F O R D E A L M A K E R S

SHAKEN & STIRREDReal estate industry hasbeen in trouble. But ex-perts believe the industrywill stage a recovery ofsorts by launching ‘afford-able’ options. 15

RIDE OUT THE STORMHedge fund managers wholived through the carnageof 2008 say that there arebrighter days ahead in Indiafor those investors willingto ride out the storm. 14

CATCH-22: LIFE OF ANENTREPRENEURAn exclusive column byMohanjit Jolly. He explainshow a startup can dealwith the chicken and eggproblem of achieving mile-stones and raising the capi-tal required to do it. 20

POWER SHIFTWe track the top levelchanges in private equity,VC and financial world. 24

TRENDMILLFollowing the latest investment trends, dealsand dealmakers. 2

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www.vccircle.com February 2009

FROM THE EDITOR

A few weeks ago, a friend from a private equityfund wrote to me saying "2009 is the year of inflection". What he meant was: this is the year topush your company harder (and take it to greaterheights when the good times come). 2009 will nodoubt look very tough. Revenues may be hard tocome by. Profits, even harder. But that should notstop you from building your company or distractyou from the real thing. My investor friend, con-trary to the prevailing view, is convinced that gooddays are ahead, if not in 2009, the year after.

As the year confronts youwith challenges that youhaven't seen before (notin the lifetime of many ofus), here is a 24-pagespecial offering from VC-Circle that should helpyou obtain deep insightsinto India’s investmenteconomy. We have aptlytitled it VCC Insight. Themini-mag debuts with adetailed survey on thedeal economy based onthe thought-provoking

views of 33 top dealmakers in the country. Our tal-ented editorial team led by Shrija Agrawal andMadhav A Chanchani conducted exhaustive inter-views with the busy fund managers to know howthe year will look like for dealmaking.

This was no mean task given the high profile of therespondents. Yet, it was accomplished in a shortspan of two weeks. The key takeaways are: therewill be fewer deals in the year; quality will prevailover quantum of deals; valuations will adjust evenfurther, especially in the private markets; sectorslike education, alternative energy and media willattract funding. I am not spilling all the beans here;turn to Page 4 for more.

We also bring to you a special feature on the In-dian real estate industry. Ruchika Sharma providesa detailed account of the ground realities govern-ing the industry. Check this out on Page 16.

Also remember to read Mohanjit Jolly’s columnCatch-22: Life Of An Entrepreneur.

We hope you will enjoy reading this special offer-ing from us. Remember to send your feedback tosahad@vccircle.com.

Sahad P.V.

TRENDMILLCricket And Celebs

Investor interest inthe Indian PremierLeague (IPL) seems tobe increasing in therun-up to its secondedition which willbegin in April this year.The growing interestin the IPL franchises isgoverned both by itspopularity and invest-ment opportunity. Inkeeping with this sen-timent, film actressShilpa Shetty and herfriend Raj Kundra havepicked a 11% stake inRajasthan Royals, theteam from Rajasthanthat won the first edi-tion of the IPL. The IPLfranchise has beenvalued at $140 million.Manoj Badale, ownerof the franchise, saidthe firm had seen a lotof private equity in-terest, especially since

its returns on investment had nearly doubled in lessthan a year.

Earlier, Deutsche Bank executive Anshu Jain bought a15% stake in Mukesh Ambani's IPL franchise MumbaiIndians in late 2008. Hyderabad-based media companyDeccan Chronicle has put its IPL franchise DeccanChargers on the block.

AIMing At PromotersRaising funds in Lon-don Stock Ex-change’s AlternativeInvestment Market(AIM) may be easy,but maintaining thelisted status and alsohandling the share-holders can get diffi-

cult. KSK Emerging India Energy Fund Ltd (KEF), acompany that raised £100 million in June 2008, is acase in point. KEF was wound up on January 23, 2009,after an extraordinary general meeting of the share-holders held on January 22 tendered a resolution de-manding their funds back. Although all details are not

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available, the company has attributed the shareholderapathy to their own internal problems (caused by theglobal capital crunch). KEF, promoted by Hyderabad-based KSK Group, has not made an investment yet;that could make the liquidation easier.

Another example of shareholder activism in AIM isthat of a hedge fund shareholder demanding the re-moval of Raghav Bahl and Alok Verma as directors ofthe Indian Film Company. The company, promoted byTV 18 chairman and managing director Raghav Bahl,has apparently not delivered returns to shareholderscommensurate with what the company has earned.IFC has released blockbuster movies like Jab We Met,Welcome, Singh is Kinng and Ghajini.These films haveperformed well at the box office, but not for theshareholders, Altima India Master Fund, the share-holder, alleged. Bahl has finally met with the hedgefund’s demand. Bottomline: If you are aiming for alisting on AIM, be prepared for hard questions.

Pledge Shares, But DiscloseIndian promoters of listed com-panies have been pledging shareswith financial institutions andbanks to fund their own venturesor even to buy a personal jet or aprivate island. You can still dothat, but now you need to tellyour shareholders that you havepledged the shares to raise debtfrom institutions. Market regula-tor Securities & Exchange Boardof India (Sebi) has made itmandatory for promoters to dis-

close the pledging of shares.

Sebi’s action was in response to Satyam Computer Serv-ices’ former chairman B Ramalinga Raju’s revelationthat he pledged almost all his shares in the IT companyto fund his family’s real estate forays. After the Satyamscam broke out and the shares took a plunge, the insti-tutions in possession of those shares started sellingthem.

IIML Scaling New HighIL&FS Investment Man-agers (IIML), the PEarm of IL&FS, has rea-sons to rejoice in thesegloomy times. For one,only a couple ofmonths ago, they

closed a giant, $895 million real estate fund. In Janu-ary, IIML announced the first close of its internationalfund at $568 million. The fund – christened StandardChartered IL&FS Asia Infrastructure Growth Fund - isco-sponsored by IL&FS and Standard Chartered Bank.

Both the institutions have invested $150 million eachin the fund, which has a final target between $800million and $1 billion. This would be the first instanceof an Indian fund manager raising a fund with a pan-Asia focus. Besides these two, IIML also closed itsgrowth fund at $225 million recently.

The fund has also made its maiden India deal by pick-ing up a 5% stake in IL&FS Transportation Networks(ITNL) for Rs 130 crore. IIML has about $1.9 billionunder management.

Family Businesses Into PEAditya Birla Group is one of thefew traditional family businessgroups in India to set up an in-dependent PE fund. The groupis currently on road to raise a$250 million mid-market fo-cused PE fund which will haveexternal investors. Kumar Man-galam Birla (left), head of AdityaBirla Group, will be the anchorinvestor. He is expected to putin 20% of the corpus. The fundexpects its first close at $100-

125 million in the second quarter of this year, accord-ing to Bharat Banka, MD & CEO of Aditya Birla PE.

The Dabur group has also set up a fund. The Burmans(Gaurav and Mohit Burman, sons of Vivek Burman) arethe chief promoters of Elephant Capital, an AIM listedPE fund with an India investment focus. The £50 mil-lion fund – earlier called Promethean India – was spunoff as a separate entity some months ago.

Last year, Chennai’s TVS family and the Shriram groupteamed up to set up a PE fund – TVS Shriram GrowthFund – with a corpus of Rs 600 crore. Can we seemore of such funds?

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Yes, We Can! Dealmakers could perhaps borrow anugget from the Obama wisdom to make the next12-18 months worthwhile. An exclusive surveyconducted by VCCircle based on interviews with 33top dealmakers in the country indicates that farfewer deals may be seen in 2009 - coming from pri-vate equity, venture capital or M&A alike. The over-riding sentiment is that despite all talk ofcorrections in the public market valuations, the pri-vate companies have still to adjust their expecta-tions. Private equity investors find that animpediment to do further deals. However, the liq-uidity crunch and over-leveraged positions willeventually induce the promoters to readjust theirpositions.

Exits this year are also likely to be few and far be-tween with the IPO market drying up. StrategicM&As and consolidation-by-necessity will becomethe only routes to get out. Investment holding pe-riods will stretch out for sure. The era of quickbucks, it emerges, is well and truly over.

