Sarath Naru managing director, APIDC-VCL (Andhra Pradesh Industrial Development Corporation Venture Capital Ltd) is of the view that spotting good early stages opportunities in India is a challenge as there are not enough experienced / business savvy technoprenuers that are emerging to start up businesses. The venture capitalists (VC's) have to proactively identify entrepreneurs to help shape their business plans.
Naru has been associated with several assignments working for Procter & Gamble in brand management for US & UK and VST Industries in Hyderabad. He was also an entrepreneur in the business of trading & manufacturing in US and India. Naru was enticed to the world of venture capitalism and has been a part of APIDC management since 1995.
Naru commented on several issues of the VC sector including the fact that VC's not being impressed by the start-up plans and the start-ups not happy about the reluctance of funding agencies, in an e-mail interview with Nandita Vijay of Pharmabiz.com. Excerpts:
In the wake of venture capitalists boom in India would be the competitive positioning of APIDC-VCL? What kind of organisation does APIDC-VCL want to evolve into?
The VC industry, more so than any other industry is a highly co-operative industry where the VC's prefer to share opportunities and co-invest rather than compete. Consequently we encourage other VC's to join us in funding "early stage" businesses and "biotechnology" businesses for which at present we appear to be the only VC's.
Our vision is to be India's first! We want to be both the first VC fund that early stage businesses turn to and we want to be the first fund that investors turn to for the best long-term capital gains. We have made some significant progress in this regard. We continue to maintain an investment focus of being the first VC investor in any company we invest in. We have been the first technology VC fund to be approved by the IRDA (Insurance Regulatory & Development Authority) for investment by insurance companies. We are the first public-private VC fund manager. We launched the first R&D institution linked VC fund in India. We have now launched the first biotechnology-focused fund in India.
Our vision is to evolve APIDC VCL into an organization that is able to build / create industry leaders and pioneers from scratch. We have already built initiated a number of such leaders in our earlier funds like Moschip Semiconductor (India's first semi-conductor products company), Ocean Sparkle, (India's leader in port management services with over 80 per cent market share), Gland Pharma (leader in small volume parenteral manufacture (likely to be India's first FDA approved), N_logue, (India's largest rural internet kiosk operator), Vibromech, (only second company in India to be approved by General Motors (USA) for imports), Dodla Dairy, ( leading private sector dairies in South India with best ratio of equity employed to sales & profits) Triad Fleet Control, ( pioneer in gas station automation & fuel management of fleets).
What are the likely trends that are expected to emerge in venture capital funding?
Our belief is that the government agencies need to take a pro-active role in supporting technology development by backing early stage venture capital funds. While agencies such as Technology Development Board are attempting this, they only provide debt currently and are not set up to provide any hand-holding. They are recognising their handicaps and that of the early stage VC industry. My strong belief is that they will support early stage VC's through schemes small business investment companies (SBIC) such as those that kick-started the United States VC industry in the 50s.
The R&D institutions will follow the kind of models started by Stanford University and MIT to proactively push technologies that can be commercialised. Institutions like the CSIR, the IIT's etc will take a lead in this.
NRI's (non-resident Indians) will continue to be a major source of entrepreneurs as they recognise the competitive advantages that India offers for many technology businesses.
Have you chalked an action plan for the Biotechnology Fund? Could you highlight some thrust areas that have been identified as growth areas?
The Biotechnology Fund will invest in drug discovery & healthcare related areas; agriculture & animal husbandry, industrial & environmental biotech. The aim of the fund is not only to invest in companies that are at the heart of the biotechnology revolution, but also in peripheral businesses like new generation seeds distribution companies, specialized hospitals, waste management companies, packaging companies, etc. that are expected to have an impact of the growth.
Don't you feel returns from life sciences sector take a long time to yield? How is APIDC-VCL going to cope with this, as many other VCs have been unhappy over the prolonged results?
We have understood the long gestation periods associated with biotechnology companies and have set our expectations to see returns only after 5+ years for each investment compared to just 3+ years for Information Technology (IT) companies. For product companies that are into basic drug discovery even this is short and consequently we are being extremely selective about such product companies and will have significant emphasis on services business. We will invest in product businesses that specifically draw upon the advantages of India such as Ayurveda (traditional medicine) and wide biodiversity to ensure the success of such companies and create rapid exits for our investments.
What are you expectations from the areas of life sciences?
Globally life sciences, with its current high throughput techniques and IT embellishments is set to revolutionize every healthcare and nutrition. We expect to see personalized drugs with minimal side effects, crops with enhanced traits such as higher yielding varieties and ones that are tolerant to environmental stress. In the areas of industry and environment, life science offerings will pave the way for cleaner process without excessive use of toxic chemicals or fossil fuels. India stands to make major contributions in all areas.
