India Venture Capital Report

Jul-Sep

2008

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GIVCA/Venture Intelligence-India Venture Capital Report

Table of Contents

Section

Page No.

1. Highlights 2. Investments by Industry 3. Investments by Stage 4. Liquidity Events 5. Angel Activity 6. Fund Profile / Interview 7. Entrepreneur Profile / Interview 8. Appendix 1: Definition of Stages 9. Appendix 2: List of VC investments 10. Appendix 3: List of VC Exits via M&A

3 4 6 6 6 7 9 12 12 15

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GIVCA/Venture Intelligence-India Venture Capital Report

1. Highlights
VC Investments in India during Jul-Sep 2008: 49 deals, $274 Million Venture Capital firms invested $274 million over 49 deals in India during the three months ending September 2008. The VC investment activity during the period was significantly higher compared to the same quarter last year (which had witnessed 36 investments worth $252 million) as well as the immediate previous quarter ($165 million invested across 28 deals). The latest numbers take the total VC investments in the first nine months of 2008 to $661 million (across 108 deals) as against the $648 million (across 97 deals) during the corresponding period in 2007.
The $18 million raised by TutorVista is the largest investment during Q3 08 Share of IT & ITES companies dips to about 50% (in volume terms) Early stage deals account for about 67% of all investments (63% in value terms) Over 61% of the investments are $5 million or more Ten of the reported deals are $10 million or above VC firms obtain exit routes in three companies during the period

Top Investments
The largest investment reported during Q3 2008 was the $18 million raised by online tutoring services provider TutorVista from existing investors Sequoia Capital India and LightSpeed Ventures.

Top VC Investments
Company TutorVista Sector Online Services (Remote Tutoring) Communications Tech (Revenue Assurance) Online Services (Video Rental) Microfinance Water Purifiers Amount Investors
(US$ M)

18.0

Sequoia Capital India, Lightspeed Ventures IFC, NEA-IUV, SAP Ventures, Others NEA-IUV, ePlanet Ventures, DFJ, Matrix Partners India Bellwether, Others Origo Sino-India, Unilever Tech Ventures

Connectiva Systems Seventymm Equitas Micro Finance HaloSource

17.0 12.0 12.0 11.5

See Appendix 2 for a list of all publicly disclosed investments

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GIVCA/Venture Intelligence-India Venture Capital Report

Distribution of Investments by Deal Size

25 20 20 No. of Deals 15 10 6 5 0 0-2 2-5 5-10 10-15 15+ 13

7 3

Investment Amount (US$ Millions)

2. Investments by Industry
Information Technology and IT-Enabled Services (IT & ITES) industry retained its status as the favorite among VC investors during Q3 08.

Led by the $12 million investment by Bellwether and others into Chennai-based microfinance firm Equitas, BFSI emerged as the second largest (in value terms) for VC investments during the period. Other microfinance firms that attracted investments during Q3 08 included Kolkata-based Arohan Financial Services (which raised funding from Lok Capital and others) and Guwahati-based Asomi Finance (IFC and Aavishkaar Goodwell).

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GIVCA/Venture Intelligence-India Venture Capital Report

VC Investments by Industry
Volume (No. of Deals) Industry
Q3 08 IT & ITES BFSI Engg & Construction Healthcare & Life Sciences Education Other Services Manufacturing Media Energy Travel & Transport Retail Telecom YTD** Q3 08 YTD

Value (US$ M)

25 5 3 6 2 1 2 2 2 1 -

58 8 4 12 3 6 2 5 6 2 1 1

147 34 23 4 17 15 13 11 6 4 -

361 54 33 52 23 29 13 19 48 14 10 5
* Year to date

Within IT & ITES, Online Services regained its customary top slot from which it had been displaced in the immediate previous quarter by Mobile VAS. Apart from TutorVista, other Online Services companies like Seventymm, Yatra Online and DimDim also raised follow on rounds during the latest quarter.

VC Investments in IT & ITES

Industry Volume
Q3 08 Online Services IT Products Mobile VAS Enterprise Software Communications Tech 9 4 2 2 2 YTD 21 6 7 6 2

Value (US$ M)
Q3 08 64 23 13 4 18 YTD 147 35 64 17 18

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GIVCA/Venture Intelligence-India Venture Capital Report

BPO Security Tech Semiconductors IT Services Embedded Tech 3 1 1 1 6 1 2 5 1 18 1 1 6 27 1 11 38 3

3. Investment by Stage
About 67% of VC investments during Q3 08 were in the early stage segment. (See definitions at the end of the report).

