Silicon Valley-based VC firms are taking the lead to enter India, a market that offers the best of the three key location-based advantages. At last count, 44 US-based VCs had announced plans to set up India-based funds of an average fund size of $100 million, says Bundeep Singh Rangar, chairman of the UK-based India-focused cross-border advisory firm, IndusView.

Few things excite venture capitalists more than the possibility of investing at a low price in a company with global disruptive potential that offer an exponential return. Internet start-ups offer among the best potential for high-growth, capital efficient and exit-able investments. As India''s internet user base of 50 million grows at 25 per cent each year, more internet companies are being formed to target the online market. Consequently, more funds are being set up to invest in such companies.

Not surprisingly, Silicon Valley based VC firms are taking the lead. At last count, 44 US-based VCs had announced plans to set up India-based funds of an average fund size of $100 million. If successful, that would imply about $4.4 billion in new investment capital would be available for venture investments in India over the next five to six years. That''s more than twice the $2.03 billion total in venture capital and private equity investments in India in 2005 and comparable to the investments in 2006 at $7.8 billion.

Taking Indian Purchasing Power Parity (PPP) into consideration, that would be equal to $22 billion worth of investment capital in the U.S.

Recently, Silicon Valley-based Venture Capital fund Sequoia Capital merged its India operations with VC Fund WestBridge Capital Partners based in Bangalore, capital city of the south Indian state of Karnataka. WestBridge has been one of the most active VC funds in India. The new merged entity is now called Sequoia Capital India.

Sequoia joins other Silicon Valley funds such as Kleiner Perkins, Norwest Venture Partners, Matrix Partners, Benchmark Capital, Draper Fisher Jurvetson, and Greylock Partners that have expanded their presence in India recently.

After a lull between 2000 and 2004, early stage companies received venture capital investments worth $482 million across 52 deals in 2005. Last year, investors took greater risks by investing money in very early stage companies. In 2006, that resulted in VCs investing 70 per cent in sectors such as online classifieds and travel, mobile and mobile value-added services companies, gaming and telecoms.

IT and ITeS
It is difficult to ignore a market that offers the best of the three key location-based advantages: a skilled workforce, lower costs and growing domestic market. That probably explains the big investment announcements that have been doing the rounds by some of the industry captains.

Leading the pack is the world''s largest IT services company, International Business Machines, Inc., (IBM). In June last year, the company announced a long-term strategy to align with India involving a total investment of $6 billion. This is the largest investment by a multinational operating in India. IBM''s Chief Executive Officer Sam Palmisano had said the money will be used to build service delivery centres in Bangalore and create a telecommunications and research centre for clients.

This investment is three times the $2 billion it has already invested in the country. Since then, IBM''s headcount in the country has swollen to 53,000 from about 40,000. This is the largest IBM workforce outside the U.S. Meanwhile, other notable blue chip companies are following suit.

Private equity firms have made lucrative returns from early bets on companies. The Business Process Outsourcing (BPO) industry, which grew by 37 per cent to $6.3 billion in FY06 and expected to touch $8 - 8.5 billion by the end of FY07 has actually been a runaway success.

Warburg Pincus, the largest private equity investor in India, made 13 times its initial investment when India''s largest independent Business Process Outsourcing firm WNS Ltd listed its shares on the New York Stock Exchange on July 26.

Warburg bought a 65 per cent stake in WNS in May 2002 when the then financially-strapped British Airways Plc, sold a part of its founding shares for $40 million. That stake was worth almost $523 million as the company topped a billion dollars in market value.

Electronic Data Systems Corp. (EDS), a business and technology solutions provider based in Plano, Texas, acquired the Indian business process outsourcing (BPO) company Mphasis BFL Ltd. EDS had placed $380 million open offer for a 52 per cent stake in MphasiS.

VC fund Baring Private Equity Partners used the open offer to exit completely from one of its most successful investments. Baring sold 56.01 million shares aggregating to 34.73 per cent stake in the company for $252 million.

Venture capital investment in India''s growing online market is also picking up speed. The Internet user base in the country, which is expected to reach 100 million by 2010, from 70 million today, has resulted in renewed venture capital interest in funding start-ups seeking to tap online spending.

VC investment in this sector is likely to be 10 times that of last year. Silicon Valley VCs such as Kleiner Perkins Caufield and Byers and Sequoia Capital and corporations such as Yahoo Inc. led 70 per cent worth of financing in the online travel and classifieds sites compared with a total of $10 million invested in Indian Internet companies in 2005.

Internet users are mostly among India''s affluent and price sensitive 300 million middle class, who are able to spend on goods ranging from computers to travel tickets. E-commerce revenue is expected to double this year to more than half a million dollars from $262 million last year.

This underlines the growing importance of an India-strategy in the overall business plans of global investors.