Value added services in the drug discovery arena will include the use of sophisticated math-IT platforms combined with cutting edge wet-lab assays to bolster mainstream processes like lead discovery, trials in animals and humans.
The myriad Indian plant varieties include those that are naturally resistant to adverse conditions such as high salinity and drought. Genes from such plants can be identified, isolated and incorporated into cash crops. Such varieties in addition to being seminal for Indian agriculture to gain global leader status, will also represent huge business opportunities
In the areas of Industrial and environmental biotech, Companies such as Biocon have pioneered the path and will continue to so by producing enzymes that eliminate the need for high energy and toxic by-product chemical processes
Indian plant and human sub-racial diversity also hold vital clues to diseases mechanisms and cures. Combined with our knowledge of Ayurveda, Indian Biotech stands to make very significant offerings to Global biotech in the long term (10 years), both in the form of IPR and blockbuster drugs.
There has been much talk about BT (biotech) being the next wave after IT. Is the hype justified for VC to find companies to fund? Sectorally which area do you see maximum activity coming in?
The buzz associated with the BT boom is well justified. It will exceed the penetration of IT into everyday life in about ten years plus, but until then the growth of BT will be less rapid than what was experienced by the IT sector.
There are a few key differences between BT and IT. However, IT has enhanced existing processes to be faster, more accurate, allow greater connectivity and data access / integration. BT, as opposed to IT, stands to change existing processes completely, in being able to provide radically better understanding and in turn products. Additionally BT address fundamental human needs (health and nutrition) and is recession-free. BT is based on decades of validated knowledge not normally associated with boom industries.
Classically, the VC industry has exemplified revenue generation through funding revolutionary technologies. Most success stories have been through identification of early-stage opportunities. The trick is to identify the opportunity when a field like BT is in its nascence. This normally involves being able to identify a new technology (with a competitive edge to replace a current use or to set a new trend) along with an experienced team. This is now possible in India because of country-specific advantages (genetic diversity, talent and low costs). The activity does however need a significant amount of business handholding, in addition to funds.
We feel that if done right, Indian Biotech represents very good investment opportunities.
There are many concerns about VC's not been impressed by the start-up plans and the start-ups not happy about the reluctance of funding agencies. Please comment
Both to an extent are true but at this time there less than a handful of VC funds in India that are looking to invest in start-up / early stage businesses, while there is no other biotechnology focused fund other than ours. The Indian VC industry has become over- cautious as a knee-jerk reaction to the dotcom catastrophe. The Indian VC industry has adopted a safer late-stage / private equity investment model.
But spotting good early stages opportunities in India is a challenge as there are not enough experienced / business savvy technoprenuers that are emerging to start up businesses. This requires VC's to both go proactively identify entrepreneurs and help shape business ideas, and following this it requires them to provide significant handholding.
Could you briefly trace the background of APIDC-VCL and what has been the experience in venture funding so far?
APIDC-VCL started in 1990. It was the brainchild of the current RBI Governor Dr. Y. Venugopal Reddy, who was the first Vice-Chairman & MD of APIDC. Dr. Narasimhan (a previous RBI governor) was the first Chairman. In 1994, the government of Andhra Pradesh privatised APIDC VCL, and it became India's first public-private venture capital management Company. The privatised management of APIDC-VCL manages APIDC-VCF, a broad fund that invested in 20 companies. Over a year ago, the management of APIDC-VCL is also in charge of Ventureast Tenet Fund, India's first R&D institution (IIT Madras) linked fund. This Fund has so far supported four companies. The Biotechnology Venture Fund has approved investments in three companies. The three funds currently have invested in about 30 companies and is expected to go up to 60 companies in a couple of years. A unique aspect of APIDC-VCL funding is that it into 'early-stage' (start-up) financing with a motto to be the first VC investor in the company.
What are the strengths and weaknesses of APIDC?
The key strength of APIDC VCL is the strong operational background of its management team, which is a crucial element for handholding early stage businesses to become a success. The management team's secondary qualification is finance and the experience covers entrepreneurs, corporate business unit heads, technology developers, scientists, etc.
A successful VC manager needs to have a small management team in order to not become hierarchical, which could result in the top management layers losing the flavour of the deals that are coming up, etc. While we maintain this principle at APIDC VCL, it also causes situations where we are not able to respond as quickly as we would like to new business opportunities and are constantly working to become more efficient.
Where is APIDC-VCL placed today and what are the future plans? How do you see APIDC-VCL placed in the next three years?
APIDC VCL is placed squarely at the front in terms of attracting early stage businesses. We will have to continue building industry leaders from scratch in order to maintain this position. We will continue to back early stage businesses and technology focused businesses over the future as well.