Who can argue with We have learnt from our mistakes or Technology by itself is insufficient to create wealth, what matters is its innovative usage. This we-have-been-reformed air almost makes you believe that the initial frenzy leading up to the dotcom bust of 2000 is over and a process of sensible recomposition has begun. It all sounds so unexceptionable, so reasonable and so really polite.
But just a few scratches below the surface, you still get some stuff that either makes no sense or is just old wine in new bottles. Instead of eyeballs and angel investors, the new terms are audience management and permission filtering technology. You still get the sense that many of these guys are overloaded with money, off on the hunt for the next Big Idea, and are having a jolly good time just trying to be different for the sake of it.
I came across an interesting study: in the US, from 1992 to 1996, about $10 billion per year of venture capital was invested, producing on average 25-40 per cent annual rates of return. Those were good years. But then came the bad. From 1997 to 2001, the amount per year soared, reaching $70 billion in 2000, but the returns became negative. Nobody knows exactly how much in the negative, since there is a cloak of secrecy, but estimates range from 10 to 30 per cent in the red. Of course, some of this has to do with the tanking of US equity markets, but many were just plain bad investments.
In India, reliable estimates of VC funding are also difficult, mostly because not all that is reported is real and because rules allow many VC transactions to fall outside official statistics by making them indistinguishable from routine foreign investment. Still, there is broad agreement that VC funding in India in the calendar year 2003 was in the $500-600 million range, a sharp drop from $1.1 billion in 2002 and $900 million in 2001. Over 80 per cent new VC investment in India is in profitable companies rather than start-ups, with Internet companies clearly out of favour and BPO, media, entertainment and healthcare emerging as the new stars.
But Indian VC investment, for all its brouhaha, is essentially small, far less than China and Japan, and far less exciting. In fact, India has now slipped to the 5th position (from 3rd place in 2002) in Asia. More than the dotcom bust, this is perhaps due to the belated realisation that India remains an untested if not shaky market, and that success is often shaped by a combination of social circumstance and government role.
Take vaccines for instance, where a number of firms are in the race. On surface, the market opportunity looks huge; after all, infant mortality is high in India, over 3 million children under the age of five die each year and one in every 15 persons is a carrier of some immunisable disease. But while vaccine sales are robust and growing, around 20 per cent annually, they have hardly shown the dramatic growth that was projected by many venture capitalists.
Why Because government is still the largest buyer. Official procurement remains mired in bureaucracy and corruption, while refrigeration and medical infrastructure needed for an effective immunisation programme simply does not exist in the far reaches of the country. The bottomline is that no matter how fantastic a discovery, a new vaccine will enjoy only limited market penetration due to the meagre resources of the public health system.
Venture and technology people (there is an 80 per cent overlap) are not stupid but they operate under far less checks and balances than do others. The business by its nature is very lonely, the rush to spot novel ideas and emerging technologies is both consuming and seductive, and there are few markers to help along the way. All these push VCs to believing in their own destiny. Confidence and risk-taking are essential for creating wealth, but not if you act as if you just had a conversation with God. Combined Indian industry estimates speak of reaching $1.5 billion financing in 2004, but more than quantity we need to focus on the quality and impact of this capital.
The author is an analyst of Indian political and business trends and the editor of India Focus, a political risk report for international investors