Many a fund - especially rookie fund managers -willfind it difficult to do deals in this market, and somesay a shake-out is on the anvil in the fund world.Those with high pedigree and sound background

will weather the tough times, while the others maysimply disappear or lie low.

But those funds that are looking to do deals in thesetimes say certain sectors are undoubtedly appealingeven today. Consumption -driven sectors like edu-cation and healthcare, and even alternative energyare the preferred destinations. Venture capitalistsbelieve tough times like these are the best times tobuild great companies. Another point stressed bythe survey participants is capital efficiency. There isno easy capital for companies that require lots ofmoney to build their businesses. Corporate gover-nance too is back in the investment lexicon.

Our survey says that outbound M&A deals will comedown as there is no capital to fund such acquisi-tions. We know how difficult it has been for TataMotors to raise capital for the Jaguar Land Roveracquisition. The ticket size of deals will also godown drastically.

We present the key findings of our interviews with33 MD/CEO level functionaries of PE/VC funds andinvestment bankers. For easy reading, we havesegmented the findings under three broad heads –Venture Capital, Private Equity & M&As.

THE DEAL OUTLOOK 2009A survey of 33 investors and bankers show that dealmaking may slow downthis year, but quality will prevail. BY SHRIJA AGRAWAL & MADHAV A CHANCHANI

Sudheer KuppamMD, Intel Capital

Raja Kumar,MD, UTI Ventures

Gopal SrinivasanCMD, TVS Capital

Harsha RaghavanMD, Candover PE

Sarath Naru,MD, VenturEast

Sanjay Bansal, MD,Ambit Corp Finance

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PRIVATE EQUITYSlowing DealsThere is near unanimity on the pace of deal making in2009. It will be slow. Almost all private equity fundmanagers that VCCircle spoke with see a slowdown indeal making this year. They say that going forward thedeals may be available at even cheaper valuations. So,why do a deal now and regret later?

For some, it mayalso be a ques-tion of not find-ing the rightdeals. "I wouldrather not dodeals than beingin an embarrass-ing situation,"says Nitin Desh-mukh, SeniorManaging Direc-tor, Kotak Pri-vate Equity.Deshmukh hasnot made any in-vestment tilldate from the$ 4 3 0 - m i l l i o nfund that he

raised in February 2008. He could stick by this planthrough this year too. "If not, I would rather returnthe capital to my LPs," he adds.

"The slowdown in transactions is not because of privateequity funds' unwillingness to do the deal," says ShujaatKhan, Managing Director, Blue River Capital, "Rather,promoters are not willing to dilute at low valuations."

The deals are also taking a longer time to close due todifferences over valuation or because the investors aredoing a more intensive due diligence now than ever be-fore, especially in the wake of the Satyam scandal.

"Deal cycles are definitely getting longer," says Aluri Srini-vasa Rao, Managing Director, Morgan Stanley Private Eq-uity Asia. However, the majority view is that the situationis likely to improve towards the end of the year.

Question Of ValuationThe dominant view among the investors is that thevaluations in the private markets have not fallen intandem with the public market valuations. "The ex-pected slowdown in corporate earnings means thatgrowth projections need to be realigned, especiallyfor privately-owned businesses. There still remains asubstantial gap between public and private markets,"says Sameer Sain, MD & CEO, Future Capital Holdings.However, promoters may be forced to reduce theirexpectations as there are not many avenues to raisecapital in this environment.

"With banks not willing to lend, the IPO markets dry-ing up, FCCB redemption pressures scaling up, andhedge funds going bust, promoters have realised thesituation is not in their favour. Hence the only assetclass that remains to be tapped is PE," says Sanjiv Kaul,Managing Director, Chrys Capital.

Also, many companies are over-leveraged at the com-pany or promoter levels. This situation cannot be sus-tained for long and private equity fund managers likeKhan of Blue River Capital are hoping that cash-strapped companies will reach out to the funds to un-wind a lot of this leverage.

Harsha Raghavan, Managing Director, Candover Capi-tal. disagrees: "There will always be entrepreneurswho either don't need the money or don't see the op-portunity of coming out of this period of weak senti-ment – they will instead hold out for the highest priceat the cost of their business plans."

Who Will Get WhatAlthough there is a view that the focus will increasinglybe on promoters than sectors (the Satyam scandal hasbrought in a sense of fear among the fund managers),certain business sectors will continue to be more at-tractive than the others. For instance, asset and capitalheavy businesses will be less preferred by investors thisyear. The bar willalso become "in-credibly high" forinfrastructure-ori-ented sectorswhereas the sec-tors that take the

DEEPAK SHAHDADPURI, MD, BCP ADVISORS“WHAT WE ARE ACTUALLY SEEING IN THE MARKETS RIGHT NOW IS NOT DISTRESSED ASSETS BUT QUALITY ASSETS FROM DISTRESSED SELLERS.”

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cake are healthcare, education, alternative energy and media. "We are looking at energy genera-tion side, and also cleantech. Edu-cation is a very critical part of theinfrastructure segment," says LuisMiranda, Managing Director, IDFCPrivate Equity.

Private equity funds in general willavoid the exports sector or busi-nesses that are dependent onglobal demand, early stage busi-nesses, and businesses that haveheavy manufacturing facilities, andthat require high capex.

However, the domestic consumption story is still in-tact, according to the survey. "Sectors that will ben-efit from the domestic consumption at large andspecifically consumer discretionary and non-discre-tionary-linked businesses like healthcare, education,alternative energy and media, would be preferred,"says Sain.

Joining him on this point is Gaurav Mathur, ManagingDirector, India Equity Partners. "We will prefer to in-vest in education, healthcare, waste management,water and railways. We would not look at commodi-ties in 2009," he says.

SMEs will also have takers. "We find SMEs very attrac-tive right now as valuations have come down," saysAchal Ghai, Managing Partner, Avigo Capital Partners.A few of the respondents also found specialty infra-structure and specialty retail as interesting areas tobe pursued.

Back To Classic PE Model The stock markets are at levels more attractive than

last year but pri-vate investmentin public enter-

prises (PIPE) will likely take a back-seat in 2009. A key reason beingthat PIPEs come with limited duediligence and rights, which is acause of concern. There is a fearthat more corporate frauds like theone concerning Satyam may sur-face in the coming months as morecompanies come under closescrutiny. The pressures from lim-ited partners on general partnerswill also be difficult to handle.

"LPs are demanding appropriate-ness of the 2 and 20 compensationstructures if the majority of invest-ments are in listed companies," says

Raja Kumar, Managing Director, UTI Ventures.

However, no one minds a good company if that comescheap. Investors will prefer to take a majority stakeand demand a board seat as things unfold differentlyin the public markets.

Our survey revealed that the majority of PE investorswould prefer to invest in a privately-held companythough the liquidity events have a much longer hori-zon (4-5 years) now. But this is what classic privateequity is about – engage in a long haul with the port-folio companies, build them up and then exit insteadof getting into financial engineering. Firms will notmake decisions that may haunt them for years.

The majority of the PE investors believe that 2009 willsee a return to the classic PE model.

No Quick Bucks Here 2009 will not be a good time for exits, the survey re-veals. The chance of exits through IPO continues to bevery bleak. There could be a few exits in the form ofM&As though. However, with even good companiesbeing cash conservative, both M&A and IPO seem dis-tant options.

SAMEER SAIN, CEO & MD, FUTURE CAPITAL HOLDINGS“THE EXPECTED SLOWDOWN IN CORPORATEEARNINGS MEANS THAT GROWTH PROJEC-TIONS NEED TO BE REALIGNED, ESPECIALLYFOR PRIVATELY-OWNED BUSINESSES. THERESTILL REMAINS A SUBSTANTIAL GAP BETWEENPUBLIC AND PRIVATE MARKETS.”

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"With equity valuations crashing so soon, companiescan't really use stock as a currency to do deals," saysMukund Krishnaswamy, Managing Director, Light-house Funds.

