1. www.vccircle.com February 2009
FOR DEALMAKERS
SHAKEN & STIRRED
Real estate industry has
been in trouble. But ex-
perts believe the industry
will stage a recovery of
sorts by launching ‘afford-
able’ options. 15
RIDE OUT THE STORM
Hedge fund managers who
lived through the carnage
of 2008 say that there are
brighter days ahead in India
for those investors willing
to ride out the storm. 14
CATCH-22: LIFE OF AN
ENTREPRENEUR
An exclusive column by
Mohanjit Jolly. He explains
how a startup can deal
with the chicken and egg
problem of achieving mile-
stones and raising the capi-
tal required to do it. 20
POWER SHIFT
We track the top level
changes in private equity,
VC and financial world. 24
TRENDMILL
Following the latest
investment trends, deals
and dealmakers. 2
1

2. FROM THE EDITOR TRENDMILL
A few weeks ago, a friend from a private equity Cricket And Celebs
fund wrote to me saying "2009 is the year of Investor interest in
inflection". What he meant was: this is the year to the Indian Premier
push your company harder (and take it to greater League (IPL) seems to
heights when the good times come). 2009 will no
be increasing in the
doubt look very tough. Revenues may be hard to
run-up to its second
come by. Profits, even harder. But that should not
stop you from building your company or distract edition which will
you from the real thing. My investor friend, con- begin in April this year.
trary to the prevailing view, is convinced that good The growing interest
days are ahead, if not in 2009, the year after. in the IPL franchises is
governed both by its
As the year confronts you popularity and invest-
with challenges that you ment opportunity. In
haven't seen before (not keeping with this sen-
in the lifetime of many of timent, film actress
us), here is a 24-page Shilpa Shetty and her
special offering from VC- friend Raj Kundra have
Circle that should help picked a 11% stake in
you obtain deep insights Rajasthan Royals, the
into India’s investment
team from Rajasthan
economy. We have aptly
that won the first edi-
titled it VCC Insight. The
mini-mag debuts with a tion of the IPL. The IPL
detailed survey on the franchise has been
deal economy based on valued at $140 million.
the thought-provoking Manoj Badale, owner
views of 33 top dealmakers in the country. Our tal- of the franchise, said
ented editorial team led by Shrija Agrawal and the firm had seen a lot
Madhav A Chanchani conducted exhaustive inter- of private equity in-
views with the busy fund managers to know how terest, especially since
the year will look like for dealmaking. its returns on investment had nearly doubled in less
than a year.
This was no mean task given the high profile of the
respondents. Yet, it was accomplished in a short Earlier, Deutsche Bank executive Anshu Jain bought a
span of two weeks. The key takeaways are: there 15% stake in Mukesh Ambani's IPL franchise Mumbai
will be fewer deals in the year; quality will prevail
Indians in late 2008. Hyderabad-based media company
over quantum of deals; valuations will adjust even
Deccan Chronicle has put its IPL franchise Deccan
further, especially in the private markets; sectors
like education, alternative energy and media will Chargers on the block.
attract funding. I am not spilling all the beans here;
turn to Page 4 for more. AIMing At Promoters
Raising funds in Lon-
We also bring to you a special feature on the In- don Stock Ex-
dian real estate industry. Ruchika Sharma provides change’s Alternative
a detailed account of the ground realities govern- Investment Market
ing the industry. Check this out on Page 16. (AIM) may be easy,
but maintaining the
Also remember to read Mohanjit Jolly’s column
listed status and also
Catch-22: Life Of An Entrepreneur.
handling the share-
We hope you will enjoy reading this special offer- holders can get diffi-
ing from us. Remember to send your feedback to cult. KSK Emerging India Energy Fund Ltd (KEF), a
sahad@vccircle.com. company that raised £100 million in June 2008, is a
case in point. KEF was wound up on January 23, 2009,
Sahad P.V. 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
2

3. available, the company has attributed the shareholder Both the institutions have invested $150 million each
apathy to their own internal problems (caused by the in the fund, which has a final target between $800
global capital crunch). KEF, promoted by Hyderabad- million and $1 billion. This would be the first instance
based KSK Group, has not made an investment yet; of an Indian fund manager raising a fund with a pan-
that could make the liquidation easier. Asia focus. Besides these two, IIML also closed its
growth fund at $225 million recently.
Another example of shareholder activism in AIM is
that of a hedge fund shareholder demanding the re- The fund has also made its maiden India deal by pick-
moval of Raghav Bahl and Alok Verma as directors of ing up a 5% stake in IL&FS Transportation Networks
the Indian Film Company. The company, promoted by (ITNL) for Rs 130 crore. IIML has about $1.9 billion
TV 18 chairman and managing director Raghav Bahl, under management.
has apparently not delivered returns to shareholders
commensurate with what the company has earned. Family Businesses Into PE
IFC has released blockbuster movies like Jab We Met, Aditya Birla Group is one of the
Welcome, Singh is Kinng and Ghajini.These films have few traditional family business
performed well at the box office, but not for the groups in India to set up an in-
shareholders, Altima India Master Fund, the share- dependent PE fund. The group
holder, alleged. Bahl has finally met with the hedge is currently on road to raise a
fund’s demand. Bottomline: If you are aiming for a $250 million mid-market fo-
listing on AIM, be prepared for hard questions. cused PE fund which will have
external investors. Kumar Man-
Pledge Shares, But Disclose galam Birla (left), head of Aditya
Indian promoters of listed com- Birla Group, will be the anchor
panies have been pledging shares investor. He is expected to put
with financial institutions and in 20% of the corpus. The fund
banks to fund their own ventures expects its first close at $100-
or even to buy a personal jet or a 125 million in the second quarter of this year, accord-
private island. You can still do ing to Bharat Banka, MD & CEO of Aditya Birla PE.
that, but now you need to tell
your shareholders that you have The Dabur group has also set up a fund. The Burmans
pledged the shares to raise debt (Gaurav and Mohit Burman, sons of Vivek Burman) are
from institutions. Market regula- the chief promoters of Elephant Capital, an AIM listed
tor Securities & Exchange Board PE fund with an India investment focus. The £50 mil-
of India (Sebi) has made it lion fund – earlier called Promethean India – was spun
mandatory for promoters to dis- off as a separate entity some months ago.
close the pledging of shares.
Last year, Chennai’s TVS family and the Shriram group
Sebi’s action was in response to Satyam Computer Serv- teamed up to set up a PE fund – TVS Shriram Growth
ices’ former chairman B Ramalinga Raju’s revelation Fund – with a corpus of Rs 600 crore. Can we see
that he pledged almost all his shares in the IT company more of such funds?
to fund his family’s real estate forays. After the Satyam
scam broke out and the shares took a plunge, the insti-
tutions in possession of those shares started selling
them.
IIML Scaling New High
IL&FS Investment Man-
agers (IIML), the PE
arm of IL&FS, has rea-
sons to rejoice in these
gloomy times. For one,
only a couple of
months ago, they
closed a giant, $895 million real estate fund. In Janu-
ary, IIML announced the first close of its international
fund at $568 million. The fund – christened Standard
Chartered IL&FS Asia Infrastructure Growth Fund - is
co-sponsored by IL&FS and Standard Chartered Bank.
3

