Is it going to be the morning after?

In a span of 15 months, i have seen a black Monday(Sensex down 1000 pts) and a golden monday (sensex up 2200 pts, upper circuit hit, mkts closed for the rest of the day). Indeed markets have very short memories. On March 9th anything and everything was getting sold. On May 18th anything and everything was getting bought.
What would explain this irrational exuburance ?? The markets seem to think that the UPA govt will change the face of India. To some degree they would, but the market has conveniently forgotten about the budget deficit and that the current government was in power for the last 5 years as well. A 7-10% surge was warranted, but the kind of franctic buying - $1bn of FII investment with PE of 15.4x (above the long term average of 14.5x) . FII's can very easily pull out money as they put money in, so for a retail investor it would be key to look at fundamentals, rather than sentiment. Surely, it seems the momentum is huge - it remains to be seen how long this rally will last

Venture Capital Industry in India and Bay Area - a few points of comparision

A lot has been written about venture capital in India and US, and here is my take on it from the perspective who has lived in the bay area for 9 years, went through the dot-com bust and helped sell a company , worked at one of the internet darlings only to be working at the best investment bank of the world.

The industry in India and Bay Area is vastly different

1. Stages of investing - Bay Area as you can imagine is the incubator of all technologies and the venture capital ecosystem is mature and setup with firms specializing at each stage of the company starting from seed stage investing to late stage firms. However, in India most venture capital firms have morphed into late stage growth capital private equity shops. My personal take on this is that over a period of time they would see a dearth of deals as the venture funding required at the seed stage or early stage of investing is missing.
   
2. Succesful exits - Most venture capital firms have not witnessed the kind of exits that they have seen in the valley - the likes of Google, Yahoo!, Electronic Arts. It is going to take some time for venture backed companies in India to see such exits.
   
3. Environment of innovation - I see a lot of development, especially in the IT hubs of Bangalore and to some extent in Mumbai where the young folks are leaving their cushy jobs to become first generation enterpueners. Also a lot of venture capital firms are visiting universities, colleges and having enterpuenership meets to create budding enterpueners. Such efforts need to be appreciated, however, it is still in a nascent stage and would take some time to develop.
   
4. Business Models - I think this point bears a lot of thought. There is a lot of difference of how the early stage companies are set-up. India is still trying to solve basic logistical problems like bus ticket inventory (bus travels is an unorganized sector with most operators having 2-3 buses with little incentive to bring inventory online) or yellow pages where the carpenter in the neighborhood is listed on the web. So, most business models that get funding are either models that have been successful in the US and are being replicated in India.
   

Trends in BPO/KPO industry in India

From the hey days of IT outsourcing which put India on the world map in 2000-2001, this is a successful and tested model. This model has contributed almost 3-4% of India's GDP in the past.

The Indian IT-ITeS sector (including hardware) grew by 33 per cent in FY 2008 to reach US$ 64 billion in aggregate revenue. Of this, the ITeS/BPO sector contributed US$ 12.5 billion as against US$ 9.5 billion in FY 2007, an increase of 31 per cent.

The Indian ITeS-BPO exports grew significantly from US$ 8.4 billion in FY 2007 to US$ 10.9 billion in FY 2008 while the revenues of domestic BPO grew to US$ 1.6 billion in FY 2008 from US$ 1.1 billion in FY 2007. The sector provided direct employment to 700,000 in FY 2008 up from 553,000 in FY 2007.

This business model is based on labor arbitrage and works on two conditions being fulfilled- one, wage disparity between different countries and secondly, tasks that can be performed off line using a predetermined set of instructions. My personal take on this is that wage discrepancy will exist in India so long as India keeps churning young eager high caliber talent from its numerous engineering and management schools ready to work for less than $500 a month. According to economists, India would have the largest population in the world in the age group of 20-50 by 2035.
The two new trends in outsourcing are legal process outsourcing and with the demise of banking system in the US - banking and research KPO. However from my experience working at a services company, for the long term success of such models - the model down the line needs to maintain Service level agreements (read Quality) as well as provide value addition to the process/task ( read move to being a product company in addition to a purely services company or be able to provide on the ground research/intelligence not available to the foreign outsourcer). Some of the emerging financial services companies are Amba Research (Helion Ventures), Copal Partners, Evalueserve, UnitedLex (Helion Ventures), Pangea3 (Sequoia Capital), Mindcrest (Ganesh Natarajan), and JuriMatrix (Jerry Rao) to name a few.

How do Venture Capitalist value your startup

There are generally two ways VC's do their Voodoo !!

1. Early Stage start-up - This is more of an art and less of a science. To calculate the exact value of a business is tough, since a lot of assumptions used can change over time starting with from the definition of the market the startup is going after. However, the general method used is - start with the market size, estimate as to how much of the market share this startup can potentially capture and then multiply these two with the profit margins. This would generally give you an idea of the value of the startup. But as you can imagine there are a lot of variables and most numbers are best a gestimate firstly because there are no published authoritative reports on how big the market size is or would be and secondly, over time how would the competitive landscape change - meaning, how much market share and the startups' profit margins might be. Hence, frequently you would find a lot of Venture capital firms focusing on the sectors they know best(so the assumptions/variables have been tested and verified against) and investing money with people they trust (so they are reducing at least one variable/risk - the management's ability to deliver.

2. Late stage start-up with some cash flows - Again, you would use the same methodology as you would with early stage start-ups, the only difference is the variables/assumptions are more grounded in reality. Firstly because the company has been in operation for a while so you can judge from past performance as to market share and profit margins. Secondly, hopefully you are in a sector which seems attractive to other enterpueners and you see competition - you a benchmark to compare your startup both in terms of precedent deals that other VC's have done as well as market share and profit margin numbers to compare.