However, most of the PE fund managers believe thatexits may happen through secondary sale to anotherPE fund. PE funds that are facing difficulties in doingdeals themselves could buy existing deals from someother funds. Such an exercise becomes an exit optionfor one fund and a deal for another. Much of this hasnot been seen in the previous years.

Diamonds In QuicksandThe majority of PE funds believe that distressed assetsales will not happen in 2009 unless the global eco-nomic scenario weakens further. On an average, In-dian corporates are not too over-leveraged to makedistressed asset sale so compelling. However, a fewbelieve there will be more distressed asset salesacross hedge funds and PE funds, particularly duringthe latter half of 2009.

Distressed investing becomes a vehicle of choice forrealising the value of financially troubled companies."We can say that valuations have come down and sohave expectations in many cases. Distressed assetsales typically happen after prolonged downturns. Wehave not reached that stage yet,"says Gopal Srinivasan, Chairman andManaging Director, TVS ShriramGrowth Fund.Adds Deepak Shahdadpuri, MD, BCPAdvisors, "What we are actually see-ing in the markets right now is notdistressed assets but quality assetsfrom distressed sellers."

Funds Shakeout? Some of the fund managers polledwere of the view that there will be ashrinkage of funds in 2009. So theindustry is preparing for a shake-out.Taking the point further, Deshmukh

adds that this willbe "the first timeand last timefunds for many".

The majority of PE funds anticipate a slowdown in thenumber of funds coming into the market in 2009. Thefund raising environment is extremely difficult andthere are about 78 India-focussed funds on road toraise $24 billion, according to Preqin data. It remainsto be seen how many of them can close this year.

"Already many of the hedge funds and sovereignwealth funds that posed severe competition in 2007and 2008 are gone. A number of PE firms are alsogoing slow or downsizing their global funds undermanagement, and focusing on portfolio companies.The market is rationalising and this is healthy," addsRaghavan of Candover.

Experienced fund management teams with an estab-lished track record should be able to sail through inthis environment, points out Raja Kumar, MD, UTI Ven-tures.

However, emerging markets are still thought of as acall option on world growth. Given the underlyingdrivers of emerging market growth, the institutional

fund managers will not do the mis-take of abandoning a strategic assetallocation to private equity at a timeof maximum stress.

Time For Buyouts, Perhaps Buyouts will increase this year, say PEinvestors. "We are on an upwardtrack as far as buyouts are con-cerned. But private equity in India isstill a growth capital deployer," saysKaul of ChrysCapital.

"We are seeing a huge surge in offersfor sale of controlling stakes. Weforesee this trend increasing as many

SANJIV KAUL, MANAGING DIRECTOR , CHRYSCAPITAL“WITH BANKS NOT WILLING TO LEND, THE IPOMARKETS DRYING UP, AND FCCB REDEMPTIONPRESSURES MOUNTING, PROMOTERS HAVE RE-ALISED THE SITUATION IS NOT IN THEIRFAVOUR. HENCE THE ONLY ASSET CLASS THATREMAINS TO BE TAPPED IS PE.”

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promoters realisethat the easymoney days areover," adds Ragha-van. Sudhir Ka-math, MD, 2iCapital, seconds

this view on buyouts. But such deals may also needinnovative restructuring, points out Anmol Nayyar, iC2Capital.

However, not everyone buys that line. Sarath Naru,Managing Director, VenturEast, one of the oldest VCfunds in India, says: "Availability of debt to financebuyouts is still scarce in India. Also, Indian companiesare largely promoter driven where the promoter isboth the shareholder and the management – moreoften than not promoters are against ceding control."

PE-Backed Transactions To Go UpThere will be a significant increase in PE-backed ac-quisitions. Growth is going to slow down significantlyin the coming years and PE funds are looking at grow-ing their companies which in turn are looking to ac-quire other weaker companies. We are already seeingsuch developments. For instance, Blackstone-backedNuvizeedu Seeds recently acquired two seed makingcompanies for Rs 35 crore. The majority of PE fundsexpect such PE-backed acquisitions to grow.

VENTURE CAPITAL Few venture capital firms like Intel Capital, NorwestVenture Partners and Matrix Partners are not lookingto do lesser deals, but the industry as a whole is likelyto do fewer deals as what matters will be quality. Cau-tious optimism is the way forward.

Quality, Not QuantityThe majority of the VCs feel there will be a slowdownin dealmaking this year as the bar for deals is raised.But there are people looking to make the best of theopportunities presented by the current economic cli-mate. "We could see our investment pace increasingin 2009 because there are a lot of interesting compa-nies out there looking for funding," says PromodHaque, Managing Partner of Norwest Venture Part-ners. The firm recently invested $4.2 million in Ban-galore-based Appnomic Systems. When asked if therewill be a slowdown in deals, Intel Capital's SudheerKuppam said: "Not for us. This is one of the best timesto invest and we are really looking forward to makingsome exciting deals.” They are looking at later stage,growth and PIPE deals in India in 2009. Intel an-nounced $23 million investment in three firms in Jan-uary alone.

Samir Kumar, Managing Director of Inventus Capital,which raised a $125-million early stage fund last year,says: "Inventus has made just one investment in 2008.We will see a significant increase in investing activityin 2009."

Focus On Capital Efficiency "Businesses that are not capital efficient will be hardto scale in a liquidity constrained environment," saysMohit Bhatnagar, Operating Partner, Sequoia CapitalIndia, which manages $1.8 billion in four funds. Of the13 venture capital fund managers polled, eight saidtheir due diligence process will remain the same,while the others said the time they take to close adeal will be somewhat longer now. "The investmentdecision making process will be scrutinised muchmore and the process may take 5-6 months unlike inthe past," says Mohanjit Jolly, Executive Director, DFJIndia. VCs are now making their evaluation processmuch more stringent with a focus on capital effi-

LUIS MIRANDA, MD, IDFC PRIVATE EQUITY“WE ARE LOOKING AT ENERGY GENERATIONAND CLEANTECH. EDUCATION IS ALSO A VERY CRITICAL PART OF THE INFRASTRUC-TURE SEGMENT.”

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ciency and short-term validity of busi-ness. "We will spend additional timeon understanding the time periodneeded for making a business cash-flow break even," adds Bhatnagar.

There are further reasons why VCs willtake longer to close deals. They arenow spending more time with theirportfolio companies and relatively lesstime toward chasing new deals. Also,many of the VCs who started opera-tions a couple of years ago now havesignificantly large portfolios to man-age.

Valuations: Growth Vs Early StageIn the last three years, valuations hadgone up significantly due to whichmany VCs have abstained from doingdeals. But all the respondents of thissurvey felt that valuations have cor-rected significantly - mainly forgrowth capital and series-B/C dealsrather than for early stage or series-A investments. "There is already animpact on series B/C valuations by upto 50%. Series A valuations don'tseem to have much scope of falling,"says Alok Mittal, Managing Director,Canaan Partners. His fund has madeearly stage investments in iYogi andtechTribe, and late stage invest-ments in BharatMatrimony and Cellcast.

"Not just valuations but also other investment termswill become much more investor friendly," remarksKuppam. So other investment conditions like numberof board seats, tag along rights and ratchet clausesare also likely to be in favour of investors.

The downward trend in the valuations is likely to con-tinue right through the first half of current year. Butthe majority of entrepreneurs are yet to completelyreadjust to their valuations. "Entrepreneurs are morelikely to lower their expectations due to the need toraise funds. This will result in realistic valuation-drivendeals getting done in 2009," says Gautam Patel, Man-aging Director India, Battery Ventures.

Exits Unlikely, Rollups LikelyThe exit markets are expected to becompletely shut-off this year, espe-cially the public offer window. Nine ofthe 13 VCs polled have said they ex-pect the IPO market for exits tomostly remain shut through the year.Exits for venture capitalists will takeplace through M&As, but they will notbe big ticket or meaningful exits.

M&As will primarily involve companies'being sold' rather than 'beingbought', says Jolly. "In other words,these will be part of the triaging thatVCs may do this year to package theirunderperformers or non-performersand try to recover what they can," headds. Venture capitalists may nowlook to trim their portfolios to includejust manageable winners, and focuson their growth.