4. THE DEAL OUTLOOK 2009
A survey of 33 investors and bankers show that dealmaking may slow down
this year, but quality will prevail. BY SHRIJA AGRAWAL & MADHAV A CHANCHANI
Sudheer Kuppam Raja Kumar, Gopal Srinivasan Harsha Raghavan Sarath Naru, Sanjay Bansal, MD,
MD, Intel Capital MD, UTI Ventures CMD, TVS Capital MD, Candover PE MD, VenturEast Ambit Corp Finance
Yes, We Can! Dealmakers could perhaps borrow a will weather the tough times, while the others may
nugget from the Obama wisdom to make the next simply disappear or lie low.
12-18 months worthwhile. An exclusive survey
conducted by VCCircle based on interviews with 33 But those funds that are looking to do deals in these
top dealmakers in the country indicates that far times say certain sectors are undoubtedly appealing
fewer deals may be seen in 2009 - coming from pri- even today. Consumption -driven sectors like edu-
vate equity, venture capital or M&A alike. The over- cation and healthcare, and even alternative energy
riding sentiment is that despite all talk of are the preferred destinations. Venture capitalists
corrections in the public market valuations, the pri- believe tough times like these are the best times to
vate companies have still to adjust their expecta- build great companies. Another point stressed by
tions. Private equity investors find that an the survey participants is capital efficiency. There is
impediment to do further deals. However, the liq- no easy capital for companies that require lots of
uidity crunch and over-leveraged positions will money to build their businesses. Corporate gover-
eventually induce the promoters to readjust their nance too is back in the investment lexicon.
positions.
Our survey says that outbound M&A deals will come
Exits this year are also likely to be few and far be- down as there is no capital to fund such acquisi-
tween with the IPO market drying up. Strategic tions. We know how difficult it has been for Tata
M&As and consolidation-by-necessity will become Motors to raise capital for the Jaguar Land Rover
the only routes to get out. Investment holding pe- acquisition. The ticket size of deals will also go
riods will stretch out for sure. The era of quick down drastically.
bucks, it emerges, is well and truly over.
We present the key findings of our interviews with
Many a fund - especially rookie fund managers -will 33 MD/CEO level functionaries of PE/VC funds and
find it difficult to do deals in this market, and some investment bankers. For easy reading, we have
say a shake-out is on the anvil in the fund world. segmented the findings under three broad heads –
Those with high pedigree and sound background Venture Capital, Private Equity & M&As.
4

5. Question Of Valuation
PRIVATE EQUITY The dominant view among the investors is that the
Slowing Deals valuations in the private markets have not fallen in
tandem with the public market valuations. "The ex-
There is near unanimity on the pace of deal making in
pected slowdown in corporate earnings means that
2009. It will be slow. Almost all private equity fund
growth projections need to be realigned, especially
managers that VCCircle spoke with see a slowdown in
for privately-owned businesses. There still remains a
deal making this year. They say that going forward the
substantial gap between public and private markets,"
deals may be available at even cheaper valuations. So,
says Sameer Sain, MD & CEO, Future Capital Holdings.
why do a deal now and regret later?
However, promoters may be forced to reduce their
expectations as there are not many avenues to raise
For some, it may
capital in this environment.
also be a ques-
tion of not find-
"With banks not willing to lend, the IPO markets dry-
ing the right
ing up, FCCB redemption pressures scaling up, and
deals. "I would
hedge funds going bust, promoters have realised the
rather not do
situation is not in their favour. Hence the only asset
deals than being
class that remains to be tapped is PE," says Sanjiv Kaul,
in an embarrass-
Managing Director, Chrys Capital.
ing situation,"
says Nitin Desh-
Also, many companies are over-leveraged at the com-
mukh, Senior
pany or promoter levels. This situation cannot be sus-
Managing Direc-
tained for long and private equity fund managers like
tor, Kotak Pri-
Khan of Blue River Capital are hoping that cash-
vate Equity.
strapped companies will reach out to the funds to un-
Deshmukh has
wind a lot of this leverage.
not made any in-
vestment till
Harsha Raghavan, Managing Director, Candover Capi-
date from the
tal. disagrees: "There will always be entrepreneurs
$430-million
who either don't need the money or don't see the op-
fund that he
portunity of coming out of this period of weak senti-
raised in February 2008. He could stick by this plan
ment – they will instead hold out for the highest price
through this year too. "If not, I would rather return
at the cost of their business plans."
the capital to my LPs," he adds.
"The slowdown in transactions is not because of private Who Will Get What
equity funds' unwillingness to do the deal," says Shujaat Although there is a view that the focus will increasingly
Khan, Managing Director, Blue River Capital, "Rather, be on promoters than sectors (the Satyam scandal has
promoters are not willing to dilute at low valuations." brought in a sense of fear among the fund managers),
certain business sectors will continue to be more at-
The deals are also taking a longer time to close due to tractive than the others. For instance, asset and capital
differences over valuation or because the investors are heavy businesses will be less preferred by investors this
doing a more intensive due diligence now than ever be- year. The bar will
fore, especially in the wake of the Satyam scandal. also become "in-
credibly high" for
"Deal cycles are definitely getting longer," says Aluri Srini- infrastructure-ori-
vasa Rao, Managing Director, Morgan Stanley Private Eq- ented sectors
uity Asia. However, the majority view is that the situation whereas the sec-
is likely to improve towards the end of the year. 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.”
5

