Indian IT sector upsets Chinese applecart in venture capital deals

Jan 27 2013, 03:11 IST
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SummaryThe sluggish global economy hasn’t stopped investors from cherry picking opportunities in the India growth story.

The sluggish global economy hasn’t stopped investors from cherry picking opportunities in the India growth story. After trailing behind its larger neighbour China for three years, India’s venture capital (VC) investment in the information technology (IT) space finally zoomed past its rival in 2012.

Venture capital funding in China, which saw a slump last year, witnessed almost a 50% plunge in overall deal volumes and value. As per data from Dow Jones Venture Source, Chinese IT, which was impacted the most, managed only about $200 million worth of deals in 2012 as against $272 million across 120 deals in India.

In 2011, the technology sector in India attracted $367 million across 96 deals, says data from investment research firm Venture Intelligence, against China’s $849 million. While India can take comfort in the fact that the country has managed to come on top this year, the cumulative VC investment over the past three years in the Chinese IT sector is still much ahead of India.

“Over the past few years China has been increasingly attracting more VC funds in the IT sector, usually a strength area of India,” says Pradeep Tagare, director, Intel Capital India, the investment arm of the global chipmaker. The fund, which focuses on the technology space, has invested more than $670 million in China and over $320 million in India since 1998. Globally, the US and Israel hold the top slot in attracting VC funding in IT, followed by China and India.

Investors point out that investment in China is propelled by the emergence of large home-grown companies in the local language. Baidu, which is the Chinese equivalent of Google; Sina Weibo, the Chinese Twitter; Alibaba, the answer to Amazon, have raised the need for solutions in local language, spawning several small start-ups serving the domestic market.

Says Karthik Reddy, managing partner of Blume Ventures, a VC fund with a R100-crore corpus, “These start-ups have the advantage of providing a readily available large captive domestic market where other companies cannot enter due to language and regulatory issues.”

In China, the VC investments in IT roughly average around 15% of the total investments, while in India IT accounts for 65% of the funding. For early-stage VC fund Accel Partners, the $260-million India fund focuses only on technology, while in China it is across sectors with a corpus size of $2.5 billion.

Prashanth Prakash, partner, Accel Partners India, feels it will be tough for Chinese companies to replicate the product engineering expertise that IT product companies in India have developed over the years.

“The product companies in China are not yet serving global clients like the Indian peers. When they will try to go global, they will find it difficult to do the language transition.”

But India cannot afford to rest on its laurels, feel analysts. Says Kumar R Parakala, KPMG, head of IT Advisory, the investment in academics, along with the collaboration with industry and huge money poured by angel investors and VCs, is also fueling innovation in product space as well. “There are a lot of incentives for start-ups in China apart from getting many infrastructure facilities for free,” notes Parakala.

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