"Exits will happen in fewer numbersbut we can see more of sector consol-idation, roll-ups, and M&A," says Patelof Battery. Rollup is a technique usedby VCs where multiple small compa-nies in the same market are acquiredand merged. Four VCs said most of theM&As will lead to consolidation.

Many companies can look at acquir-ing their smaller rivals. "What you might see is largecompanies buying assets opportunistically at prettycheap prices," says Avnish Bajaj, Founding ManagingDirector of Matrix Partners India.

Most companies raise venture capital funding for 18-24months, and then they expect to go for the next roundor eventually public offering. Venture capitalists in-vested some $928 million in 80 deals for entrepreneur-ial companies in India during 2007. In 2006, this figurewas around $349million in 36 deals,according DowJones Venture-Source. The datafor 2008 is ex-

AVNISH BAJAJ, FOUNDING MD, MATRIX PARTNERS INDIA“WHAT YOU MIGHT SEE IS LARGE COMPANIESBUYING ASSETS OPPORTUNISTICALLY ATPRETTY CHEAP PRICES.”

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pected to be around $750 million invested across 125-130 deals.

Most of the companies that raised funds in 2006 and2007, and have not raised subsequent rounds, will belooking to raise their next round this year. But subse-quent rounds will be tough this year and VCs may pullthe plug on deals that are not working out. "We re-serve significant capital for our portfolio companiesand are in a position to put follow-on capital in de-serving companies," says Canaan's Mittal.

Education Scores HighThough technology and telecom continue to remain theold favourites of VCs, the education sector seems to beemerging as the new favourite. Eight of the 13 partici-pants said education is a sector they will look to invest in2009. Also, this space has started getting some tractionwith DFJ investing in online education firm Catura, MatrixPartners in pre-school firm Tree House and more recentlyIntel Capital and Helion Ventures investing in vocationaltraining firm Global Talent Track. SAIF Partners has al-ready funded English language training chain Veta andaccounting training firm ICA Infotech.

Mobile, IT/ITES and consumer internet remain thefavourites with 10, nine and seven VCs, respectively,saying that they will invest in these sectors. Healthcareand cleantech seem to be emerging as the new niches

as they got fourvotes each. Somefunds are also eye-ing sectors like fi-nancial services,media & entertain-

ment, and infrastructure. However, ad-rev-enue based models are losing their flavourwith VCs. "We would be less interested in aseed stage Internet company in India with anexclusively ad-funded model," says Haque ofNorwest.

Lower Risk AppetiteThe risk appetite of the VCs also seems to bedying down in 2009. Eight of the VCs polledsay they will prefer to do mid/ late stage deals.While some like Matrix, Battery, Intel Capitaland Norwest are heavily focusing on growthcapital deals this year, others are looking for a

mix with early stage deals. "There will be a bias towardsrisk aversion. Therefore, VCs are expected to go afterventures that are fully backed with customer validationand those that have reached the initial milestones. Be-sides, valuation should be attractive too," says Jolly.

But some other VCs are sticking to their early stagefocus as they believe it's a good time to be on thatside. "This is a good time to do early deals, since suchdeals take about a year or two to come to market, bywhich time we can expect the market downturn tohave ended," says Kumar of Inventus.

Good Time To Build A BusinessMany VCs believe that this is the best time to start a busi-ness, and build strong fundamentals and efficient cost-structures. When asked if the current economicenvironment would impact the entrepreneurial activity,10 of the respondents said that it's unlikely to have animpact, though there are those who somewhat differthis, People needa positive senti-ment for them toleave a comfort-able job and starta business, saysBajaj of Matrix. Butall the VCs sur-veyed agree thatnothing will stopthe hard-core en-trepreneurs. Also,there are otherfactors that someVCs believe will

PROMOD HAQUE, MD, NORWEST VENTURE PARTNERS“WE WOULD BE LESS INTERESTED IN A SEEDSTAGE INTERNET COMPANY IN INDIA WITH ANEXCLUSIVELY AD-FUNDED MODEL.”

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help entrepreneurship in this environment.

"We are seeing an increase in the number of NRIs withproduct management experience returning to India.Some of the alpha engineers and the returning NRIswill turn their creative energies into starting up newventures," says Rajesh Srivathsa, Managing Partner,Ojas Venture Partners.

Also, the current markets provide an opportunity forentrepreneurs. "This is the time to build revenue rela-tionships with customers that include low marketingcost but high skin-in-the-game contracts. The upsideof these contracts in the good times to come will bethe key differentiator," says Patel.

Haque of Norwest says they are being approached byentrepreneurs whom they backed before. "Many of theentrepreneurs are using this downturn as an opportu-nity to innovate, capitalise on new prospects and ad-dress the market needs," he adds.

MERGERS &ACQUISITIONS Deal ActivityThe survey of leading bankers showsthat M&A deals will see a pause untilthe second quarter of 2009. Uncer-tainty is very dramatic in this periodof time and even more dramatic incross-border situations. "Outbounddeals will decline and it will be verytough to do deals," says Vikram Ut-tamsingh, Executive Director, Trans-actions Advisory Practice, KPMG. Thisview was echoed by Sanjay Bansal,Managing Director, Corporate Fi-nance, Ambit Corporate Finance,"There is a desire for outbound dealsbut with cash crunch it looks tough."

Taking the point further, Ajay Arora,Partner, Ernst & Young, adds, "A lotof outbound M&A activity over therecent years was driven by highlyleveraged LBO structures. Non-avail-

ability of leverageoptions would re-strict the M&As toonly select com-panies with sub-stantive real cashassets."

However, there is also a counterview. "Outbound dealactivity should be of high interest from domestic ac-quirers who have cash and are looking at acquiringbrands/distribution networks/assets overseas," saysShyam Shenthar, Managing Director, o3 Capital, aMumbai-based investment bank. There were 196 out-bound deals in 2008 aggregating to $13.19 billion, ac-cording to Grant Thornton.

Inbound Deals May RiseThe inbound deal activity is expected to see an in-crease as compared to the outbound activity. "In-bound should show interest as India valuations will beattractive for global companies to invest in," says Ut-tamsingh. Senthar of o3 Capital supports this view:"There are cash rich overseas acquirers who want toget access to the Indian/Chinese markets which arethe only growing markets now."

There were 86 inbound deals in 2008 with an aggregatevalue of $12.55 billion.

Domestic Activity On the domestic M&A front, thedeals will be driven more by dis-tress as opposed to desire to sell.In these tough times, whengrowth slows down significantly,the pressure on margins will forcecompanies to focus on dealswhich add to cost savings as com-pared to those which add to thetopline. "Increased debt burdenand low demand will force trou-bled companies to align withlarger, stronger players creating aperfect marriage of sorts," wroteCG Srividiya, Partner, SpecialistAdvisory, Grant Thornton, in thefirm's Annual Deal Tracker.

ALOK MITTAL, MD, CANAAN PARTNERS“THERE IS ALREADY AN IMPACT ON SERIES B/CVALUATIONS BY UP TO 50%. SERIES A VALUATIONSDON'T SEEM TO HAVE MUCH SCOPE OF FALLING.”

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Pharma Leads The PackPharma has emerged as one of the most active sectorsfor deal activity. In 2008, there were 57 deals in thepharma, healthcare and biotech sectors with an aggre-gate value of $5.57 billion, just a little short of the tele-com space which saw the highest value of deals of about$5.78 billion. Pharma will maintain the momentum thisyear too. There's not much juice left in telecom, saysBansal of Ambit Corporate Finance. According to Uttam-singh, the sectors expected to see consolidation areIT/BPO, power, transport and healthcare.

The sectors which have taken maximum hit in the cur-rent liquidity crisis are expected to see less deal ac-tivity. For instance, there will be more distressedopportunities in real estate.

Infrastructure enablers like power and industrial equip-ment, and the sectors which are reasonably unaffectedby the slowdown like education, and healthcare are ex-pected to see more deal activity, according to Arora.