6. cake are healthcare, education, prises (PIPE) will likely take a back-
alternative energy and media. seat in 2009. A key reason being
"We are looking at energy genera- that PIPEs come with limited due
tion side, and also cleantech. Edu- diligence and rights, which is a
cation is a very critical part of the cause of concern. There is a fear
infrastructure segment," says Luis that more corporate frauds like the
Miranda, Managing Director, IDFC one concerning Satyam may sur-
Private Equity. face in the coming months as more
companies come under close
Private equity funds in general will scrutiny. The pressures from lim-
avoid the exports sector or busi- ited partners on general partners
nesses that are dependent on will also be difficult to handle.
global demand, early stage busi-
nesses, and businesses that have "LPs are demanding appropriate-
heavy manufacturing facilities, and ness of the 2 and 20 compensation
that require high capex. structures if the majority of invest-
ments are in listed companies," says
However, the domestic consumption story is still in- Raja Kumar, Managing Director, UTI Ventures.
tact, according to the survey. "Sectors that will ben-
efit from the domestic consumption at large and However, no one minds a good company if that comes
specifically consumer discretionary and non-discre- cheap. Investors will prefer to take a majority stake
tionary-linked businesses like healthcare, education, and demand a board seat as things unfold differently
alternative energy and media, would be preferred," in the public markets.
says Sain.
Our survey revealed that the majority of PE investors
Joining him on this point is Gaurav Mathur, Managing would prefer to invest in a privately-held company
Director, India Equity Partners. "We will prefer to in- though the liquidity events have a much longer hori-
vest in education, healthcare, waste management, zon (4-5 years) now. But this is what classic private
water and railways. We would not look at commodi- equity is about – engage in a long haul with the port-
ties in 2009," he says. folio companies, build them up and then exit instead
of getting into financial engineering. Firms will not
SMEs will also have takers. "We find SMEs very attrac- make decisions that may haunt them for years.
tive right now as valuations have come down," says
Achal Ghai, Managing Partner, Avigo Capital Partners. The majority of the PE investors believe that 2009 will
A few of the respondents also found specialty infra- see a return to the classic PE model.
structure and specialty retail as interesting areas to
be pursued. 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 be
Back To Classic PE Model very bleak. There could be a few exits in the form of
The stock markets are at levels more attractive than M&As though. However, with even good companies
last year but pri- being cash conservative, both M&A and IPO seem dis-
vate investment tant options.
in public enter-
SAMEER SAIN, CEO & MD, FUTURE CAPITAL HOLDINGS
“THE EXPECTED SLOWDOWN IN CORPORATE
EARNINGS MEANS THAT GROWTH PROJEC-
TIONS NEED TO BE REALIGNED, ESPECIALLY
FOR PRIVATELY-OWNED BUSINESSES. THERE
STILL REMAINS A SUBSTANTIAL GAP BETWEEN
PUBLIC AND PRIVATE MARKETS.”
6

7. SANJIV KAUL, MANAGING DIRECTOR , CHRYSCAPITAL
“WITH BANKS NOT WILLING TO LEND, THE IPO
MARKETS DRYING UP, AND FCCB REDEMPTION
PRESSURES MOUNTING, PROMOTERS HAVE RE-
ALISED THE SITUATION IS NOT IN THEIR
FAVOUR. HENCE THE ONLY ASSET CLASS THAT
REMAINS TO BE TAPPED IS PE.”
"With equity valuations crashing so soon, companies adds that this will
can't really use stock as a currency to do deals," says be "the first time
Mukund Krishnaswamy, Managing Director, Light- and last time
house Funds. funds for many".
However, most of the PE fund managers believe that The majority of PE funds anticipate a slowdown in the
exits may happen through secondary sale to another number of funds coming into the market in 2009. The
PE fund. PE funds that are facing difficulties in doing fund raising environment is extremely difficult and
deals themselves could buy existing deals from some there are about 78 India-focussed funds on road to
other funds. Such an exercise becomes an exit option raise $24 billion, according to Preqin data. It remains
for one fund and a deal for another. Much of this has to be seen how many of them can close this year.
not been seen in the previous years.
"Already many of the hedge funds and sovereign
Diamonds In Quicksand wealth funds that posed severe competition in 2007
The majority of PE funds believe that distressed asset and 2008 are gone. A number of PE firms are also
sales will not happen in 2009 unless the global eco- going slow or downsizing their global funds under
nomic scenario weakens further. On an average, In- management, and focusing on portfolio companies.
dian corporates are not too over-leveraged to make The market is rationalising and this is healthy," adds
distressed asset sale so compelling. However, a few Raghavan of Candover.
believe there will be more distressed asset sales
across hedge funds and PE funds, particularly during Experienced fund management teams with an estab-
the latter half of 2009. lished track record should be able to sail through in
this environment, points out Raja Kumar, MD, UTI Ven-
Distressed investing becomes a vehicle of choice for tures.
realising the value of financially troubled companies.
"We can say that valuations have come down and so However, emerging markets are still thought of as a
have expectations in many cases. Distressed asset call option on world growth. Given the underlying
sales typically happen after prolonged downturns. We drivers of emerging market growth, the institutional
have not reached that stage yet," fund managers will not do the mis-
says Gopal Srinivasan, Chairman and take of abandoning a strategic asset
Managing Director, TVS Shriram allocation to private equity at a time
Growth Fund. of maximum stress.
Adds Deepak Shahdadpuri, MD, BCP
Advisors, "What we are actually see- Time For Buyouts, Perhaps
ing in the markets right now is not Buyouts will increase this year, say PE
distressed assets but quality assets investors. "We are on an upward
from distressed sellers." track as far as buyouts are con-
cerned. But private equity in India is
Funds Shakeout? still a growth capital deployer," says
Some of the fund managers polled Kaul of ChrysCapital.
were of the view that there will be a
shrinkage of funds in 2009. So the "We are seeing a huge surge in offers
industry is preparing for a shake-out. for sale of controlling stakes. We
Taking the point further, Deshmukh foresee this trend increasing as many
7

8. LUIS MIRANDA, MD, IDFC PRIVATE EQUITY
“WE ARE LOOKING AT ENERGY GENERATION
AND CLEANTECH. EDUCATION IS ALSO A
VERY CRITICAL PART OF THE INFRASTRUC-
TURE SEGMENT.”
promoters realise
that the easy VENTURE CAPITAL
money days are
Few venture capital firms like Intel Capital, Norwest
over," adds Ragha-
Venture Partners and Matrix Partners are not looking
van. Sudhir Ka-
to do lesser deals, but the industry as a whole is likely
math, MD, 2i
to do fewer deals as what matters will be quality. Cau-
Capital, seconds
tious optimism is the way forward.
this view on buyouts. But such deals may also need
innovative restructuring, points out Anmol Nayyar, iC2
Capital. Quality, Not Quantity
The majority of the VCs feel there will be a slowdown
However, not everyone buys that line. Sarath Naru, in dealmaking this year as the bar for deals is raised.
Managing Director, VenturEast, one of the oldest VC But there are people looking to make the best of the
funds in India, says: "Availability of debt to finance opportunities presented by the current economic cli-
buyouts is still scarce in India. Also, Indian companies mate. "We could see our investment pace increasing
are largely promoter driven where the promoter is in 2009 because there are a lot of interesting compa-
both the shareholder and the management – more nies out there looking for funding," says Promod
often than not promoters are against ceding control." Haque, Managing Partner of Norwest Venture Part-
ners. The firm recently invested $4.2 million in Ban-
PE-Backed Transactions To Go Up galore-based Appnomic Systems. When asked if there
will be a slowdown in deals, Intel Capital's Sudheer
There will be a significant increase in PE-backed ac-
Kuppam said: "Not for us. This is one of the best times
quisitions. Growth is going to slow down significantly
to invest and we are really looking forward to making
in the coming years and PE funds are looking at grow-
some exciting deals.” They are looking at later stage,
ing their companies which in turn are looking to ac-
growth and PIPE deals in India in 2009. Intel an-
quire other weaker companies. We are already seeing
nounced $23 million investment in three firms in Jan-
such developments. For instance, Blackstone-backed
uary alone.
Nuvizeedu Seeds recently acquired two seed making
companies for Rs 35 crore. The majority of PE funds
Samir Kumar, Managing Director of Inventus Capital,
expect such PE-backed acquisitions to grow.
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 activity
in 2009."
Focus On Capital Efficiency
"Businesses that are not capital efficient will be hard
to scale in a liquidity constrained environment," says
Mohit Bhatnagar, Operating Partner, Sequoia Capital
India, which manages $1.8 billion in four funds. Of the
13 venture capital fund managers polled, eight said
their due diligence process will remain the same,
while the others said the time they take to close a
deal will be somewhat longer now. "The investment
decision making process will be scrutinised much
more and the process may take 5-6 months unlike in
the past," says Mohanjit Jolly, Executive Director, DFJ
India. VCs are now making their evaluation process
much more stringent with a focus on capital effi-
8

