STATE OF VENTURE CAPITAL IN INDIA

Saurabh Srivastava Chairman

Indian Venture Capital Association, Infinity Ventures & Xansa India

THE WORLD VIEW Top 20 Countries in 2002 - Based on Investment

(2001 Rankings in Parentheses)
North America

1. USA (1) 9. Canada (4)

Western Europe
2. United Kingdom (2) 3. France (5)

<1%

4. Italy (7)
6. Germany (3) 8. Netherlands (11) 10. Sweden (9) 14. Spain (17) 17. Finland (-) 20. Belgium (19)

63%

25%
25% 9%

Asia Pacific
5. Japan (6) 7. Korea (10) 11. Australia (14)

12. India (15)

15. Hong Kong (8) 16. Indonesia (-) 19. China (13)

Central & South America

2% 1%
Middle East & Africa

13. Israel (12) 18. South Africa (-)

Note: There is no published data on Asia Pacific countries for 2002, therefore estimates from the AVCJ are shown

THE WORLD VIEW

Top 20 Countries - Based on Growth (CAGR 98-02)
North America

Western Europe

13. Canada (9%) 20. USA (<1%)

2. Sweden (57%) 3. Denmark (50%) 7. France (29%) 8. Italy (24%) 9. Spain (22%) 10. Finland (19%) 14. Netherlands (8%)

15. Switzerland (5%)

16. UK (5%) 17. Belgium (4%) 18. Germany (2%) 19. Norway (1%)

Asia Pacific

1. India (82%)
4. Australia (39%) 5. South Korea (39%) 6. Japan (31%) 12. China (11%)

Central & South America Middle East & Africa

11. Israel (14%)

Only Countries with investments of at least $0.225 billion in 2002 are shown Note: There is no published data on Asia Pacific countries for 2002, therefore estimates from the AVCJ are shown

PRIVATE EQUITY IN ASIA 2003

Status

An estimated $17.5 billion of private equity and venture capital was invested in the Asia Pacific region in 2003-a whopping 92% increase on 2002 Japan led the region accounting for $7.3bn of the value of deals completed, followed by Korea with $3.3bn and Australia with $2.8bn In contrast, only $3.32 billion of new funds were raised in 2003 (up only 10% on 2002 levels) The pool of private equity capital under management rose to $97.6 billion in 2003 up from $88.6bn in 2002 Start-up and early stage investment is estimated at $ 0.6 bn and $1.4 billion was invested in expansion stage companies in 2003 Telecommunication section had the highest percentage of invested capital with $3.7bn or 21% followed by financial services with $2.3bn or 18.3%

INDIA VC HISTORY

Phase I - Formation of TDICI in the 80s and regional funds as GVFL & APIDC in the early 90s. Phase II - Entry of Foreign Venture Capital funds between 1995-1999 Phase III - (2000 onwards). Emergence of successful India-centric VC firms Phase IV US VCs increasing appetite to invest in India

INDIA VENTURE CAPITAL INVESTMENT TRENDS

1,400 1,200 1,000 800 600 400 200 0 96 97 98 99 '00 '01 '02 '03 '04 20 80 250 500 1,160 937 774 590 900

Source: IVCA/AVCJ

THE INDIAN ENVIRONMENT

2002
India ranked as second most active VC market, outside of Japan, in attracting capital.
$590 MN (VC/PE) was invested in 2002. Down 37.01% YOY 41 exits in 2002 Spectramind, Customer Asset, EXL, iFlex Investment focus is on big ticket and late stage deals 76 deals received investment, but average deal size marginally lower Indian VC funds received $241 MN in new commitments in 2002, up 11.7% from 2001
Source:AVCJ/IVCA

Mood
Active

2003
Slipped to fourth place, outside of Japan in attracting capital $774 MN (VC/PE) funds invested in 2003 Up 39.18% YOY. $ 900 MN estimated for 2004 Increased M&A & attractive IPO market led to big ticket exits- UTI Bank, TV Today, Indraprastha Gas, Worldzen, VisionSource Majority of the investments in Late Stage & PIPE transactions with banks and media as the hot sectors Average deal size much larger though no. of deals decreased to 42

Patient

Aggressive

Cautious

Selective

Active

Indian VC funds approx $ 360 MN in new commitments in 2003.