Necessity Of ConsolidationIt is expected that people will hold on to their compa-nies as much as possible as valuations will be poor fordeals. However, 2009 will see people moving away fromthe luxury of consolidation to the necessity of consoli-dation as a lot of companies will see their revenues andprofitability decline and being forced to either sell outor merge. Besides, one can see the refinancing of for-eign currency convertible bonds (FCCBs) going up in thecoming year. "Some companies which have raised funds

via FCCBs are un-likely to see thembeing converted.They will need tobe refinanced,"says Uttamsingh.

You may also seemore distressed assets on the block, especially fromthe promoters of companies who had pledged theirshares to raise funds. They may be off-loaded in thestock market or other strategic buyers in case thepromoters fail to meet their obligations.

As liquidity worsens and companies hold on to as muchcash as possible, there will be a shift towards buyingcompanies in stock deal than cash deal. However, thereis a flipside to it since one tends to overpay in stock dealsin a volatile market. The avenues for leveraging havedried up significantly. With lower leveraging ability, pro-moter contribution becomes more important and banksmay require additional comforts from acquirer. "Thiswould significantly reduce the highly leveraged LBOs.The maximum debt levels are likely to be in the regionof 2.5 – 3.0 X EBITDA (post acquisition) vis-à-vis levels of4-5 X which were being structured through multiple lev-els of senior, subordinated, quasi and unsecured debt in-struments," says Arora.

On the whole, the days of billion dollar deals are overand and the average ticket size of a deal is likely to bein the range of $20-100 million.

Deepak Shahdadpuri, MD, BCP AdvisorsAlok Mittal, General Partner, Canaan PartnersMohanjit Jolly, Executive Director, DFJGautam Patel, MD India, Battery VenturesSudheer Kuppam, MD, Intel CapitalSamir Kumar, MD, Inventus CapitalSuvir Sujan, MD, Nexus India CapitalRajesh Srivathsa, Managing Partner, Ojas Venture PartnersAvnish Bajaj, Founding MD, Matrix Partners IndiaKumar Shiralagi, MD, NEA-IndoUS VenturesPromod Haque, Managing Partner, Norwest Venture PartnersVijay R. Ranganathan, Assistant VP, HITVELSasha Mirchandani, Sr Inv. Director, Blue Run VenturesSarath Naru, MD, VenturEastVikram Uttamsingh, ED, Transaction Services, KPMGShyam Shenthar, MD, o3 CapitalSanjay Bansal, MD, Ambit Corporate FinanceAjay Arora, Partner, Ernst & Young, India

AcknowledgementVCCircle expresses its gratitude to the following dealmakers in Indiafor their insightful views on the deal outlook for 2009.

Sanjiv Kaul, MD, ChrysCapitalHarsha Raghavan, MD, Candover AdvisorsSameer Sain, CEO, Future Capital HoldingsGopal Srinivasan, CMD, TVS Capital Funds Gaurav Mathur, MD, India Equity PartnersAluri Srinivasa Rao, MD, Morgan Stanley Private EquityLuis Miranda, MD, IDFC PEShujaat Khan, MD, Blue River CapitalAchal Ghai, Managing Partner, Avigo CapitalMukund Krishnaswamy, MD, Lighthouse FundsSudhir Kamath, MD, 2i CapitalNitin Deshmukh. MD, Kotak Private EquityRaja Kumar, MD & CEO, UTI VenturesHari Buggana, MD, Evolvence Lifesciences FundAnmol Nayar, Founding Partner, ic2 Capital

SANJAY BANSAL, MD, AMBIT CORPORATE FINANCE“THERE IS A DESIRE FOR OUTBOUND DEALS,BUT WITH CASH CRUNCH IT LOOKS TOUGH”

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It’s no secret that emerging markets hedge funds,specifically those focused on India, fell from their apexlast year and took a beating along with the rest of theindustry. Funds of all strategies and sizes dropped be-tween 28% and 88% during the course of the year. How-ever, hedge fund managers who lived through thecarnage of 2008 say that there are brighter days aheadin India for those investors willing to ride out the storm.

Nowhere To HideRidaa Murad, co-founder of the Veda Multi-StrategyIndia Fund, a fund of hedge funds which waslaunched in September 2008, said managers who suf-fered the most last year were the ones with the largeside pocket investments because “when the liquiditycrunch came, they were in no position to do anythingwith those (side pockets).”

Real estate was also a toughspace to be in and quite afew funds with either directexposure to land acquisitionsor to publicly-listed compa-nies suffered drawdowns,according to Murad.

Another strategy that faredpoorly was PE investment inthe public markets (i.e. having long-term investmentsin public companies), which worked really well in 2007but was hammered because holdings that were notlisted on the index and could not be hedged were soldwithout any regard for valuations.

Murad’s own fund lost 26.52% through December,compared to the BSE 500 Index, which was down68.8% for the year. Firm co-founder BradfordMatthews said while the firm is not happy about thenegative returns, given the market dislocation, he be-lieves the fund has done what it set out to: give in-vestors returns from multi-asset classes whileexperiencing 50% less of the downside volatility thanthe index, while at the same time capturing a dispro-portionate amount of the upside volatility.

Changes?Going forward, Murad foresees an increase in India-focused long-biased funds for investors who wantindex-plus exposure, more long/short portfoliosgeared toward typical hedge fund investors, and

more hybrid private equity/hedge fund products forendowment type investors.

For its part, Murad said the firm isn’t making anychanges to its portfolio, which houses direct lending,debt lending, convertible arbitrage and distressed debt.It is also keeping its fees the same—1% for manage-ment and 10% for incentives. The fund has a one-yearlockup with quarterly liquidity thereafter. Up to one-fifth of the fund can be invested in non-liquid assets.

Buy & Hold“We told our investors that if they’re not looking toinvest in India for three years, they shouldn’t putmoney there at all,” said Murad, who admitted thatfinding new investors is very hard because they have

lost faith in the region and aresitting on the sidelines.

Gautam Prakash, founder ofBethesda, Maryland-basedMonsoon Capital, echoesMurad’s sentiments. “Indiawas more the flavour of theday for these investors in pre-vious years and they tendedto buy high and sell low whenthey should have been doing

the opposite,” said Prakash. “Looking at month-to-month returns in India may not be wise. We remainbullish on the 10-year picture of where India’s going.”

Prakash declined to comment on Monsoon’s per-formance but said export-oriented companies and in-frastructure firms generally fared poorly last year. Thefirm runs a liquid PE strategy, a real estate PE fund,and a hedge fund.

“The Indian mid-cap market was down some 75% indollar terms last year, so almost everything wasdown,” said Prakash. “The other factor impacting thefirm’s performance was the rupee’s depreciationagainst the dollar.”

This year, Prakash said Monsoon is taking a more de-fensive posture by reducing its gross exposure to ex-port-oriented companies, focusing more on liquidnames in the mid-cap space.

Hung Tran is Editor, FINalternatives, a global hedge fund tracker

Hedge FundsRIDE OUT THE STORMIndia-focused hedge funds need to prepare for the long haul, writes HUNG TRAN

‘MANAGERS WHO SUFFERED THEMOST WERE THE ONES WITH THE

LARGE SIDE POCKET INVEST-MENTS. WHEN THE LIQUIDITYCRUNCH CAME, THEY WERE INNO POSITION TO DO ANYTHINGWITH THOSE (SIDE POCKETS)’

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Real EstateSHAKEN & STIRRED

Circa May 2003: Unitech, then a nondescriptDelhi-based real estate company, traded atan average Rs 40.00 on the bourses. Circa April 2006: Unitech captured the fancyof investors with its stock scaling the Rs6,000 level. A 15,000% appreciation in stockvalue since May 2003, which was emblematicof the unprecedented Indian real estateboom in the New MillenniumCut to January 2009: The same scrip hit arock-bottom Rs 30 or so, down from its 52-week high of Rs 432 (the stock was earliersplit 1:10).

A host of real estate companies turned trailblazers inthe euphoric times, hitting new highs in the capitalmarkets. Take the case of another Delhi-based real es-tate player Anantraj Industries whose stocks rosefrom an average Rs 15.60 in 2005 to a high Rs 816.2in less than 12 months. Today, the same stock is lyingat Rs 57.25.