9. ciency and short-term validity of busi- Exits Unlikely, Rollups Likely
ness. "We will spend additional time The exit markets are expected to be
on understanding the time period completely shut-off this year, espe-
needed for making a business cash- cially the public offer window. Nine of
flow break even," adds Bhatnagar. the 13 VCs polled have said they ex-
pect the IPO market for exits to
There are further reasons why VCs will mostly remain shut through the year.
take longer to close deals. They are Exits for venture capitalists will take
now spending more time with their place through M&As, but they will not
portfolio companies and relatively less be big ticket or meaningful exits.
time toward chasing new deals. Also,
many of the VCs who started opera- M&As will primarily involve companies
tions a couple of years ago now have 'being sold' rather than 'being
significantly large portfolios to man- bought', says Jolly. "In other words,
age. these will be part of the triaging that
VCs may do this year to package their
Valuations: Growth Vs Early Stage underperformers or non-performers
In the last three years, valuations had and try to recover what they can," he
gone up significantly due to which adds. Venture capitalists may now
many VCs have abstained from doing look to trim their portfolios to include
deals. But all the respondents of this just manageable winners, and focus
survey felt that valuations have cor- on their growth.
rected significantly - mainly for
growth capital and series-B/C deals "Exits will happen in fewer numbers
rather than for early stage or series- but we can see more of sector consol-
A investments. "There is already an idation, roll-ups, and M&A," says Patel
impact on series B/C valuations by up of Battery. Rollup is a technique used
to 50%. Series A valuations don't by VCs where multiple small compa-
seem to have much scope of falling," nies in the same market are acquired
says Alok Mittal, Managing Director, and merged. Four VCs said most of the
Canaan Partners. His fund has made M&As will lead to consolidation.
early stage investments in iYogi and
techTribe, and late stage invest- Many companies can look at acquir-
ments in BharatMatrimony and Cellcast. ing their smaller rivals. "What you might see is large
companies buying assets opportunistically at pretty
"Not just valuations but also other investment terms cheap prices," says Avnish Bajaj, Founding Managing
will become much more investor friendly," remarks Director of Matrix Partners India.
Kuppam. So other investment conditions like number
of board seats, tag along rights and ratchet clauses Most companies raise venture capital funding for 18-24
are also likely to be in favour of investors. months, and then they expect to go for the next round
or eventually public offering. Venture capitalists in-
The downward trend in the valuations is likely to con- vested some $928 million in 80 deals for entrepreneur-
tinue right through the first half of current year. But ial companies in India during 2007. In 2006, this figure
the majority of entrepreneurs are yet to completely was around $349
readjust to their valuations. "Entrepreneurs are more million in 36 deals,
likely to lower their expectations due to the need to according Dow
raise funds. This will result in realistic valuation-driven Jones Venture-
deals getting done in 2009," says Gautam Patel, Man- Source. The data
aging Director India, Battery Ventures. for 2008 is ex-
AVNISH BAJAJ, FOUNDING MD, MATRIX PARTNERS INDIA
“WHAT YOU MIGHT SEE IS LARGE COMPANIES
BUYING ASSETS OPPORTUNISTICALLY AT
PRETTY CHEAP PRICES.”
9

10. ment, and infrastructure. However, ad-rev-
enue based models are losing their flavour
with VCs. "We would be less interested in a
seed stage Internet company in India with an
exclusively ad-funded model," says Haque of
Norwest.
Lower Risk Appetite
The risk appetite of the VCs also seems to be
dying down in 2009. Eight of the VCs polled
say they will prefer to do mid/ late stage deals.
While some like Matrix, Battery, Intel Capital
and Norwest are heavily focusing on growth
capital deals this year, others are looking for a
pected to be around $750 million invested across 125- mix with early stage deals. "There will be a bias towards
130 deals. risk aversion. Therefore, VCs are expected to go after
ventures that are fully backed with customer validation
Most of the companies that raised funds in 2006 and and those that have reached the initial milestones. Be-
2007, and have not raised subsequent rounds, will be sides, valuation should be attractive too," says Jolly.
looking to raise their next round this year. But subse-
quent rounds will be tough this year and VCs may pull But some other VCs are sticking to their early stage
the plug on deals that are not working out. "We re- focus as they believe it's a good time to be on that
serve significant capital for our portfolio companies side. "This is a good time to do early deals, since such
and are in a position to put follow-on capital in de- deals take about a year or two to come to market, by
serving companies," says Canaan's Mittal. which time we can expect the market downturn to
have ended," says Kumar of Inventus.
Education Scores High
Though technology and telecom continue to remain the Good Time To Build A Business
old favourites of VCs, the education sector seems to be Many VCs believe that this is the best time to start a busi-
emerging as the new favourite. Eight of the 13 partici- ness, and build strong fundamentals and efficient cost-
pants said education is a sector they will look to invest in structures. When asked if the current economic
2009. Also, this space has started getting some traction environment would impact the entrepreneurial activity,
with DFJ investing in online education firm Catura, Matrix 10 of the respondents said that it's unlikely to have an
Partners in pre-school firm Tree House and more recently impact, though there are those who somewhat differ
Intel Capital and Helion Ventures investing in vocational this, People need
training firm Global Talent Track. SAIF Partners has al- a positive senti-
ready funded English language training chain Veta and ment for them to
accounting training firm ICA Infotech. leave a comfort-
able job and start
Mobile, IT/ITES and consumer internet remain the a business, says
favourites with 10, nine and seven VCs, respectively, Bajaj of Matrix. But
saying that they will invest in these sectors. Healthcare all the VCs sur-
and cleantech seem to be emerging as the new niches veyed agree that
as they got four nothing will stop
votes each. Some the hard-core en-
funds are also eye- trepreneurs. Also,
ing sectors like fi- there are other
nancial services, factors that some
media & entertain- VCs believe will
PROMOD HAQUE, MD, NORWEST VENTURE PARTNERS
“WE WOULD BE LESS INTERESTED IN A SEED
STAGE INTERNET COMPANY IN INDIA WITH AN
EXCLUSIVELY AD-FUNDED MODEL.”
10