INVESTMENTS IN 2002 & 2003

Deal Stage

No. of Companies

Sum Invested ($mil)

Average per Deal

Startup/Seed Early Stage Expansion Later Stage Other/Unknown Total 2002 Total 2003

7 9 44 2 15 77 42

27.98 52.8 345.82 4.56 159.05 590.21 774.01

3.11 5.28 7.36 2.28 10.6 7.03 18.43

Deals in 2003 (BY STAGE)

Stage SEED/ EARLY Sector Banking BPO BPO LATE/MBO Chemical Retail Media Media BPO Consumer VC/PE Fund Citicorp, Chrys Capital, Russell Infra Fund Sequoia Capital WestBridge CDC Capital ICICI Ventures Henderson Capital Standard Chartered West River Capital Warburg Pincus Company Yes Bank 24/7 Customer Indecomm World ICI PVR Cinemas Hindustan Times NDTV V-Customer Radhakrishna Foods Amount ($m) 15.5 22 4 16.5 8.5 25 11 7 50

PIPE

Infrastructure
Pharma Media Auto

Chrys Capital & Citicorp

Newbridge & Citicorp ICICI Ventures CDC Capital & GIC

IVRCL
Lupin Labs Tata Infomdia Punjab Tractors

23
55 22.5 57

GROWTH OF FIRMS IN INDIA

Year
1995 1996 1997 1998

No. of Funds
4 7 10 6

1999 2000 2001

2002 2003

5 47 12
6 2

FUND RAISING POSITION

Year
2001 2002 2003 Total

No. of Funds
10 5 2 17

Amount Raised ($mil)

216.5 241.8 260.0 718.3

Average per fund

21.65 48.36 130.00 42.25

VC ACTIVITY IN ASIAN REGION - 2003

Country Japan South Korea Australia China Amt. Invested ($MN) $ 7,297.71 $ 3,152.94 $ 2,174.70 $ 1,279.83 Number of Companies 77 21 71 44

India Indonesia
Singapore Bangladesh Philippines Hong Kong Taiwan
Source : AVCJ

$ 774.01 $ 653.45
$ 501.81 $ 472.70 $ 149.30 $ 131.16 $ 37.98

42 5
16 2 4 7 3

WHY IS AN ACTIVE VC COMMUNITY IMPORTANT FOR INDIA?

Innovation needs risk capital in a largely regulated, conservative, legacy financial system Job creation -- large pool of skilled graduates in the first and second tier cities Creating new industry clusters Media, Retail, Call Centers and back office processing, trickling down to organized effort of support services like office services, catering, transportation Patient capital Not flighty, unlike FIIs

DRIVERS OF VENTURE INVESTING IN INDIA

Knowledge based industries growing fast and mostly global; less affected by domestic issues World class engineers, professionals, entrepreneurs - success evident in the US as well 2nd largest English speaking population; science and mathematics at a premium India has advanced rapidly in the 90s, catching up with global markets in many sectors Evidence of this in the US as well
25% of small IT companies in the US have Indian founders (Upside) Disproportionately large presence of Indians in the US Software Sector (1 million?) 50% of all H1 visas issued to Indians

SUPPORTIVE REGULATORY ENVIRONMENT

Government highly supportive of growth in technology and knowledge based sectors Strong and supportive legal framework Information Technology Act, VC norms, ESOPs, copyright, etc Government controlled telecom being fully deregulated Capital Market system amongst most advanced in Asia

Electronic trading through NSE and BSE

WHERE ARE VCs INVESTING IN INDIA?

IT and IT-enabled services

Software Products (Mainly Enterprise-focused)

Wireless/Telecom/Semiconductor

Banking
PSU Disinvestment
Media/Entertainment Bio Technology/Bio Informatics Pharmaceuticals Contract Manufacturing Retail

THE VC HOTBEDS

City competencies Emerging

Bangalore All IP-led companies; IT and IT-enabled services Delhi (NCR) Software services, IT enabled services, Telecom Mumbai Software services, IT enabled services, Media, Computer Graphics, Animation, Banking Other emerging Centers Chennai, Hyderabad, and Pune

ISSUES AND CHALLENGES Indian VC yet to be established as a sustainable asset class among institutional investors

Limited amount of true risk-capital will impact entrepreneurial activity

Exit challenges shallow capital markets and dull M&A environment for small companies Beyond services, India yet to create a brand-name for IP-led companies, like Israel has successfully done

Thank You