The sharp gyrations in the stock prices of these com-panies give a clear sense of the roller coaster ridetaken by the Indian real estate sector in the last fiveyears.

The real estate boom was largely facilitated by thespectacular domestic GDP growth, rise of a large mid-dle class with increasing disposable income and higher

A mix of macro-economic downtrends and flawed investment strategieshas stalled the Indian real estate industry’s dream run. But all is not lost.Experts believe the industry will stage a recovery of sorts by launching‘affordable’ options even as the Government eases the credit crunch. BY RUCHIKA SHARMA

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aspirations, growing demand for commercial and in-stitutional space, broader financing options and liber-alisation of land-use norms across states. ShobhitAgarwal, Joint Managing Director of real estate con-sultancy Jones Lang LaSalle Meghraj adds that India’semergence as a global investment destination alsocontributed significantly to the domestic real estateuptrend.

The fundamental strengths however failed to stay putin the face of a global economic slowdown, the earlywarnings of which were sensed in late 2007 itself. Thesector somehow enjoyed an extended stint of goodtimes until mid-2008 but when the reality of an eco-nomic recession loomed large, the companies beganto fall off the edge causing a crisis of sorts in the mar-kets. Buyer sentiment, already weakened by slacken-ing disposable income, was further hit by the highinterest regime and the general unwillingness on thepart of banks to extend credit.

The consequent high cost of funding of real estateprojects induced many an investor to exit the space.Excess inventory of high-end properties and the lackof a defined strategy to jump-start affordable housingleft the real estate players with few options to presson with their growth plans.

The ensuing liquidity crunch did little to enthuse thereal estate players of all hues. Earlier, the developershad used the customer's cash (by pre-selling houses)to buy up land and launch projects. But they couldbarely garner additional financial resources to com-plete the projects in the face of the economic con-traction and credit squeeze. Gaurav Dalmia, Chairmanof Landmark Projects, told VCCircle in an interview inJune 2008: "You have to watch the fun in the next two

‘2013 WILL BE ANOTHERBOOM TIME’Lalit Kumar Jain,Chairman, Kumar Builders, a leadingPune real estate developer

What is your reading of the real estate industry now?People are scared to buy property due to thecash crunch and the media reports urgingthem not to buy. The interest rate hike hadalso affected the sales but there is now somerespite on that front. However, the developersare starting to sell at whatever prices that at-tract new customers.

Would you say the 5-year boom has ended?Real estate is a cyclical business with a pricecorrection every five years. There is excessstock in the market. Once this is addressed, thesector will bounce back.

Are we likely to see some consolidation in the industry?More than consolidation there will be a lot ofprivate equity and other funding activities inthe industry.

Is affordability the key factor going forward?Working on such options calls for a particularmindset which may not suit all players. Thefocus will be on cost control and low-marginbusinesses which few would settle for.

Has the government done enough to revive this sector?No. In India we tend to administer medicinesonly after the person is dead. I think the gov-ernment is waiting for this industry to die.

With steel and cement prices coming down, has thepressure eased on the developers to some extent?Cement prices have not come down, whilesteel prices have come down. So, in real termsthere are no gains.

What are the likely trends in 2009?The supplies are rather limited in the market.So I expect a revival post June.

Do you see 2009 as the turnaround year?You can say that some pain will be gone. Weare on the revival path but I am sure 2013 willbe another boom time.

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years. People will be out there with begging bowls."

He couldn’t have been more prophetic. Many a smalldeveloper is getting out of business while the largerdevelopers are having to downsize their projects andslash the prices to attract customers. A case in pointis JP Wishtown, a high-end residential project inNoida, in sub-urban Delhi. The promoter company hasslashed its apartment prices by 25-30% to tap buyersseeking "affordable" options. A well-equipped fourbedroom apartment is now available for Rs 65-70 lakhcompared to Rs 1 crore plus less than a year ago.

Land Banks: Losing GroundThe real estate promoters, swayed by the factors driv-ing the economic boom, failed to note the downsiderisks of intensely speculative activities. They chan-neled the bulk of the accruals from the propertytransactions for building land banks instead of com-pleting the projects that had been launched. As theeconomic slowdown set in, the value of such invest-ments plummeted leaving the builders with littlefunds to complete their projects.

Aashish Kalra, Managing Director of Trikona Capital, areal estate fund with over $1 billion under manage-ment, amplifies this point when he says that "all In-dian developers, for some bizarre reason, thought ofland banking as the only way to grow in the real es-tate industry. No one thought of land as a potentialburden on the cash flow. They all just focused on pur-chasing more land and creating asset bases."

‘Affordable’ Tag: Sole SaviourSo, what will drive the real estate business now? Ex-perts say that affordable housing will be a big draw inthese hard times. Most of the housing projects an-nounced recently are evidently targeting the middle

What is your assessment of the state of the industry?I think the industry is going through its naturalcycle. People were fixated on land and enteredland banking without any regard to cashflow.You cannot build assets in thin air. Assets needcashflow to support them. Fundamentally forbusiness models to be based on cashflow, youhave to be selling the right product at theright price to the right people.

We see a lot of small and mid sized developers want-ing to liquidate their land and incomplete projects byselling them to bigger developers or PE players, oftenat lower valuations. Are we then seeing a necessity ofconsolidation rather than the luxury of consolidation?I think we are moving to a necessity of cashflow. The developers were focused on land ag-gregation. Land was a store of value. But nowif they were to sell land, even if at a lowerprice, how many large developers would havethe funds to buy? And how many private eq-uity funds are interested in such deals?

Do you think the Government's second leg of stimuluspackage will work for the industry?I honestly don't understand how people be-lieve that they can change their business mod-els and businesses every quarter based on theflavour of the month. The important thing is tounderstand how to generate your cash flowand how do you generate it fast enough. It'sabout velocity. Because in these markets yourmargins are thin, you have to generate veloc-ity for earning fast.

With such policy initiatives, government's recentmeasures like steel and cement prices coming down,which make it affordable for developers to launchprojects, do you see this as a time to innovate too?A lot more needs to be done. We need to haveclear titles on land; for that we need comput-erised land registry and more importantly, youneed a well functioning court system. And ifyou are trying to promote low income or mid-dle income houses, the land cost has to becommensurate. You need to have infrastruc-ture and lastly, if your permissions don't arrivein time, you cannot make money.

‘PEOPLE WERE FIXATEDON LAND BANKING’ Aashish Kalra,Co-Founder and MD, Trikona Capital

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income group with prices in the range of Rs 15-35lakh a unit (of sizes from 600 sq ft to 1,200 sq ft).

Jones Lang LaSalle's Agarwal says: "The projection ofIndia needing approximately 22 million units still holdstrue, so the demand is there. Affordability in housingwill help tap this demand." Agarwal points out thatmost developers had ignored the low income seg-ment during the boom. "Affordability has to come tosuburbs nearer to the central business districts toconvert this demand into real transaction," he says.

Some of the developers are already acting on this op-portunity. Ansal Properties and Infrastructure Ltdplans to invest about Rs500 crore for the devel-opment of 10,000 af-fordable homes in thenext 18 months. Thehouses are expected tobe priced between Rs2.5 lakh and Rs 9.5 lakh.That is at the lower endof the affordable hous-ing spectrum.

Trikona Capital plans toinvest $120-160 millionin the low budgethomes. Likewise, MirRealtors, PuravankaraProjects, the LodhaGroup and Hyderabad-based Aparna Construc-tions and Estates planto invest in this seg-ment. A Mint report(Jan 29, 2009) says thatDelhi-based OmaxeConstructions plans toinvest Rs 80,000 crore(did we read it right?)over the next three tofive years in developingone million affordablehousing units in tier IIcities such as Indore,Raipur, Rohtak andSonepat.

Transit-Oriented De-velopmentThe other focus area fordevelopment would bethe transit areas suchplaces near IT parks.Ashish Bhalla of Millen-nium Spire (MSL), a

Delhi-based real estate investment firm, says, "Wefind that development of offfice complexes and ITparks in the transit corridors and such areas makemuch more sense. So, we are increasingly going totransit-oriented developments. The quality and thenature of such developments will improve."