VC Investments by Stage
Stage of Company Development
Early Growth

Volume
Q3 08 33 16 YTD 67 41 Q3 08 172 102

Value
YTD 339 322

4. Liquidity Events
Venture Capital firms obtained exit routes for their investments in three companies during Q3 08, the largest being ICICI Ventures reported sale of a14% stake in discount retail chain Subhiksha to PremjiInvest, the PE investment vehicle of Wipro Chairman Azim Premji, for $56 million. Canbank Ventures-backed IT services firm Iteamic agreed to be acquired by US-based technology consulting company Ciber for an undisclosed amount. Iteamic employs about 200 professionals and is expected to report revenues of $7-8 million for fiscal 2009. Shopping search engine uGenie, backed by BlueRun Ventures, Sierra Ventures and Mentor Partners, was acquired by US-based self-publishing marketplace Lulu for an undisclosed amount.

5. Angel Activity Update

Indian Angel Network
The group announced three new investments during Q3 08 including Legal BPO TechLit Solutions, Online Food Ordering firm Hungryzone and Robotics R&D firm Robhatah.

Mumbai Angels http://www.mumbaiangels.com

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GIVCA/Venture Intelligence-India Venture Capital Report

This group has made news investments in Intrends Skin Solutions, a distributor of international cosmetic and beauty products in India; Apalya Technologies, a Mobile VAS firm and M-Tech Innovations, a provider of innovative printing and manufacturing services.

6. GP Interview
Vani Kola Managing Director NEA Indo-US Ventures
NEA-IndoUS Ventures has had a busy 2008 announcing investments in eight companies across sectors such as publishing outsourcing (PreMedia Global and Pressmart Media), software for educational institutions (Idenizen), online services (Seventymm), Communications Tech (Connectiva Systems and Bay Talkitec), Financial Services outsourcing (Basiz Fund Services) and waste recycling (Attero). Venture Intelligences N. Sriram spoke recently to Vani Kola to learn more about the firms latest investments and trends in the VC space. Venture Intelligence: You have announced five investments this quarter. What explains the accelerated pace of investments? Vani Kola: These investments were made on different dates. Its just that the companies that we have invested in have come out with press releases and the news got picked up by the media. We maintain a disciplined and consistent pace of investments. We have not really increased our pace. VI: Tell us more about Attero Recycling. Has this kind of business been VC-funded elsewhere? VK: Its the first of its kind in India for sure. This business is pretty much in existence in many countries in Europe but I cannot confirm whether they have been PE or VC funded. We are excited about this investment as India doesnt have a proper solution for e-waste management. Nor do we have a proper recycling system for the e-goods that we use. VI: You seem excited about outsourcing opportunities in the publishing industry. What is driving your interest in this sector? VK: There are certain industries where the cost models are going through radical changes just like it happened with the IT industry. Publishing is one such space. Even with the advent of online news and online consumption of information, publishing still has a strong role to play. The cost models have changed fundamentally that India, as an enabler in the publishing industry, will continue to grow as a destination, much the same way as IT did. We are glad that we are early in that trend. VI: Isn't selling to Indian educational institutions a tough business? What excites you about Idenizen? VK: I agree that selling to educational institutions in India is difficult just in terms of how they adopt these kinds of solutions but we also understand that there is a need for different kinds of solutions in these institutions. What excited us about Idenizen was that they pioneered a very interesting business model. It is such that there is no cost to the educational institution at all and the benefit accrues to students if they pro-actively adopt next generation technology and solutions. The offer that Idenizen makes is that we will bear the investment cost of setting up

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GIVCA/Venture Intelligence-India Venture Capital Report

