VCs Calling: Internet Growth Spurs Investment

Few things excite venture capitalists than the possibility of investing at a low price in a company with global disruptive potential that give it an exponential return. Internet start-ups offer among the best potential for high-growth, capital efficient and exit-able investments. As India’s Internet user base of 50 million grows at 25% each year, more Internet companies are being formed to target the online market. Consequently, more funds are being set up to invest in such companies.

Not surprisingly, Silicon Valley based VC firms are taking the lead. At last count, 44 U.S.-based VCs announced plans to set up India-based funds of an average fund size of $100 million. If successful, that would imply about $4.4 billion in new investment capital would be available for venture investments in India over the next five to six years. That’s more than twice the $2.03 billion total in venture capital and private equity investments in India in 2005.

Taking Indian Purchasing Power Parity (PPP) into consideration, that would be equal to $22 billion worth of investment capital in the U.S.

After a lull between 2000 and 2004, early stage companies received venture capital investments worth $482 million across 52 deals last year. This year, investors have taken greater risks by investing money in very early stage companies. Consequently, they’ve invested a similar amount as last year in twice the number of companies. In the first six months of 2006, that resulted in $240 million invested in 49 companies in sectors such as online classifieds and travel, mobile & mobile value-added services companies, gaming and telecoms.

China is Bigger and Faster. So Is Its Government

India’s growth has been described as “self-sustaining” compared with Chinese growth, which has largely been government-induced and propelled by large-scale foreign direct investments (FDI) almost 12 times the FDI in India.

With a record inflow of $79 billion, China accounted for one-fifth of all inflows into emerging markets in 2005, according to a report by the Economist Intelligence Unit (EIU), part of The Economist Group providing research & advisory services and country, industry and management analysis. India, on the other hand, received only $6.7 billion FDI during the year.

The EIU report points out that such investment into China is reaching a point of saturation and is affecting some Chinese industries, and this may deter further FDI. The report acknowledges that FDI into India will grow but will remain very low in relation to the size and potential of its economy.

Notwithstanding lower FDI, the Indian economy continues to grow on the back of Foreign Institutional Investment in its capital markets, export revenue and money transfers sent by its overseas Indians that’s expected to reach $21.7 billion this year making it the largest remittance market in the world.

India’s 1st Quarter GDP Growth: A Positive Surprise

The Indian economy grew, better than expected, by 8.9% in the first quarter ended June 2006. Weeks before the Central Statistical Organisation (CSO) released official figure, India’s Finance Minister P. Chidambaram, tempered expectations by projecting a modest growth rate of 7% for the quarter. Analysts expect the country to exceed the annual growth rate for 2006 to be in excess of the 7.5% to 8% that’s been forecast by the country’s central bank, the Reserve Bank of India (RBI). The International Monetary Fund (IMF), an organization of 184 countries that fosters global monetary cooperation, for example, raised India’s GDP growth forecast to 8.3% for 2006 compared with 7.3% forecast in April this year.

Efforts to transform India’s exports to a hybrid manufacturing and services one from a largely service one alone seem to be paying off. The services sector, which contributes more than half of India’s GDP, grew 13.2% in the quarter compared with 11.7% in the same quarter last year. Manufacturing grew 11.3% compared with 10.7% last year.

One consequence of the GDP growth has been a phenomenal growth in the real estate market. With a housing requirement of 80 million units over the next 15 years and 200 million square feet in office space required over the next five years by the country’s Information Technology and Business Process Outsourcing industries alone, India’s real estate market is expected to be worth $50 billion in 2010 from $14 billion this year. Our Special Report in this section describes the key factors driving this growth in more detail.

Bundeep Singh Rangar
Chairman, IndusView
Bundeep.Rangar@IndusView.com
www.indusview.com