‘We should double the number of Internet users by 2016' ::Business Line

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As more entrepreneurs get funded, targeting the Indian market, you will have more risk-taking that will eventually become self-sustaining. SUDHEER KUPPAM, MD, ASIA PACIFIC REGION AT INTEL CAPITAL

Venture capital funds are among the significant sources of financing for entrepreneurs in early stages. Mr Sudheer Kuppam, Managing Director of Asia Pacific region at Intel Capital, talked to Business Line on the opportunities for start-ups in India and various aspects of the venture capital industry.

Excerpts form the interview:

What is the key factor that fosters innovation in any country?

The most important factor is the human resource pool. You need the entrepreneurs who are willing to step up, take the risk and go with their idea to create something new. It need not be innovation aimed at the entire world; local innovation will also suffice for the entrepreneur to be successful and to grow a reasonable business.

We don't think that regulatory policies or the government matters. At the end of the day we think Indian entrepreneurs know how to work with existing policies. Eventually, even the government will pick a lesson or two on the regulatory side from developed markets. They can clearly see how the venture eco-system has benefitted the economies there.

In India, we are seeing a lot more deal activity of late. The increased activity is good for the Indian economy because it is viral. As more people see entrepreneurs targeting Indian market getting funded, you will have more and more risk-taking that will eventually become self-sustaining.

What is the average holding period for investments in your portfolio?

In general, for Intel Capital world-wide it is five to seven years and it is the same for India. The period varies with the stage we invest in. We do all the way from early stage to late stage to PIPEs. If we do a late stage investment, the average holding period is three years, whereas the period could be seven years or more for an early stage investment. We invested real early in Persistent Software, a Pune-based company, back in 1999-2000 and exited last year. NIIT was a PIPE that we invested in 2005 and exited in 2007.

Is it true that only 40 per cent of the investments in a venture fund make money and the success stories make up for the losses?

If you look at some of the published historical data, in general, 20-30 per cent of your portfolio will give 3x returns. 10 per cent of the portfolio will give home-runs which are greater than 10x returns.

The rest of it is either mediocre or you lose money. But given the wide breadth of the return, the portfolio will overall give good returns. Venture capital is a high-risk asset class. Mutual funds or hedge funds have a diversified investment philosophy, wherein typically 3-5 per cent is invested in high-risk assets, that is venture capital and private equity.

What is done with companies that are hard to exit, that go down-hill?

Obviously, our resources are finite. We do not have the band-width to continue to nurture companies that are doing badly. So what we do is to cut our losses, early on. We either make a secondary sale or sell the stake back to the owners. It is often seen that the founders might want to do something else, that they started with a particular strategic intent that did not pan out and the company now wants to make a right-hand turn, do something else, that might not be strategic for us. It is also possible that sometimes we make the exit with loss.

Would you recommend a venture capital fund as an investment option for individuals?

It depends on the individual's preferences. In Silicon Valley, high net worth individuals are limited partners in some big venture funds.

These high net worth individuals could be having a very influential rolodex (contacts) that the venture partnership might want to tap. Since the HNI is a partner, he will be committed to help out the venture fund and the portfolio companies. But I haven't seen similar relations in India.

Having numerous individuals investing small sums in a venture fund can be a problem. The venture fund is answerable to all its partners. If I have a $100-million (Rs 500 crore) fund with 40 angel investors putting in Rs 1 crore each, I will not be going to them every quarter telling them how things are etc. It is a headache.

Stepping back, if some people are throwing money at some of these funds, they are free to do so. But in more professional funds, unless the fund sees value in the angel, they do not take them on. For instance, our CEO, Paul Otellini is a limited partner in few funds. You can see why there is value in taking Paul as a partner.

Within the technology sector in India, which segments do you see as potential growth drivers?

It is definitely broadband. Ever since 3G was allowed in India, you can clearly see an uptick in broadband penetration. And we believe this is an inflexion point. Right now the spread of 3G is spotty. But as they set up the infrastructure, Reliance is planning 4G that they plan to roll out next year; once all of this happens, broadband penetration will clearly go up, which will increase PC and mobile phone penetration that, in turn, will increase all technology-related businesses that are feeding off those trends.

You can see how China has morphed. They are the number one technology market, even for Intel. We sell more CPUs, more silicon to China than to the US. The demographics help because they have 450 million Internet users, whereas the US population is 330 million. India will also get there.

We believe that in the next five years our conservative forecast is that we should double the number of Internet users that is currently 100 million. With support from smart phones and tablets, it could even accelerate.

Would you agree that venture funds act as a herd and converge on the sector in vogue despite opportunities in other sectors?

If you look at our previous two press releases, we started out this year investing in Policybazaar, that is in consumer Internet; then we invested in a robotic surgery company that is now offering surgery using robots in Delhi called SSI Robotics, very soon it will expand to Mumbai. Then, in September, we invested in TestingCzars which do mobile apps.

Later, we invested in WhatsOnIndia which is electronic programming guide. If you subscribe to Tata Sky or Airtel, the menu that you get is from this company. We have invested in MCX in 2009, that is an electronic exchange for commodities and commodities derivatives. Our investments have been quite diversified.

Can you share some details of your financial performance?

Intel Capital does not share details of financial return details. We benchmark ourselves every quarter to Cambridge Associates' venture capital data on how returns are for venture funds. And Intel Capital is in the top quartile of top performing funds. Within Intel Capital, India is a strong performer in terms of returns. Most Indian exits have been awesome — Sasken, Persistent Software, NIIT, Sharekhan, Rediff and so on.