that you can control and forget about what you cannot control. Be creative, be passionate, be viral. That virus fueled by passion, commitment, persistence and conviction will ultimately infect others somewhere along the CC and they will join as employees, advisors, directors, and investors. The job of the entrepreneur is to be a prolific salesperson, since he/she will spend a lot of time convincing others of the "better, faster, cheaper mousetrap", be they investors, customers, potential employees, channel partners, etc. And quite honestly, that passion combined with a grand vision that is clearly articulated, can make an investor forget the risks and write a check on the spot to a couple of bright eyed, bushy tailed, first time techno-geek entrepreneurs. Mohanjit Jolly is Executive Director, Draper Fisher Jurvetson India

‘YOU CAN SELL YOUR VISION TO GET SEASONED EXECUTIVES TO COME ON BOARD EVEN THOUGH THERE MAY NOT BE ANYTHING TANGIBLE IN TERMS OF A PRODUCT OR SERVICE CURRENTLY AVAILABLE’

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DEAL of deal activity in the last three years. TRACKER A snapshot

21

POWER SHIFT
Changes At ICICI
India's largest private sector lender ICICI Bank has seen a total revamp of its top management. The bank has appointed N S Kannan, presently Executive Director of ICICI Prudential Life Insurance Company, as its ExecMadhabi Puri-Buch utive Director and CEO on the board with effect from May 1. Meantime, Madhabi Puri-Buch will take over as the MD and CEO of ICICI Securities. These appointments have come in the backdrop of Chanda Kochhar, the present CFO, taking over as MD and CEO from KV Kamath. Another top executive, Kalpana Morparia, has left ICICI Bank to join as head of JPMorgan India. Citigroup operations in India, Sri Lanka, Bangladesh and Nepal. KKR has closed two transactions in India - $900 million buyout of software firm Aricent and an investment in telecom tower firm Bharti Infratel. KKR's decision to open the India office follows similar decisions by other biggies like Bain Capital and Apollo.

Anil Ahuja Is 3i's Asia Head
Private equity major 3i Group elevated its India head Anil Ahuja as head of its Asia operations. Ahuja will now be based out of the firm’s Singapore office and will lead 3i's inAnil Ahuja vestment teams across Asia, working with 3i's local business heads in China, Singapore and India. The PE group maintains this appointment underlines the increasing importance of Asia in 3i's global strategy. 3i opened its India office four years ago and has invested in sectors such as media, automotives, construction, power, ports and manufacturing. Ahuja, an IIM (Ahmedabad) and IIT (Delhi) alumnus, joined 3i in 2005.

Lightspeed Gets New Chief
Lightspeed Venture Partners has got a new chief in India. Bejul Somaia, an entrepreneur and a one-time VC, has been appointed as Managing Director at its India office. Somaia, who will be Bejul Somaia based out of Delhi, will be resposible for expanding the Indian investment activities of the firm. Prior to Lightspeed, Somaia was a co-managing director of Twiga Fiberglass, a building materials company in India. Previously, he was co-founder and principal investor of Open List, a US-based vertical web search company. He was also a principal at General Catalyst Partners in the US. Somaia holds a BSc in economics from the London School of Economics and an MBA from Harvard Business School.

GE Capital’s India CEO
GE Capital has appointed Vicky Bindra as president and chief executive of its financial services business in India. He will now lead GE's all consumer as well as commercial finance businesses including strategic partnerships such as SBI Cards. One of his mandates is to invest in businesses with high-growth and highmargin platforms, the company said in a statement. Bindra joined GE in 2007 as President and CEO of GE Commercial Finance India.

Vikas Sharma As Nomura India Head
Japanese investment banking major Nomura International has appointed Vikas Sharma as head of India operations. Nomura had some time back taken over the Asia operations of bankrupt Wall Street I-bank Lehman Brothers, which included the latter's India operations and outsourcing centre in India as part of the deal. Sharma was earlier Nomura's investment banking head in India. He takes over from former Lehman India chief Tarun Jotwani, who will now don a global role at the Japanese firm’s operations in Tokyo. Besides this, Nomura has also appointed six new appointments as part of its global operations, which included two ex-JPMorgan employees. Sahad P .V. Rajiv Raghunath Shrija Agrawal Madhav A Chanchani Ruchika Sharma Kapil Kashyap Vidyabhushan Upadhye Sudeep Pradhan Sanjana Jain Chandni Jafri Ben Mathew
Editor & Publisher Issue Editor Principal Correspondent Senior Correspondent Correspondent Design Consultant Principal Analyst Analyst Researcher Business Director Associate - BD & Alliances

KKR Hires Citi’s Sanjay Nayar
Global PE giant Kohlberg Kravis Roberts & Co (KKR) has hired Citigroup veteran Sanjay Nayar as its chief executive for India. He will be based in Mumbai. Nayar is presently the CEO of Citigroup India, and the area head for

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Sanjay Nayar

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