Liquidity EasingThe negative newsflow on the sector has not ebbedbut a ray of hope has been sighted since the Govern-ment began to ease up the credit squeeze with a se-ries of rate cuts and liberalised borrowing norms. Forinstance, the Reserve Bank of India has recently re-laxed the norms for external commercial borrowing

(ECB) to allow develop-ers of integrated town-ship and NBFCs toborrow from abroad.The Government hasalso removed the inter-est rate cap on ECBs.Earlier, the all-in-costceilings for ECBs, incase of both automaticand approval routes,for average maturityperiod of three to fiveyears and more thanfive years, were sixmonth Libor plus 300basis points and sixmonth Libor plus 500bps respectively. Theseceilings have been re-moved now. Hence, thesector will be able toaccess foreign funds ateasier rates andthereby tide over theliquidity problems thatconfront them.

The Government hasalso reduced the inter-est rates to 7-8% forhome loans in therange of Rs 5-20 lakh.Although critics say itmay not help boost thedemand in a big way,it's an indicator ofthings to come as far asinterest rates are con-cerned.

According to Agarwal,shorter developmentcycles can also be seen

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as the success mantra for the developers. "In times tocome we will see the acceleration of the industrythrough smaller and shorter cycles. People will planprojects which can be conceived and completed in amuch shorter duration."

However, Bhalla disagrees. He says that one should nolonger look at short gestation cycles. “We can't take arisk on projects that are to be completed in 12months. If in the past we looked at a 2-3 year turn-around, now we are looking at a 5-6 year turnaround.So, invest in and work with projects that are betterplanned."

He adds: "To expect your money to double in 6 monthswould be a gamble but it would be fair to expect 15-20% returns."

The Outlook For 2009It's a mixed bag of answers on whether the industrywill turn the corner this year. While Aashish Kalra ofTrikona Capital feels that 2009 will be a "terrible year"for most of the real estate investors in India, LalitKumar Jain, chairman of Pune-based developer KumarBuilders, feels that the conditions would get normalby mid 2009.

Kalra, while insisting that 2009 would not be a prof-

itable year for most of the real estate investors, says,"I believe India remains a place that will generate farsuperior results in the medium to long term becauseof its demographic nature. We have a young eco-nomic population that will urbanise."

Bhalla says, "Though we have a positive outlook, aquick turnaround is unlikely. I think it's a good time tobe an end user. It will take at least 24 months for themarket to reach the levels it ruled in the good times.”

Jain's view is that a recovery will be seen as there aregenuine buyers in the market. He says, "The homeloan interest rates will come down substantially as therate of inflation dips and there will be pressure onbanks to reduce the interest rates. I see sales pickingup post June 2009. You may also see a little bit of up-ward correction in real estate in tier II and tier IIIcities."

Jain is also convinced that the boom will revisit the in-dustry in about four years. "I am sure 2013 will be an-other boom time. Today we are seeing the real estatestocks at their lowest prices. By 2010, we will see the vi-brancy returning to the market along with an uptick inthe industry. This will reach its pinnacle around 2012-2013, resulting in another peak." So brace for theUnitech stock reaching four digits in another four years.

Although the real estate sector hastaken a beating due to higherhome-loan rates, IL&FS InvestmentManagers Ltd (IIML) which recentlyraised a $895 million real estatefund, remains confident of deliver-ing an IRR of 25% to its investors asit sees this to be the right timewhere developers are showcasingsome of their best jewels. VCCircletalks to Archana Hingorani, Exec-utive Director, IIML. Excerpts:

What are the perceptible invest-ment trends in the face of thecurrent credit crunch?

India is known as a market forprivate equity with limited orminority stakes. But, due to thecredit crunch, family houses andentrepreneurs are focusing ontheir core strengths and shed-ding non- core assets.

I see a huge potential for privateequity in India to get to the nextlevel - controlled transactions. Ifthis credit crisis had not hap-pened, it probably would nothave surfaced for another twoto three years.

Do you think that promoter ex-pectations have come down?I would agree that promoter ex-pectations are coming down butit will take another quarter be-fore people realise that thebounce-back will not happen sosoon. Then, transactions will

begin to happen at a lower level.

Many real estate developers areseen to be working in a stressedif not distressed environment.Would you be looking at such op-portunities?I am not too comfortable say-ing that I want to look atstressed or distressed assets.What we want to rather look atare transactions where youhave a developer who knowswhat he is doing, who has theexecution skillset and is offer-ing a better piece of his portfo-lio. Those are the transactionswe are seeing now. If a devel-oper who has a land bank, andis trying to give it to me at thecheapest valuation, I would nottake on that project because Ialso need to worry about howit would get executed.

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Over my career as a VC, investment banker and advisor,I have heard thousands of pitches from entrepreneurs,some good but most not so good. The key issue thatkeeps popping up (and it doesn't matter if it concerns aSilicon Valley entrepreneur or one here in India) is onewhere the entrepreneur is constantly faced with thecircular dilemma, most often referred to as a catch-22situation (I don't think Kurt Vonnegut knew how muchthat phrase was going to be used in the entrepreneur-ial lingo). More specifically, this has to do with the factthat during the fundraising process, a startup is oftenexpected to have achieved certain milestones (espe-cially in an environment where VCs tend to become rel-atively more risk averse), but the entrepreneur needscapital to achieve those very milestones. What shouldan entrepreneur do then? Well, let me lay out somespecific concerns and practical solutions in this regard:

Managing RiskFirst and foremost, realise that you are asking a VC or anangel investor to part with ei-ther their own or their LimitedPartners’ (LP) money. Thoughsuch a request may seem un-reasonable to you, it is onethat is completely justifiablesince the VC will have to ex-plain to their LPs when asked"why in the world did you in-vest in a raw startup?"

Also, realise that you are com-peting with other startups forthe VCs’ time and capital. Even though you may thinkyour idea is superb, there may be another scrappystartup that has more traction, a clearer message and amore believable trajectory to growth and profitability.So, believe it or not, timing may have something to dowith how excited a VC gets about your business. Thelevel of excitement is a combination of both relativeand absolute metrics. In absolute terms, a VC may get

excited about the idea/vision, but he/she has to alsoevaluate a startup relative to others on his/her desk atthat given moment. Since the key resource that a VChas is time (i.e. bandwidth to manage the portfolio),he/she may opt for a potentially less risky smaller playthan a risky big play depending on the number andquality of ventures that he/she is evaluating at anygiven time. What's worse from a startup's standpoint isthat the risk profile for a particular VC continues to shiftover time. As an example, a fund may be prone to doingearly stage risky deals towards the beginning of itsfund's investment cycle, and less risky later stage dealstowards the end of the fund's lifetime.

With the above as backdrop, let's address the catch-22scenario directly:

Proof Of ConceptTake comfort in the fact that this is not a dilemmaunique to you. This is a fact of startup life that is faced

by most, if not all, at somepoint as they launch their ini-tial venture. But there are spe-cific steps that you can take toaddress the risk (either per-ceived or real) that a VC mayindicate. I call this series ofsteps, the "credibility contin-uum" (CC), which in otherwords, is a spectrum of risk re-duction parameters. On oneend, there are high margin,high value paying customers

(low risk) and on the other is a raw core team of first-time entrepreneurs with nothing but an idea and asmall font 40 slide PPT (high risk). The VCs would ideallylike the startup to be on the "paying customer" endwhile reality is usually closer to the other side of thespectrum.