11. ALOK MITTAL, MD, CANAAN PARTNERS
“THERE IS ALREADY AN IMPACT ON SERIES B/C
VALUATIONS BY UP TO 50%. SERIES A VALUATIONS
DON'T SEEM TO HAVE MUCH SCOPE OF FALLING.”
help entrepreneurship in this environment. ability of leverage
options would re-
"We are seeing an increase in the number of NRIs with strict the M&As to
product management experience returning to India. only select com-
Some of the alpha engineers and the returning NRIs panies with sub-
will turn their creative energies into starting up new stantive real cash
ventures," says Rajesh Srivathsa, Managing Partner, assets."
Ojas Venture Partners.
However, there is also a counterview. "Outbound deal
Also, the current markets provide an opportunity for activity should be of high interest from domestic ac-
entrepreneurs. "This is the time to build revenue rela- quirers who have cash and are looking at acquiring
tionships with customers that include low marketing brands/distribution networks/assets overseas," says
cost but high skin-in-the-game contracts. The upside Shyam Shenthar, Managing Director, o3 Capital, a
of these contracts in the good times to come will be Mumbai-based investment bank. There were 196 out-
the key differentiator," says Patel. bound deals in 2008 aggregating to $13.19 billion, ac-
cording to Grant Thornton.
Haque of Norwest says they are being approached by
entrepreneurs whom they backed before. "Many of the Inbound Deals May Rise
entrepreneurs are using this downturn as an opportu- The inbound deal activity is expected to see an in-
nity to innovate, capitalise on new prospects and ad- crease as compared to the outbound activity. "In-
dress the market needs," he adds. bound should show interest as India valuations will be
attractive for global companies to invest in," says Ut-
tamsingh. Senthar of o3 Capital supports this view:
MERGERS & "There are cash rich overseas acquirers who want to
get access to the Indian/Chinese markets which are
ACQUISITIONS the only growing markets now."
Deal Activity There were 86 inbound deals in 2008 with an aggregate
The survey of leading bankers shows value of $12.55 billion.
that M&A deals will see a pause until
the second quarter of 2009. Uncer- Domestic Activity
tainty is very dramatic in this period On the domestic M&A front, the
of time and even more dramatic in deals will be driven more by dis-
cross-border situations. "Outbound tress as opposed to desire to sell.
deals will decline and it will be very In these tough times, when
tough to do deals," says Vikram Ut- growth slows down significantly,
tamsingh, Executive Director, Trans- the pressure on margins will force
actions Advisory Practice, KPMG. This companies to focus on deals
view was echoed by Sanjay Bansal, which add to cost savings as com-
Managing Director, Corporate Fi- pared to those which add to the
nance, Ambit Corporate Finance, topline. "Increased debt burden
"There is a desire for outbound deals and low demand will force trou-
but with cash crunch it looks tough." bled companies to align with
larger, stronger players creating a
Taking the point further, Ajay Arora, perfect marriage of sorts," wrote
Partner, Ernst & Young, adds, "A lot CG Srividiya, Partner, Specialist
of outbound M&A activity over the Advisory, Grant Thornton, in the
recent years was driven by highly firm's Annual Deal Tracker.
leveraged LBO structures. Non-avail-
11

12. SANJAY BANSAL, MD, AMBIT CORPORATE FINANCE
“THERE IS A DESIRE FOR OUTBOUND DEALS,
BUT WITH CASH CRUNCH IT LOOKS TOUGH”
Pharma Leads The Pack via FCCBs are un-
Pharma has emerged as one of the most active sectors likely to see them
for deal activity. In 2008, there were 57 deals in the being converted.
pharma, healthcare and biotech sectors with an aggre- They will need to
gate value of $5.57 billion, just a little short of the tele- be refinanced,"
com space which saw the highest value of deals of about says Uttamsingh.
$5.78 billion. Pharma will maintain the momentum this
year too. There's not much juice left in telecom, says You may also see
Bansal of Ambit Corporate Finance. According to Uttam- more distressed assets on the block, especially from
singh, the sectors expected to see consolidation are the promoters of companies who had pledged their
IT/BPO, power, transport and healthcare. shares to raise funds. They may be off-loaded in the
stock market or other strategic buyers in case the
The sectors which have taken maximum hit in the cur- promoters fail to meet their obligations.
rent liquidity crisis are expected to see less deal ac-
tivity. For instance, there will be more distressed As liquidity worsens and companies hold on to as much
opportunities in real estate. cash as possible, there will be a shift towards buying
companies in stock deal than cash deal. However, there
Infrastructure enablers like power and industrial equip- is a flipside to it since one tends to overpay in stock deals
ment, and the sectors which are reasonably unaffected in a volatile market. The avenues for leveraging have
by the slowdown like education, and healthcare are ex- dried up significantly. With lower leveraging ability, pro-
pected to see more deal activity, according to Arora. moter contribution becomes more important and banks
may require additional comforts from acquirer. "This
Necessity Of Consolidation would significantly reduce the highly leveraged LBOs.
The maximum debt levels are likely to be in the region
It is expected that people will hold on to their compa-
of 2.5 – 3.0 X EBITDA (post acquisition) vis-à-vis levels of
nies as much as possible as valuations will be poor for
4-5 X which were being structured through multiple lev-
deals. However, 2009 will see people moving away from
els of senior, subordinated, quasi and unsecured debt in-
the luxury of consolidation to the necessity of consoli-
struments," says Arora.
dation as a lot of companies will see their revenues and
profitability decline and being forced to either sell out
On the whole, the days of billion dollar deals are over
or merge. Besides, one can see the refinancing of for-
and and the average ticket size of a deal is likely to be
eign currency convertible bonds (FCCBs) going up in the
in the range of $20-100 million.
coming year. "Some companies which have raised funds
Acknowledgement Deepak Shahdadpuri, MD, BCP Advisors
VCCircle expresses its gratitude to the following dealmakers in India Alok Mittal, General Partner, Canaan Partners
for their insightful views on the deal outlook for 2009. Mohanjit Jolly, Executive Director, DFJ
Gautam Patel, MD India, Battery Ventures
Sanjiv Kaul, MD, ChrysCapital Sudheer Kuppam, MD, Intel Capital
Harsha Raghavan, MD, Candover Advisors Samir Kumar, MD, Inventus Capital
Sameer Sain, CEO, Future Capital Holdings Suvir Sujan, MD, Nexus India Capital
Gopal Srinivasan, CMD, TVS Capital Funds
Rajesh Srivathsa, Managing Partner, Ojas Venture Partners
Gaurav Mathur, MD, India Equity Partners
Avnish Bajaj, Founding MD, Matrix Partners India
Aluri Srinivasa Rao, MD, Morgan Stanley Private Equity
Kumar Shiralagi, MD, NEA-IndoUS Ventures
Luis Miranda, MD, IDFC PE
Promod Haque, Managing Partner, Norwest Venture Partners
Shujaat Khan, MD, Blue River Capital
Achal Ghai, Managing Partner, Avigo Capital Vijay R. Ranganathan, Assistant VP HITVEL
,
Mukund Krishnaswamy, MD, Lighthouse Funds Sasha Mirchandani, Sr Inv. Director, Blue Run Ventures
Sudhir Kamath, MD, 2i Capital Sarath Naru, MD, VenturEast
Nitin Deshmukh. MD, Kotak Private Equity Vikram Uttamsingh, ED, Transaction Services, KPMG
Raja Kumar, MD & CEO, UTI Ventures Shyam Shenthar, MD, o3 Capital
Hari Buggana, MD, Evolvence Lifesciences Fund Sanjay Bansal, MD, Ambit Corporate Finance
Anmol Nayar, Founding Partner, ic2 Capital Ajay Arora, Partner, Ernst & Young, India
12