the solution for you as a college and if your students derive value from it, they will subscribe to it. VI: How does your investment in Basiz Fund Services correlate with the current environment for hedge funds in the US? Is this a play on their being forced to outsource more, given the tougher investing and fund-raising environment? VK: It is similar to what we were discussing about publishing. Fund management companies in the US are facing cost & skills crunch. Cost cutting is where the arbitrage with India can be very effective. There are many companies in India rendering general purpose financial accounting services for companies in the US but Basiz is providing specialized accounting services to fund management companies. VI: In at least 4 of your investments (Seventymm, Attero Recycling, Pressmart Media, mginger) you have Draper Fisher Jurvetson (DFJ) as a co-investor. Is there any special relationship with that firm? VK: Ever since we commenced our operation in India two years ago, we have been actively looking to find co-investment syndicates because a lot of hard work has to be put into building the companies that we invest in. And if we do that collectively the benefit will accrue to us mutually. And we are open to do that with any investor. Its just a co-incidence that we have done four back-to-back investments with DFJ. The firms we were looking at aligned with their strategies and vice versa. We have great respect for DFJ. And we are pleased to be associated with them. VI: In most of your early investments, you were the first institutional investor. However, in some of your recent investments, you have chosen to follow an investor. For example, in PreMedia Global, you have come in after a PE firm like JM Financial. Similarly, in Seventymm, you have followed Matrix and DFJ. Does this point to a change in strategy? VK: There is no change in strategy. We look at the quality of the investment. We would be glad to be the first institutional investor in a company but if someone else has identified a good company and the opportunity is bright from an investment perspective for us, we would not have any problem in following them. You cannot always be the first to identify good companies. VI: Given the turbulence in the airlines sector, how you do view your investment in Via? VK: Vias market-share in the overall pie is small and it has got ample scope to grow. Even though there is a slowdown in this aviation sector, there are people to be served who are always on the look out for cheaper airfares. VI: Given Vinod Dham's background, we expected NEA-IUV to make some semiconductor-related investments. Can we expect any investments in this sector in the near future from your firm? VK: Its a sector that interests us, but we have not yet found any interesting opportunities. If we find interesting investment opportunities, we have no problem in considering it. VI: What sectors will you not invest in? VK: We will not invest in services sectors that have no connection with technology. However if there are applied technology solutions in these sectors we will invest. VI: So even in sectors like education are you looking at technology-related firms?

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GIVCA/Venture Intelligence-India Venture Capital Report

VK: There should be understanding on how they are going to leverage technology effectively. If its an education company, we will look at what they will be doing with broadband, e-learning, etc. This should be integral to their strategy. VI: How do you evaluate a company where the technology is complex? VK: We have relationships with people who can go deeply into technology to understand the unique differentiators and intellectual property. So if its an IP-based company, they cant go to a better investor than us because we can go deep into it to understand the value proposition. VI: Do you invest across all stages? VK: We invest in seed, early and mid to growth stages, though we invest more in early stage. We dont invest in the mezzanine round. VI: Where is the venture market heading? VK: In India, the venture market is growing and would continue to grow as long as we create exits. In 3-5 years, we have to see some good exits happen for venture-backed companies in India. I dont see any immediate downturn in the Indian venture market. VI: Is there any regulation change that you think could accelerate activities in the VC market? VK: You dont see the policy makers pro-actively including or reaching out to the burgeoning venture community to understand and encourage so that overall wealth creation can happen. Things like clarity of taxation, ease in incorporation should be taken care of to encourage growth in this space. We should also allow for systems that enable easy exit options while taking care to ensure that public investors interests are protected.

7. Entrepreneur Interview
Sridhar Rajagopalan Co-founder & Managing Director Educational Initiatives

Educational Initiatives Co-founder & Managing Director Sridhar Rajagopalan became an entrepreneur in school education after acquiring a B.Tech from IIT Chennai and a PGDM from IIM-Ahmedabad followed by a three-year stint at Tata IBM. He was a member of the team that set up Eklavya School in Ahmedabad in the mid-nineties. In 2001, along with a few batch-mates from IIMA, Sridhar set up EI with an aim to create a school education system where children learn with understanding as against the currently dominant learning by rote. Sridhar firmly believes that this goal can be achieved through a 'for profit' enterprise focused on assessment tests for children based on research-based methodologies. Ahmedabad-headquartered EI's flagship product ASSET (Assessment of Scholastic Skills through Educational Testing) is a diagnostic test which, instead of trying only to find out how

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GIVCA/Venture Intelligence-India Venture Capital Report

