Walden International appointed Rajesh Subramaniam as its managing director in July last year as the venture capital fund re-entered India after a four-year-long hiatus. For Subramaniam, who was till then working as CFO of Firstsource Solutions, this was a re-entry into the venture capital industry. Before joining ICICI OneSource (which later became Firstsource), Subramaniam was working as a venture capitalist with GIV Venture Partners.

"There (GIV Venture Partners) I realized that I had no tools or skills relevant to be a venture capitalist but I wanted to help entrepreneurs," says Subramaniam. To get operational experience, he joined ICICI OneSource, where he was the first employee and built the company from 0 to $320 million. After the IPO, Subramaniam felt it was time to get back into venture capital business.

Walden is now looking at doing  two to three deals India a year, and would invest between $2-10 million in a company. It's looking at both early stage and late stage deals. VCCircle's Madhav A Chanchani talks to Subramaniam on Walden's second India innings, startups and Indian IT/ITES market. Excerpts:

Q. What is Walden International's strategy for India?

Walden is refocusing on India after almost a hiatus of four years. Historically our investment thesis has only been cross-border IT services. Our portfolio companies were MindTree, Sierra Atlantic, etc. There was nothing which was linked to a domestic consumption play.

Given what has happened with India in the last 6-7 years there is an awakening within the Walden system that India offers a big opportunity linked to domestic consumption apart from the core cross-border IT services and technologies that emerge. Obviously there is also a theory that India could emerge as a manufacturing hub in the future.

Given the long standing experience that we had in China and the US, the parameters for what you believe are inflexion point and the next 6-8 years India's going to see a different level of growth is what has prompted chairman Lip-Bu Tan to make renewed focus back on India.

Q. Why the four year gap?

In the gap years, the deals were being looked at from the Singapore office. Walden's greater commitment were being made to Greater China and the US. While we have not been investing in India, we have been investing in Indian entrepreneurs in the US who have been building their ODCs (Offshore Development Centres) and their backends in India. There are a lot of companies like Airtight Networks, BCM, etc.

Its just that the operating model for India was cross-border. But now the focus is India - where you have the entrepreneur, the production and the customer in the same country. To leverage these opportunities you need to have a presence on the ground.

Q. What are the sectors that you are looking to invest in?

The first criterion is the sectors that I understand. The second is the one that my company understands. Sectors that I understand are financial services, telecom/ value added services (VAS), healthcare, education and technology outsourcing. Among the horizontals that I would looking at along these verticals are supply chain, data analytics and consumer internet.

If I look into horizontals and the verticals I would be looking to bet at scalable plays which fit into these domains. So I might look at a technology or product company in a different vertical but it fits into my supply chain.

Q. Any sectors that you are particularly upbeat about?

Financial services while today seems to be a bad word, but I think domestically there is a lot of scope for  opportunities which I think in the next four to five years will create significant scale. There are going to be significant opportunities in the rural sector, where a lot of industries are looking to get access to the right channels to penetrate the rural sector. That is some thing that presents a lot of interesting opportunities.

Another thing that I like is supply chain in healthcare. This is not the pharmaceutical companies, but more provided management linked to claims administration and personal healthcare data records administrations. Things which are not as capital intensive as a hospital.

In the consumer internet space, I am a little skeptical about online communities, travel portals, etc. But I think there might be interesting plays available in niches which we are looking at closely. Consumer internet as a medium trying to leverage some of the channels help build verticals is going to be important. 

Q. In the consumer internet space, what do you think of ad revenue based models?

Ad revenue models are going to suffer for next two to three years. Ad revenue is going to fall significantly and I hope these companies have enough or they raise enough capital to survive next two to three years when things start getting to normalcy. Anything that does not have a subscription based model, I would not look to back (them).

Q. In the IT/ITES space, is it a good time for companies serving domestic clients?

I think its a great time. The question is that you need to make money and the popular perception is that domestic customers don't pay. But I think there is a certain fallacy there. Domestic customers today are looking to pay top dollar because they believe that the mom and pop shop kind of handling that they have been used to in last several years will not work. Now the customers are willing to pay the extra buck if they get the best level of service.

This obviously reflects in the banks and telcos willing to pay vendors to upgrade their systems, and make sure they get better service if they pay a little more but they get better services and stickiness with their clients. So I think that is happening.

But obviously price points are way lower as compared to international price points, so you have to be smart and innovative enough to figure out your delivery models to ensure that you keep your costs at a level to derive the margins that you seek that are mandated by your shareholders.

For example in Firstsource, we would take international work for customers in UK and US, but when we started taking domestic work we didn't deliver in Bangalore or Mumbai but we went to Hubli, Indore and Vijaywada. You have to be smart enough to beat your cost of capital at every point of time.

Q. What are the other themes/ verticals emerging in the outsourcing space?

Early period was cost arbitrage. Last two-three years you saw value emerging where you were not only played on cost but also making an impact on customers' revenue. The next wave you are going to see is creation of entire shared service model based on delivery at least on ITES and elements of IT where you are going to tell the customer that you give me your stuff and I am going to deliver results on agreed SLAs (Service Level Agreements).

What I am trying to say is that you are going to move out of working on clients' systems but to working off systems that you think are best of breed, whereby you give the client benefit of the economies of scale that  you can deliver managing 6-7 clients on the same system. So the client does not have to invest in capex, retain people, doesn't have to re-engineer anything on his end but at the same you are creating a shared service model where you have significant operating leverage to manage your margin.

So I think there will be lots of models in the outsourcing space which have the face of a KPO, a BPO, a transformational ITO, etc. These opportunities may not be highly scalable, like BPOs growing at 100%,  but significant value can be created if stickiness with clients is maintained.

Q. What is your take on the legal process outsourcing space?

I think its a great space. But the question is how scalable is it? Can you imagine hiring 5,000 lawyers. I am not sure how many lawyers graduate who can be trained to work for clients in US. Fundamentally I would call the space as recession proof. You either have M&A, fundraising work or you have liquidation work.

Q. You have been with Walden now for some time. What kind of deals have you looked at? Have you closed any deals?

We have managed to walk away from a few deals where we believed that as the economic environment changes it wasn't right for us to consummate. We have had couple of situations like that. In the broad space that I have mentioned, I am at term sheet stage with one company and we will see in 1-2 months.

I would be looking to do few deals and bringing my operational experience in a true way as a VC does in the Silicon Valley.

Q. In the deals that you walked away from, what kind of issues arose there?

Valuations was an issue. Valuation is a function of certain P/E you are looking at, and P/E changes once the economic climate changes. Then your valuation changes. Some cases there was a consortium, where there was a strategic investor and a financial investor. Then suddenly the strategic investor pulls out, my financial risk becomes greater. We had one situation like that where we walked away from a deal.

Q. What stages are you looking at? Are you looking at early stage only or are you looking at late stage also?

Right now I am also looking at growth stage given the valuations. The stage is irrelevant as long as some of the basic criteria of what a VC brings to table, which is in ownership (significant minority) and an absolute adequate representation of how the voice of the VC is heard in helping the entrepreneur build his company.

Right now valuations are at such a stage that with the capital that I can invest ($2-10 million per deal), I can do growth stage deals. We are not passive investors. If we can't add value to the company then we won't invest.

Q. Walden Software Investments recently sold some stake in MindTree Ltd. Was this one shot thing or are you starting a gradual exit?

It wasn't any of our funds but was one of our co-investors, Vertex Venture Holdings, who had sold out. They had co-invested with us in a common fund. We are long term investors and we don't intend to sell.

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