Promod Haque is one of the top venture capitalists in the world. He was ranked number one VC on the annual Forbes Midas List in 2004. Haque, who heads up Norwest Venture Partners as a Managing Partner, has been making investments in India in sectors such as software, communications and internet. VCCircle talks to Haque on the firm's outlook for venture capital investing in 2009.
Will you see a slowdown in venture capital dealmaking in India in 2009?
Our firm doesn't plan to slow down its investment pace in 2009, but the bar on new investments will be extremely high. There are a lot of interesting companies out there looking for funding right now.
Although the current recession is different from the previous downturns, and the industry conditions in venture are difficult, we still see tremendous opportunities at this time. Technology has become an even more pervasive part of business and consumers' lives. As long as there is demand for technology innovation, we believe venture capital will continue to be successful.
The VC business will change, and the best firms will adjust and move with these changes. Venture is a highly cyclical industry, and we believe that this is the best time to invest in venture—particular in India where we still see tremendous growth opportunities.
One thing that differentiates our firm—particularly during this downturn-- is that we're a large global firm that has been around for 47 years with $2.5 billion under management---but more importantly, we've been through the up and down cycles of the tech economy and we've fared well through the downturns in the past.
We believe that raising one global fund is a distinct advantage for our portfolio companies—each investment professional at NVP has a vested interest in our companies globally. We are patient through down cycles, and our partners have deep operating experience and entrepreneurial backgrounds. We think this global approach positions us well to capitalise on the opportunities we continue to see in India—particularly today.
How do you see venture capital exits in 2009? What is your opinion on IPOs and M&A based exits, and how will they fare in this year?
The recession will continue to make it difficult for companies this year. That's why we're working closely with our own portfolio companies to manage their cash during the downturn (as we've done during previous downturns).
We're advising our portfolio companies to be extremely cautious. Based on past experience, we know they will experience a spending squeeze as we have already started to see this year.
It takes longer in this economic climate to reach a meaningful exit (M&A or IPO—and the IPO window hasn't opened yet). Therefore, conserving cash and finding a way to reach cash flow breakeven is critical for these companies.
We still think that companies with strong fundamentals will be rewarded over time. But they need to make it through this tough economic environment—save cash, keep the burn rate down, reach cashflow breakeven sooner, etc.
Do you see valuations changing much in the venture capital sector?
I think they will continue to decrease in the first half of 2009 and then we'll see an uptick when the market begins to recover.
What are the sectors that you will prefer to invest in 2009?
It's difficult to put these sectors in order of preference, because a lot of our investments are dependent upon the types of companies we see, the stage of the company, the market timing, and many other unpredictable factors.
In 2009, we will definitely look more heavily at growth equity opportunities in a variety of sectors. The correction in valuations has created a more viable option for PEs to invest in India, particularly in the coming year.
Also, given the public markets are on hold for IPOs, it is likely that companies who need money will turn to private equity. They can't keep their expansion plans on hold, and we believe that there are tremendous growth equity opportunities across a wide range of sectors in India, including telecom, technology, financial services, infrastructure and manufacturing.
We hired a managing director in our Mumbai office earlier this year to focus on these growth equity opportunities—(Sohil Chand; he was doing private equity investments at Goldman Sachs).
IT-ITES outsourcing has also been a sector that has prospered in India over the last several years, and we are beginning to see the maturity of the second generation services market. We will continue to look closely at this sector in India as we are seeing a lot of interesting businesses in this area.
Lastly, we continue to believe there are significant opportunities in the local consumer markets (both internet and mobile) in India. We think that wireless and broadband penetration will only increase. This combined with a sizeable middle class with high spending power continues to make the investment landscape quite appealing. In 2009, we will seek out appealing businesses in these sectors, but the bar is extremely high on new investments.
What are the sectors that you will not look at investing in 2009?
We would be less interested in a seed stage Internet company in India with an exclusively ad-funded model. More mature Internet companies (that do rely on advertising) that have been demonstrating strong traction in the marketplace do continue to be very interesting to us.
An example of this kind of company is Sulekha.com, one of the most popular Internet media companies in India that reaches and connects millions of Indians worldwide—specifically reaching 44 cities in India, the US and more. The company offers classifieds, yellow pages and localised commerce. We invested in this company a few years back, and we are excited about where Sulekha is headed.
Is there a change in the way you evaluate an investment proposal? Will it take longer for you to close a deal than compared to what you did it at a boom time like 2008 or 2007?
Our criterion hasn't changed in this area. We look at several factors when making investments. We analyse the size of the market (is it large enough?) and we determine whether or not the company is considered to be a breakthrough project with world-class solutions that are highly differentiated.
We also look closely at the domain expertise of the founders and engineers (do they have a proven track record?) and do the entrepreneurs have the true passion and vision to build the company? Lastly, we need to be convinced that the differentiation is defendable, sustainable and offers a unique value proposition to the customer (customer validation, ROI and traction are critical).
Lastly, the business must be capital efficient—particularly in today's economic climate.
The timing of how soon we close a deal now compared to the last few years, really depends on the company. The bar is extremely high when it comes to new investments, and we always do a tremendous amount of due diligence before we close a deal---but this has always been the case and the timing can vary depending on the company, stage and sector in which we are making the investment.
Do you think all your portfolio companies are well capitalised? Are any of your portfolio companies looking to raise next rounds?
Some of our companies will most likely raise funds in 2009, but we are encouraging each portfolio company to conserve as much cash as possible in this tough economic environment. We will continue to fund companies with strong fundamentals.
Do you see a preference towards late/mid-stage deals now?
As I mentioned above, we will definitely look more heavily at growth equity opportunities in a variety of sectors. The correction in valuations has created a more viable option for PEs to invest in India, particularly in the coming year. We will look at all stages in the coming year when evaluating investment opportunities.
Do you see entrepreneurial activity getting stymied because of a negative economic environment? Will entrepreneurs be more risk averse?
Although industry conditions are difficult, we are still seeing tremendous opportunities and are meeting with great entrepreneurs (and repeat entrepreneurs—people whom we've successfully backed before) at this time.
As I mentioned above, as long as there is demand for technology innovation, we believe the smart and passionate entrepreneurs who want to build exciting new companies/technologies will continue to be successful over time (even if it takes them a bit longer to do so).
Many of these entrepreneurs are using this downturn as an opportunity to innovate, capitalize on new prospects and fill market needs. We believe that this is could be the best time to invest in a new venture—some of the best technologies and companies have been built during a downturn.
This is the third in the Deal outlook for 09' series on VCCircle. (You can the Deal Outlook 2009 Magazine for free)
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