Indian venture capitalists' new risk-taking culture meant that for a few bubbly months earlier this year the place to be was on the fringes of the new economy, ideally in the company of a cash-rich dotcom. Technology valuations subsequently plummeted but venture capital funds remain undeterred, busy and a little wiser.

"India's value is not in dotcoms but in technology services. The funding industry has realised that now. Six months ago it had not," says Raj Dugar, director of Westbridge Capital, a new fund launched in September with backing from Goldman Sachs, the US investment bank.

In the six months to June, some 118 private equity deals worth Rs32bn were finalised, compared with 45 deals worth Rs43bn last year, says India Advisory Partners, a Bombay-based firm that tracks deals. About two-thirds of the deals were with international funds such as Softbank, the Japanese technology investor. More than 80 per cent of the deals were related to information technology (IT), says IAP.

ost of the deals were to raise second-round financing for the survivors of the funding boom of the past 12 months during which hundreds of business-to-consumer (B2C) ventures sprang up. Some have failed, others have merged. But between 75 and 100 start-ups have emerged with enhanced prospects of earnings and growth and a settled management, says Neeraj Bhargava at eVentures India, and are ready for second round or strategic investment of between $5m and $10m. "Second round finance is going to be a very nice market for strategic investment," he says.

India's VC industry is small and almost wholly defined by IT. Though the venture capital sector goes back several years it has largely taken off with the IT boom, which remains the focus of most funds. The National Association of Software and Service Companies (Nasscom), the IT industry's powerful lobbyist, says domestic and foreign VC funds command funds of about Rs22bn ($488m).

Venture capital funds have always provoked ambivalence within official circles, which explains the government's slow acceptance of their brand of risk-taking.

The push for change has come from successful expatriate Indians in Silicon Valley, US, who are keen to invest in India via venture capital funds based in offshore tax havens; the pull has come from India's large pool of technically-trained labour that is putting up clever ideas and looking for funding. The result is an investor-friendly government trying to capitalise on these twin imperatives that underline India's so-called knowledge sector.

In the budget earlier this year, for instance, the government relaxed and simplified the tax treatment of foreign venture capital funds setting up in India.

Nasscom, which has close links with Silicon Valley-based software engineers-turned-venture-capitalists, forecast at the time of the budget that the initiatives would lead to extra inflows of $3bn by the middle of next year.

The budget measures reflected the thrust of a report commissioned by the market regulator, the Securities and Exchange Board of India (Sebi), and headed by Mr K.B. Chandrasekhar, chairman of Exodus Communications, a US-based IT company. Sebi pointed to the success of venture capital funds in the US and Israel, as a model to mobilise funds for India's knowledge industries.

India's new venture capital landscape is now made up of funds set up by old economy conglomerates, and foreign funds with global reach.

Conservative old economy groups such as Hindustan Lever, the Indian subsidiary of Unilever, the UK-Dutch consumer goods group, Mahindra & Mahindra, a large diversified industrial group, and Reliance, India's biggest private-sector group, have all launched funds in the past year. They have done so not only to hold on to their best people tempted away by dotcom opportunities; they also want to incubate employees' best ideas internally so as to transform their e-commerce operations.

In contrast, Westbridge Capital says its focus is to bring together Indian ideas and foreign funds. "People in Silicon Valley are making so much money that they can't even be bothered to invest in Europe let alone India. We want to act as a bridge," says Mr Dugar.

Among the leading funds in India are Chase Capital partners, the private equity arm of Chase Manhattan Bank, which is directing its Asia-wide investments from Bombay, a measure of India's standing as a regional IT hub.

Others include Warburg Pincus, a long-time player, and Intel Capital India, the investment arm of the US microprocessor maker, which has invested in about 20 small Indian IT companies.

However, some venture capital funds are experiencing difficulties - one that has surprised many of the ex-Wall Street bankers who have turned their backs on lucrative careers in investment banking to set up funds in India.

Venture funds typically look for talented managers and wrap a clever, new business ideas around them. Without these business leaders, ideas remain untapped and funds dormant.

r Bhargava, an ex-consultant with McKinsey, the management consultancy, says: "We have reviewed what's going wrong here and one issue recurs: we just can't hire quickly enough. To get world class valuations, we need world class people. But we can't find enough talented leaders to start and run a company. This is the biggest single barrier [for VCs]."

Raj Kondur, a banker formerly with Morgan Stanley in the US, who now runs the $65m Bombay-based Chrysalis Capital fund with Ashish Dhawan, ex-Goldman Sachs, says the shortage is acute among experienced leaders. "There is a lack of second-term entrepreneurs - people who have taken a company all the way, have learned lessons and want to do it again."


Sobering up the morning after
Local investors venture forth
Freedom emboldens backers