There are key risk reducing techniques that don't cost a

A startup is often expected to have achieved certain milestones but the entrepreneur needs capital to achieve those very milestones. BY MOHANJIT JOLLY

JOLLY’S VOLLEY

CATCH-22: LIFE OF AN ENTREPRENEUR

‘BELIEVE IT OR NOT, TIMING HASSOMETHING TO DO WITH HOW

EXCITED A VC GETS ABOUTYOUR BUSINESS. THE LEVEL OFEXCITEMENT IS A COMBINATION

OF BOTH RELATIVE ANDABSOLUTE METRICS’

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lot and also enable the entrepreneur to slide in the rightdirection on the CC scale. The key risk often hinges ontwo key areas – can the team execute on the poten-tially grand vision and will the "dogs eat the dogfood"(i.e. will the customers be willing to pay for a product orservice). A highly successful approach that a seedstartup can deploy is "credibility through association".What that means simply is that since you as a rawstartup don't have paying customers to truly validatethe idea, you can gain credibility (and therefore reducerisk) by getting a certain calibre of people associatedwith the startup, who bring ahigh level of brand equity andcredibility with them. Ideally,if you can get people to join asearly employees or senior ex-ecutives, it sends a verystrong signal to the potentialinvestor on two fronts – thatyou can sell your vision to getseasoned executives to comeon board even though theremay not be anything tangiblein terms of a product or serv-ice currently available, and the fact that people are will-ing to give up their well-paying jobs to join your startupmeans that the idea is potentially very interesting andvaluable. In some cases, the individuals may decide toinvest in addition to joining a company. Rule of thumb– cash, by any legal means is usually a positive indicationto a VC (cash from customers, from investors, fromlenders).

Who Is Your First Customer?Further down the CC are directors and advisors. Again,getting seasoned people from the industry to lend theirbrand and time to the startups gives a level of comfortto investors. Recently I was looking at a seed stagestartup where the single biggest plus in my mind wasaddition of a 35 year veteran from a specific industryas an advisor, who indicated to me that over thedecades she had been approached by many companiesfor advisory roles, but this one company's value propo-sition was the most compelling that she had comeacross in her years in thefield, and that's the reasonshe came on board.

Getting friendly companiesto try the product or servicefor a fee as beta customersor conduct a product orservice pilot can help. Again,the preference should be toget some cash rather thangive the product or serviceaway for free. Obviously, ifthere is a marquee name,

and the only way to get them to lend their logo to yourslide 5 of "key customer engagements" is by givingaway your product, then do it. Having Tata as a freepilot is better than not having Tata.

Beg-Borrow-Steal-VC-I often tell entrepreneurs that VC money is the mostexpensive capital they can get. My fundraising laddergoes something like this – revenues - grants - beg - bor-row - steal - VC (some may choose to put stealing afterVC). Do not take VC money unless you have to. And

often at the earliest stage, asmall amount of angel invest-ment might be a good startingpoint. Angels are a big part ofthe overall entrepreneurialsupply and demand chain thathas made Silicon Valley buzz.The angel community alongwith so many other aspects ofthe startup ecosystem is in itsformative stages in India.Mumbai Angels and the IndianAngel Network are a couple of

groups that have gotten somewhat institutionalised.Development of seed stage investing ecosystem willtake time, but I am very encouraged by the progressmade by angels and VC firms in doing their part to catal-yse the process. It's not a question of "if" but a questionof "when" the system will become self sustaining.

Bottomline: The catch-22 exists. And the entire life ofan entrepreneur is filled with them. But complainingabout it doesn't help. My advice is "to suck it up", or inother words, deal with it. Worry about things that youcan control and forget about what you cannot control.Be creative, be passionate, be viral. That virus fueled bypassion, commitment, persistence and conviction willultimately infect others somewhere along the CC andthey will join as employees, advisors, directors, and in-vestors. The job of the entrepreneur is to be a prolificsalesperson, since he/she will spend a lot of time con-vincing others of the "better, faster, cheaper mouse-trap", be they investors, customers, potential

employees, channel part-ners, etc. And quite honestly,that passion combined with agrand vision that is clearly ar-ticulated, can make an in-vestor forget the risks andwrite a check on the spot toa couple of bright eyed,bushy tailed, first timetechno-geek entrepreneurs.

Mohanjit Jolly is Executive Director, Draper Fisher Jurvetson India

‘YOU CAN SELL YOUR VISION TOGET SEASONED EXECUTIVES TOCOME ON BOARD EVEN THOUGHTHERE MAY NOT BE ANYTHING

TANGIBLE IN TERMS OF A PROD-UCT OR SERVICE CURRENTLY

AVAILABLE’

DEAL TRACKERA snapshot of deal activity in the last three years.

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Changes At ICICI India's largest private sector lenderICICI Bank has seen a total revamp ofits top management. The bank hasappointed N S Kannan, presently Ex-ecutive Director of ICICI PrudentialLife Insurance Company, as its Exec-utive Director and CEO on the board

with effect from May 1. Meantime, Madhabi Puri-Buchwill take over as the MD and CEO of ICICI Securities.These appointments have come in the backdrop ofChanda Kochhar, the present CFO, taking over as MDand CEO from KV Kamath. Another top executive,Kalpana Morparia, has left ICICI Bank to join as head ofJPMorgan India.

Lightspeed Gets New ChiefLightspeed Venture Partners has gota new chief in India. Bejul Somaia, anentrepreneur and a one-time VC, hasbeen appointed as Managing Directorat its India office. Somaia, who will bebased out of Delhi, will be resposiblefor expanding the Indian investment activities of thefirm. Prior to Lightspeed, Somaia was a co-managing di-rector of Twiga Fiberglass, a building materials companyin India. Previously, he was co-founder and principal in-vestor of Open List, a US-based vertical web searchcompany. He was also a principal at General CatalystPartners in the US. Somaia holds a BSc in economicsfrom the London School of Economics and an MBA fromHarvard Business School.

Vikas Sharma As Nomura India HeadJapanese investment banking major Nomura Interna-tional has appointed Vikas Sharma as head of India op-erations. Nomura had some time back taken over theAsia operations of bankrupt Wall Street I-bank LehmanBrothers, which included the latter's India operationsand outsourcing centre in India as part of the deal.Sharma was earlier Nomura's investment banking headin India. He takes over from former Lehman India chiefTarun Jotwani, who will now don a global role at theJapanese firm’s operations in Tokyo. Besides this, No-mura has also appointed six new appointments as partof its global operations, which included two ex-JPMor-gan employees.

KKR Hires Citi’s Sanjay NayarGlobal PE giant Kohlberg KravisRoberts & Co (KKR) has hired Citigroupveteran Sanjay Nayar as its chief exec-utive for India. He will be based inMumbai. Nayar is presently the CEO ofCitigroup India, and the area head for

Citigroup operations in India, Sri Lanka, Bangladesh andNepal. KKR has closed two transactions in India - $900million buyout of software firm Aricent and an invest-ment in telecom tower firm Bharti Infratel. KKR's deci-sion to open the India office follows similar decisions byother biggies like Bain Capital and Apollo.

Anil Ahuja Is 3i's Asia HeadPrivate equity major 3i Group ele-vated its India head Anil Ahuja ashead of its Asia operations. Ahuja willnow be based out of the firm’s Sin-gapore office and will lead 3i's in-vestment teams across Asia, workingwith 3i's local business heads in China, Singapore andIndia. The PE group maintains this appointment un-derlines the increasing importance of Asia in 3i's globalstrategy. 3i opened its India office four years ago andhas invested in sectors such as media, automotives,construction, power, ports and manufacturing. Ahuja,an IIM (Ahmedabad) and IIT (Delhi) alumnus, joined 3iin 2005.

GE Capital’s India CEOGE Capital has appointed Vicky Bindra as president andchief executive of its financial services business inIndia. He will now lead GE's all consumer as well ascommercial finance businesses including strategicpartnerships such as SBI Cards. One of his mandatesis to invest in businesses with high-growth and high-margin platforms, the company said in a statement.Bindra joined GE in 2007 as President and CEO of GECommercial Finance India.

Madhabi Puri-Buch

Anil Ahuja

Sanjay Nayar

Bejul Somaia

POWER SHIFT

Sahad P.V. Editor & PublisherRajiv Raghunath Issue EditorShrija Agrawal Principal CorrespondentMadhav A Chanchani Senior CorrespondentRuchika Sharma CorrespondentKapil Kashyap Design ConsultantVidyabhushan Upadhye Principal AnalystSudeep Pradhan AnalystSanjana Jain Researcher

Chandni Jafri Business DirectorBen Mathew Associate - BD & Alliances

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