Venture capital funding for technological innovation has been good in India with over $ 1 billion venture capital investment made in last 18 months, according to the industry sources which added the Indian venture capitalists were also making good returns on investments.
Though Technology Development Board (TDB) has committed over Rs 600 crore (for over seven years) to technology lead business, primarily as soft loans, of which, only 2 per cent of funds went to early stage deals. However, the inability of fund managers to provide handholding to early stage companies is a matter of concern said Sarath Naru, managing director of APIDC-VCL, Hyderabad.
The funds allocated by TDB to encourage technological innovations seem miniscule compared to the Indian capabilities. But, the portfolio has shown that handholding can significantly help the enterprises, and TDB has thus initiated such measures.
The R & D institutions in India should not only build IP culture but should also try to get their patents 'monetized,' Naru opined.
During 2001-'04 and till now, focus of VCs has been mostly on large private equity deals, and fund teams are more investment banking oriented and not operations oriented. It is learnt that VCs are running away from early stage tech deals, and this situation has been compounded by lack of big ideas and entrepreneurs. He recommended VCs to work with potential entrepreneurs from an early stage. Early stage investments need significant handholding. TDB experience has shown that without handholding technology business does not go that well.
Naru added, on the other hand, VCs also experienced poor returns from early stage companies, which further lead them to look for stable returns from matured companies.
On international VC experience, he said, Israel has shown that early stage VC investment has delivered in a short period. Israel's public-private partnership programme 'The Yozma' (established in 1993) has been a success. Investment decisions were made by those who bore the investment's risk and return. Handholding by the private sector partner was key to building the companies. Funds ultimately managed more than $200 million, which helped a number of technology companies with significant returns for the investors.
It is estimated that close to 90 per cent of the biotech projects required less than $ 1.5 mm investment, with only 2 per cent needing over $ 5 mm (based on Bio-spectrum-ABLE report - 2003). In the short and mid term, large companies will acquire / co-invest in small biotech ventures (McKinsey Report).
Naru added that public-private partnership could work with co-investment models as proven in other countries. Handholding is the critical requirement.