much a child knows (or has memorized), measures how well a student has understood concepts and gives detailed feedback on the same, to help them improve. EI recently received Venture Capital from Bangalore-based Footprint Ventures, Chennai-based IFMR Trust and US-based Novak Biddle Venture Partners. Industrialist Gautam Thapar has also invested in his personal capacity. Sridhar shares his views on education as an enterprise in a conversation with Venture Intelligences N. Sriram. Excerpts: Venture Intelligence: Are you planning to get into segments beyond assessment? Or will you stick to assessment and go for a larger footprint? Sridhar Rajagopalan: We will develop products and services based on research and assessment that will do three things: one, measure how children are learning; two, gain and share insights and information about the learning process understanding what children learn and what they do not and why, etc; three, improved self-learning. In the third area, we have just launched a product called Mindspark. If a child spends the recommended time on Mindspark every day, learning does happen on its own. Mindspark is able to do that because it is a research-based product. We plan to develop deeper expertise in the crucial but much neglected area of assessment and develop products. Our research into assessment gives insights into learning. Some of the products might look like learning products but they come out of our expertise in assessment. So we will stay in assessment in K-12. VI: Will your assessment products evolve as parallels to exams by boards like CBSE or ICSE? SR: We are working with CBSE. They invited us to see how critical thinking skills can be built in CBSE and if the board can do an assessment and get back to schools and teachers on areas of weaknesses and strengths of the children in a school. VI: Education appears a hot sector for investors. But is there a gap between where the money is actually needed and where the money is going? SR: There is a gap because there isnt a great understanding and also because most players are looking at short term returns. The real win-win will come when we look at these two things together: what is going to fundamentally make a difference and what is the value-add we can make there? But things are beginning to happen. Intelligent people are becoming interested in the issues. Many people from top institutes such as IITs and IIMs are getting into education. Today, if someone is trying to better science in schools, he wont get much venture funding. This may change in the next 3-4 years. But interestingly, when you work on fundamentals, if one product doesnt work, your fundamental work is strong enough to modify it into something else. In contrast, if you are investing in tutorials, if that is not working, you look elsewhere to see what the in-thing is. VI: Does the Indian education segment have a global role? SR: I think India has the opportunity to be a global leader in providing educational services. I am surprised that despite our short experience, we are doing things which others elsewhere in the world are not doing. We already have global customers for our products and services. VI: Do your investors share your vision?

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GIVCA/Venture Intelligence-India Venture Capital Report

SR: Even in an area like this, the commercial model is the best. We ourselves have set fairly rigorous business targets. For a product like Mindspark, a year before it launched, we decided how much business we want to do in the third year. It is not like we will start Mindspark and see how many we can sell. I dont think that works. We explain to investors what we are trying to do, why we are trying to and what the larger vision is. We need to recognize that investors are looking for returns on their money. And we need to better that. VI: Can we say that your enterprise is a proof of concept for good education being a profitable enterprise? SR: I strongly believe in that. I also think that For Profit schools should be allowed to run. However, profit should not be the direct motive. Innovation and quality should be. Profits will certainly follow. VI: What have been the key contribution of your investors? SR: There has been value addition in a number of ways. For example, we are now measuring stickiness very carefully measuring factors like what is the number of children who are taking ASSET year after year? very carefully. For example, we have been told that for a product like Mindspark, one of the best markets would be South Korea. Whether or not you do those things, thinking on those lines helps. And issues like how education companies have moved in the US, what they have done right and what they have done wrongour investors help us with perspectives on these issues. VI: What is your advice to entrepreneurs in education? SR: Be very clear about the fundamental goals that you are working towards. Do a very, very strong job on that. And dont compromise on that. Look at the profit as secondary to the basic goals you are trying to achieve. We have rejected commercial propositions that were not in tune with our basic objectives. I think it is important for businesses to draw the line and declare that we want to do the right things, the right way. At every step, check if that is in tune with your objective. Would your companys existence help the larger world? If your answer is, yes, it would, then you could be probably on the right side. VI: Do you have any role model? SR: Vikram Sarabhai. He was a great institution builder. He set up IIMA and was the father of Indias space research programme. He was also a businessman. He comes the closest to a source of inspiration. VI: Your key learning in running a business so far? SR: Learn from failures. Look at Microsoft Office. It is a successful product. I remember the first product they released. It was absolutely terrible. But they persisted. Think of an idea, persist with it. You will always have successes and failures. Work through the failures and try and get things right. In any business, you will have successes and failures in fairly uniform measure. The key question is whether you can learn and align your learning with the larger goal. Secondly, people are critical. You basically work through people to get to the goals.

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GIVCA/Venture Intelligence-India Venture Capital Report

Appendix 1: Definitions of Stages-of-company-development

Venture Capital investments are classified into the following categories in this report. Early Stage: First / Second Round of institutional investments into companies that are: 1) Less than five years old, AND 2) Not part of a larger business group, AND 3) Investment amount is less than $20 M Growth Stage: 1) Third / Fourth Round funding of institutional investments OR 2) First/Second Round of institutional investments for companies 5-10 years old OR spin-outs from larger businesses, AND 3) Investment amount is less than $20 M

Appendix 2: VC Investments*
Company TutorVista Connectiva Systems Seventymm Sector Online Services (Remote Tutoring) Communications Tech (Revenue Assurance) Online Services (Video Rental) Amount
(US$ M)