13. Hedge Funds
RIDE OUT THE STORM
India-focused hedge funds need to prepare for the long haul, writes HUNG TRAN
It’s no secret that emerging markets hedge funds, more hybrid private equity/hedge fund products for
specifically those focused on India, fell from their apex endowment type investors.
last year and took a beating along with the rest of the
industry. Funds of all strategies and sizes dropped be- For its part, Murad said the firm isn’t making any
tween 28% and 88% during the course of the year. How- changes to its portfolio, which houses direct lending,
ever, hedge fund managers who lived through the debt lending, convertible arbitrage and distressed debt.
carnage of 2008 say that there are brighter days ahead It is also keeping its fees the same—1% for manage-
in India for those investors willing to ride out the storm. ment and 10% for incentives. The fund has a one-year
lockup with quarterly liquidity thereafter. Up to one-
Nowhere To Hide fifth of the fund can be invested in non-liquid assets.
Ridaa Murad, co-founder of the Veda Multi-Strategy
India Fund, a fund of hedge funds which was Buy & Hold
launched in September 2008, said managers who suf- “We told our investors that if they’re not looking to
fered the most last year were the ones with the large invest in India for three years, they shouldn’t put
side pocket investments because “when the liquidity money there at all,” said Murad, who admitted that
crunch came, they were in no position to do anything finding new investors is very hard because they have
with those (side pockets).” lost faith in the region and are
sitting on the sidelines.
Real estate was also a tough
‘MANAGERS WHO SUFFERED THE
space to be in and quite a MOST WERE THE ONES WITH THE Gautam Prakash, founder of
few funds with either direct LARGE SIDE POCKET INVEST- Bethesda, Maryland-based
exposure to land acquisitions Monsoon Capital, echoes
or to publicly-listed compa- MENTS. WHEN THE LIQUIDITY Murad’s sentiments. “India
nies suffered drawdowns, CRUNCH CAME, THEY WERE IN was more the flavour of the
according to Murad. day for these investors in pre-
NO POSITION TO DO ANYTHING vious years and they tended
Another strategy that fared WITH THOSE (SIDE POCKETS)’ to buy high and sell low when
poorly was PE investment in they should have been doing
the public markets (i.e. having long-term investments the opposite,” said Prakash. “Looking at month-to-
in public companies), which worked really well in 2007 month returns in India may not be wise. We remain
but was hammered because holdings that were not bullish on the 10-year picture of where India’s going.”
listed on the index and could not be hedged were sold
without any regard for valuations. Prakash declined to comment on Monsoon’s per-
formance but said export-oriented companies and in-
Murad’s own fund lost 26.52% through December, frastructure firms generally fared poorly last year. The
compared to the BSE 500 Index, which was down firm runs a liquid PE strategy, a real estate PE fund,
68.8% for the year. Firm co-founder Bradford and a hedge fund.
Matthews said while the firm is not happy about the
negative returns, given the market dislocation, he be- “The Indian mid-cap market was down some 75% in
lieves the fund has done what it set out to: give in- dollar terms last year, so almost everything was
vestors returns from multi-asset classes while down,” said Prakash. “The other factor impacting the
experiencing 50% less of the downside volatility than firm’s performance was the rupee’s depreciation
the index, while at the same time capturing a dispro- against the dollar.”
portionate amount of the upside volatility.
This year, Prakash said Monsoon is taking a more de-
Changes? fensive posture by reducing its gross exposure to ex-
Going forward, Murad foresees an increase in India- port-oriented companies, focusing more on liquid
focused long-biased funds for investors who want names in the mid-cap space.
index-plus exposure, more long/short portfolios
geared toward typical hedge fund investors, and Hung Tran is Editor, FINalternatives, a global hedge fund tracker
13

14. Real Estate
SHAKEN & STIRRED
A mix of macro-economic downtrends and flawed investment strategies
has 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
Circa May 2003: Unitech, then a nondescript A host of real estate companies turned trailblazers in
Delhi-based real estate company, traded at the euphoric times, hitting new highs in the capital
markets. Take the case of another Delhi-based real es-
an average Rs 40.00 on the bourses. tate player Anantraj Industries whose stocks rose
Circa April 2006: Unitech captured the fancy from an average Rs 15.60 in 2005 to a high Rs 816.2
of investors with its stock scaling the Rs in less than 12 months. Today, the same stock is lying
6,000 level. A 15,000% appreciation in stock at Rs 57.25.
value since May 2003, which was emblematic The sharp gyrations in the stock prices of these com-
of the unprecedented Indian real estate panies give a clear sense of the roller coaster ride
boom in the New Millennium taken by the Indian real estate sector in the last five
Cut to January 2009: The same scrip hit a years.
rock-bottom Rs 30 or so, down from its 52- The real estate boom was largely facilitated by the
week high of Rs 432 (the stock was earlier spectacular domestic GDP growth, rise of a large mid-
split 1:10). dle class with increasing disposable income and higher
14

15. ‘2013 WILL BE ANOTHER
BOOM TIME’
Lalit Kumar Jain,
Chairman, Kumar Builders, a leading
Pune real estate developer
What is your reading of the real estate industry now?
People are scared to buy property due to the
cash crunch and the media reports urging
them not to buy. The interest rate hike had
also affected the sales but there is now some
respite on that front. However, the developers
are 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 price
aspirations, growing demand for commercial and in-
correction every five years. There is excess
stitutional space, broader financing options and liber-
stock in the market. Once this is addressed, the
alisation of land-use norms across states. Shobhit
sector will bounce back. Agarwal, Joint Managing Director of real estate con-
sultancy Jones Lang LaSalle Meghraj adds that India’s
Are we likely to see some consolidation in the industry? emergence as a global investment destination also
More than consolidation there will be a lot of contributed significantly to the domestic real estate
private equity and other funding activities in uptrend.
the industry.
The fundamental strengths however failed to stay put
Is affordability the key factor going forward? in the face of a global economic slowdown, the early
Working on such options calls for a particular warnings of which were sensed in late 2007 itself. The
mindset which may not suit all players. The sector somehow enjoyed an extended stint of good
focus will be on cost control and low-margin times until mid-2008 but when the reality of an eco-
businesses which few would settle for. nomic recession loomed large, the companies began
to fall off the edge causing a crisis of sorts in the mar-
Has the government done enough to revive this sector? kets. Buyer sentiment, already weakened by slacken-
No. In India we tend to administer medicines ing disposable income, was further hit by the high
only after the person is dead. I think the gov- interest regime and the general unwillingness on the
ernment is waiting for this industry to die. part of banks to extend credit.
With steel and cement prices coming down, has the The consequent high cost of funding of real estate
pressure eased on the developers to some extent? projects induced many an investor to exit the space.
Cement prices have not come down, while Excess inventory of high-end properties and the lack
steel prices have come down. So, in real terms of a defined strategy to jump-start affordable housing
left the real estate players with few options to press
there are no gains.
on with their growth plans.
What are the likely trends in 2009? The ensuing liquidity crunch did little to enthuse the
The supplies are rather limited in the market. real estate players of all hues. Earlier, the developers
So I expect a revival post June. had used the customer's cash (by pre-selling houses)
to buy up land and launch projects. But they could
Do you see 2009 as the turnaround year? barely garner additional financial resources to com-
You can say that some pain will be gone. We plete the projects in the face of the economic con-
are on the revival path but I am sure 2013 will traction and credit squeeze. Gaurav Dalmia, Chairman
of Landmark Projects, told VCCircle in an interview in
be another boom time.
June 2008: "You have to watch the fun in the next two
15