Investors Sequoia Capital India, Lightspeed Ventures NEA-IUV, SAP Ventures, IFC, Others NEA-IUV, ePlanet Ventures, DFJ, Matrix Partners India Bellwether, Others Origo Sino-India, Unilever Tech Ventures Helion Ventures, Charles River Ventures Alcazar Capital SAP Ventures, Canaan Partners, SVB, Others Cisco, Reliance Technology Ventures, Artiman Ventures Matrix Partners India

18 17 12 12 11.5 11 10

Equitas Micro Finance Microfinance HaloSource Webaroo Water Purifiers Mobile VAS

Bumi Geo Engineering Geo-Engineering Services iYogi SureWaves

BPO (Remote Support) 9.5 IT Products (OOH Media) 8 7

Tree House Education Pre-Schools

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Company A Little World Sai Sudhir Infrastructures Attero Recycling DimDim Yatra Online BuzzInTown.com Sector Amount Investors
(US$ M)

IT Products 7 (Micro-banking Devices) Infrastructure E-waste Management Online Services (Conferencing) Online Services (Travel) Online Services (Social Networking) 7 6.3 6 6 6 6 6 6 5.5 5 4 2.5 2.25 2 2 2 1.25 1.05 1

Bellwether, Legatum Ventures BTS India DFJ, NEA-IUV Nexus India Capital, others Intel Capital Intel Capital Intel Capital Helion Ventures, Canaan Partners DFJ, NEA-IUV Others, WEGA Support Sequoia Capital India Helion Ventures VenturEast NEA-IUV NEA-IUV Ojas Ventures, Inventus Capital VenturEast, Others VenturEast APIDC Biotech Acumen Fund

Emnet Samsara Media Out-of-Home Media UnitedLex Pressmart Media Unitus Capital Ideacts Innovations HummingBird Suite Atyati Idenizen Smartware Basiz Fund Services TeliBrahma BPO (Legal) IT Service (Digital Publishing) Financial Advisory Online Services (Advertising) Travel Services (Business) IT Products (Banking) Enterprise Software (Education) BPO Mobile VAS

LatticeBridge Infotech Enterprise Software (Voice recognition) Richcore Lifesciences Biotech Cecilia Healthcare Global Easy Water Health insurance Irrigation Equipment

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GIVCA/Venture Intelligence-India Venture Capital Report

Company Lifeblob Mango Technologies Pegasus Semiconductors AuthWave Tech Marillion Pharma Medicine Shoppe iMedX Info. Services Evolva Biotech Sector Online Services (Digital Diary) Communications Tech Semiconductors (LED Chips) Security Tech Biotech (Anti-cancer) Pharmacy Chain BPO (Healthcare) Biotech Amount Investors
(US$ M)

Seedfund Ojas Ventures

1 1

GVFL NEA VenturEast/APIDC Biotech VenturEast/APIDC Biotech VenturEast/APIDC Biotech VenturEast/APIDC Biotech VenturEast/APIDC Biotech Nexus India Capital Norwest, Reliance Technology Ventures Capital18 DFJ Lok Capital , Others IFC, Aavishkaar Goodwell Norwest, Reliance Technology Ventures Capital18 DFJ, Nexus India Capital, Acumen Fund, Others Tiger Capital Nexus India Capital Nexus India Capital
* Publicly disclosed during the period

Mardil Medical Devices Medical Devices Sedemac Mechatronics Energy Efficiency Products Suvidhaa Infoserve Ubona Technologies Catura Systems Arohan Financial Services Asomi Finance Suvidhaa Infoserve Ubona Technologies D Light Design IIJT Undisclosed Undisclosed Information Kiosks IT Products (Speech Recognition) Online Services (Education) Microfinance Microfinance Information Kiosks IT Products (Speech Recognition) Rural Lighting Products Vocational education Online Services Media

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Appendix 3: VC Exits via M&A

Amount Company Subhiksha Iteamic Ugenie Sector Month Acquirer PremjiInvest Ciber Lulu
(US$ M) VC Investors

Discount Retail Sep-08 IT Services Sep-08

56 -

ICICI Venture Canbank Ventures BlueRun Ventures, Sierra Ventures, Mentor Partners

Shopping Aug-08 Search Engine

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-----------------------------------------------------------------------------------------------------------------------------------------------Note: The above analysis is based on publicly announced / reported deals and data collected from Venture Capital firms. The Venture Intelligence data is updated continuously and is therefore subject to change at any time. US-IVCA and Venture Intelligence do not represent, endorse or guarantee the accuracy or reliability of this data. This report is meant solely for informational purposes, not for trading purposes or advice. US-IVCA and Venture Intelligence are not responsible for decisions, damages or other losses resulting from the use of the Information.

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