16. years. People will be out there with begging bowls."
What is your assessment of the state of the industry?
He couldn’t have been more prophetic. Many a small I think the industry is going through its natural
developer is getting out of business while the larger cycle. People were fixated on land and entered
developers are having to downsize their projects and land banking without any regard to cashflow.
slash the prices to attract customers. A case in point You cannot build assets in thin air. Assets need
is JP Wishtown, a high-end residential project in cashflow to support them. Fundamentally for
Noida, in sub-urban Delhi. The promoter company has business models to be based on cashflow, you
slashed its apartment prices by 25-30% to tap buyers have to be selling the right product at the
seeking "affordable" options. A well-equipped four right price to the right people.
bedroom apartment is now available for Rs 65-70 lakh
compared to Rs 1 crore plus less than a year ago. We see a lot of small and mid sized developers want-
ing to liquidate their land and incomplete projects by
Land Banks: Losing Ground selling them to bigger developers or PE players, often
The real estate promoters, swayed by the factors driv- at lower valuations. Are we then seeing a necessity of
ing the economic boom, failed to note the downside consolidation rather than the luxury of consolidation?
risks of intensely speculative activities. They chan- I think we are moving to a necessity of cash
neled the bulk of the accruals from the property flow. The developers were focused on land ag-
transactions for building land banks instead of com- gregation. Land was a store of value. But now
pleting the projects that had been launched. As the if they were to sell land, even if at a lower
economic slowdown set in, the value of such invest- price, how many large developers would have
ments plummeted leaving the builders with little the funds to buy? And how many private eq-
funds to complete their projects. uity funds are interested in such deals?
Aashish Kalra, Managing Director of Trikona Capital, a Do you think the Government's second leg of stimulus
real estate fund with over $1 billion under manage- package will work for the industry?
ment, amplifies this point when he says that "all In- I honestly don't understand how people be-
dian developers, for some bizarre reason, thought of
lieve that they can change their business mod-
land banking as the only way to grow in the real es-
els and businesses every quarter based on the
tate industry. No one thought of land as a potential
flavour of the month. The important thing is to
burden on the cash flow. They all just focused on pur-
understand how to generate your cash flow
chasing more land and creating asset bases."
and how do you generate it fast enough. It's
‘Affordable’ Tag: Sole Saviour about velocity. Because in these markets your
So, what will drive the real estate business now? Ex- margins are thin, you have to generate veloc-
perts say that affordable housing will be a big draw in ity for earning fast.
these hard times. Most of the housing projects an-
nounced recently are evidently targeting the middle With such policy initiatives, government's recent
measures like steel and cement prices coming down,
which make it affordable for developers to launch
projects, do you see this as a time to innovate too?
A lot more needs to be done. We need to have
clear titles on land; for that we need comput-
erised land registry and more importantly, you
need a well functioning court system. And if
you are trying to promote low income or mid-
dle income houses, the land cost has to be
commensurate. You need to have infrastruc-
ture and lastly, if your permissions don't arrive
in time, you cannot make money.
‘PEOPLE WERE FIXATED
ON LAND BANKING’
Aashish Kalra,
Co-Founder and MD, Trikona Capital
16

17. income group with prices in the range of Rs 15-35 Delhi-based real estate investment firm, says, "We
lakh a unit (of sizes from 600 sq ft to 1,200 sq ft). find that development of offfice complexes and IT
parks in the transit corridors and such areas make
Jones Lang LaSalle's Agarwal says: "The projection of much more sense. So, we are increasingly going to
India needing approximately 22 million units still holds transit-oriented developments. The quality and the
true, so the demand is there. Affordability in housing nature of such developments will improve."
will help tap this demand." Agarwal points out that
most developers had ignored the low income seg- Liquidity Easing
ment during the boom. "Affordability has to come to The negative newsflow on the sector has not ebbed
suburbs nearer to the central business districts to but a ray of hope has been sighted since the Govern-
convert this demand into real transaction," he says. ment began to ease up the credit squeeze with a se-
ries of rate cuts and liberalised borrowing norms. For
Some of the developers are already acting on this op- instance, the Reserve Bank of India has recently re-
portunity. Ansal Properties and Infrastructure Ltd laxed the norms for external commercial borrowing
plans to invest about Rs (ECB) to allow develop-
500 crore for the devel- ers of integrated town-
opment of 10,000 af- ship and NBFCs to
fordable homes in the borrow from abroad.
next 18 months. The The Government has
houses are expected to also removed the inter-
be priced between Rs est rate cap on ECBs.
2.5 lakh and Rs 9.5 lakh. Earlier, the all-in-cost
That is at the lower end ceilings for ECBs, in
of the affordable hous- case of both automatic
ing spectrum. and approval routes,
for average maturity
Trikona Capital plans to period of three to five
invest $120-160 million years and more than
in the low budget five years, were six
homes. Likewise, Mir month Libor plus 300
Realtors, Puravankara basis points and six
Projects, the Lodha month Libor plus 500
Group and Hyderabad- bps respectively. These
based Aparna Construc- ceilings have been re-
tions and Estates plan moved now. Hence, the
to invest in this seg- sector will be able to
ment. A Mint report access foreign funds at
(Jan 29, 2009) says that easier rates and
Delhi-based Omaxe thereby tide over the
Constructions plans to liquidity problems that
invest Rs 80,000 crore confront them.
(did we read it right?)
over the next three to The Government has
five years in developing also reduced the inter-
one million affordable est rates to 7-8% for
housing units in tier II home loans in the
cities such as Indore, range of Rs 5-20 lakh.
Raipur, Rohtak and Although critics say it
Sonepat. may not help boost the
demand in a big way,
Transit-Oriented De- it's an indicator of
velopment things to come as far as
The other focus area for interest rates are con-
development would be cerned.
the transit areas such
places near IT parks. According to Agarwal,
Ashish Bhalla of Millen- shorter development
nium Spire (MSL), a cycles can also be seen
17

18. as the success mantra for the developers. "In times to itable year for most of the real estate investors, says,
come we will see the acceleration of the industry "I believe India remains a place that will generate far
through smaller and shorter cycles. People will plan superior results in the medium to long term because
projects which can be conceived and completed in a of its demographic nature. We have a young eco-
much shorter duration." nomic population that will urbanise."
However, Bhalla disagrees. He says that one should no Bhalla says, "Though we have a positive outlook, a
longer look at short gestation cycles. “We can't take a quick turnaround is unlikely. I think it's a good time to
risk on projects that are to be completed in 12 be an end user. It will take at least 24 months for the
months. If in the past we looked at a 2-3 year turn- market to reach the levels it ruled in the good times.”
around, now we are looking at a 5-6 year turnaround.
So, invest in and work with projects that are better Jain's view is that a recovery will be seen as there are
planned." genuine buyers in the market. He says, "The home
loan interest rates will come down substantially as the
He adds: "To expect your money to double in 6 months rate of inflation dips and there will be pressure on
would be a gamble but it would be fair to expect 15- banks to reduce the interest rates. I see sales picking
20% returns." up post June 2009. You may also see a little bit of up-
ward correction in real estate in tier II and tier III
The Outlook For 2009 cities."
It's a mixed bag of answers on whether the industry
will turn the corner this year. While Aashish Kalra of Jain is also convinced that the boom will revisit the in-
Trikona Capital feels that 2009 will be a "terrible year" dustry in about four years. "I am sure 2013 will be an-
for most of the real estate investors in India, Lalit other boom time. Today we are seeing the real estate
Kumar Jain, chairman of Pune-based developer Kumar stocks at their lowest prices. By 2010, we will see the vi-
Builders, feels that the conditions would get normal brancy returning to the market along with an uptick in
by mid 2009. the industry. This will reach its pinnacle around 2012-
2013, resulting in another peak." So brace for the
Kalra, while insisting that 2009 would not be a prof- Unitech stock reaching four digits in another four years.
India is known as a market for begin to happen at a lower level.
private equity with limited or
minority stakes. But, due to the Many real estate developers are
credit crunch, family houses and seen to be working in a stressed
entrepreneurs are focusing on if not distressed environment.
Would you be looking at such op-
their core strengths and shed-
portunities?
ding non- core assets.
I am not too comfortable say-
ing that I want to look at
I see a huge potential for private
stressed or distressed assets.
Although the real estate sector has equity in India to get to the next
taken a beating due to higher
What we want to rather look at
level - controlled transactions. If
home-loan rates, IL&FS Investment are transactions where you
this credit crisis had not hap-
Managers Ltd (IIML) which recently have a developer who knows
pened, it probably would not
raised a $895 million real estate what he is doing, who has the
have surfaced for another two
fund, remains confident of deliver- execution skillset and is offer-
ing an IRR of 25% to its investors as
to three years.
ing a better piece of his portfo-
it sees this to be the right time lio. Those are the transactions
where developers are showcasing Do you think that promoter ex-
pectations have come down?
we are seeing now. If a devel-
some of their best jewels. VCCircle
I would agree that promoter ex- oper who has a land bank, and
talks to Archana Hingorani, Exec-
pectations are coming down but is trying to give it to me at the
utive Director, IIML. Excerpts:
it will take another quarter be- cheapest valuation, I would not
What are the perceptible invest- fore people realise that the take on that project because I
ment trends in the face of the bounce-back will not happen so also need to worry about how
current credit crunch? soon. Then, transactions will it would get executed.
18

19. JOLLY’S VOLLEY
CATCH-22: LIFE OF AN ENTREPRENEUR
A startup is often expected to have achieved certain milestones but the
entrepreneur needs capital to achieve those very milestones. BY MOHANJIT JOLLY
Over my career as a VC, investment banker and advisor, excited about the idea/vision, but he/she has to also
I have heard thousands of pitches from entrepreneurs, evaluate a startup relative to others on his/her desk at
some good but most not so good. The key issue that that given moment. Since the key resource that a VC
keeps popping up (and it doesn't matter if it concerns a has is time (i.e. bandwidth to manage the portfolio),
Silicon Valley entrepreneur or one here in India) is one he/she may opt for a potentially less risky smaller play
where the entrepreneur is constantly faced with the than a risky big play depending on the number and
circular dilemma, most often referred to as a catch-22 quality of ventures that he/she is evaluating at any
situation (I don't think Kurt Vonnegut knew how much given time. What's worse from a startup's standpoint is
that phrase was going to be used in the entrepreneur- that the risk profile for a particular VC continues to shift
ial lingo). More specifically, this has to do with the fact over time. As an example, a fund may be prone to doing
that during the fundraising process, a startup is often early stage risky deals towards the beginning of its
expected to have achieved certain milestones (espe- fund's investment cycle, and less risky later stage deals
cially in an environment where VCs tend to become rel- towards the end of the fund's lifetime.
atively more risk averse), but the entrepreneur needs
capital to achieve those very milestones. What should With the above as backdrop, let's address the catch-22
an entrepreneur do then? Well, let me lay out some scenario directly:
specific concerns and practical solutions in this regard:
Proof Of Concept
Managing Risk Take comfort in the fact that this is not a dilemma
First and foremost, realise that you are asking a VC or an unique to you. This is a fact of startup life that is faced
angel investor to part with ei- by most, if not all, at some
ther their own or their Limited point as they launch their ini-
Partners’ (LP) money. Though ‘BELIEVE IT OR NOT, TIMING HAS tial venture. But there are spe-
such a request may seem un- cific steps that you can take to
reasonable to you, it is one
SOMETHING TO DO WITH HOW address the risk (either per-
that is completely justifiable EXCITED A VC GETS ABOUT ceived or real) that a VC may
since the VC will have to ex-
plain to their LPs when asked
YOUR BUSINESS. THE LEVEL OF indicate. I call this series of
steps, the "credibility contin-
"why in the world did you in- EXCITEMENT IS A COMBINATION uum" (CC), which in other
vest in a raw startup?" OF BOTH RELATIVE AND words, is a spectrum of risk re-
duction parameters. On one
Also, realise that you are com-
ABSOLUTE METRICS’ end, there are high margin,
peting with other startups for high value paying customers
the VCs’ time and capital. Even though you may think (low risk) and on the other is a raw core team of first-
your idea is superb, there may be another scrappy time entrepreneurs with nothing but an idea and a
startup that has more traction, a clearer message and a small font 40 slide PPT (high risk). The VCs would ideally
more believable trajectory to growth and profitability. like the startup to be on the "paying customer" end
So, believe it or not, timing may have something to do while reality is usually closer to the other side of the
with how excited a VC gets about your business. The spectrum.
level of excitement is a combination of both relative
and absolute metrics. In absolute terms, a VC may get There are key risk reducing techniques that don't cost a
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