After dotcom fiasco, VCs eye ITES

After the dotcom debacle and the downturn in the US, news have been doing the rounds that venture capitalists (VCs) have picked up IT Enabled Services (ITES), for funding. With the Indian ITES sector expected to grow at a CAGR of 30 percent and contribute 20 percent of the $50 billion revenue target projected by NASSCOM for the year 2008 in software exports, that doesn't seem to be a bad choice for the VCs.

"The dynamics and market reality of ITES business makes it attractive for venture capital funding. It is a high margin (low cost of manpower) and large volume business with average investment returns of over 40 percent. Further, it requires substantial investment due to the high cost of technology and communications infrastructure in India," says Sourabh Srivastava, Co-founder and Chairman, Infinity Venture fund. 

Jagadish Ramamoorthi, Director & CEO, Allsec Technologies too agree with him that the customer interaction services, which is slowly shifting base from other countries into India, is a capital-intensive business. "What VCs look for in an enterprise is scalability. I feel VC funding in call centers will nurture large outsourced call centers and will provide one of the most important ingredients for growth." 

Though instances of VC funding have not been cited in the Tamil Nadu ITES industry so far, the idea seems to have caught up with the Coimbatore-based medical transcription company, KG Information Systems Limited (KGISL). It is looking for VC funding for its second phase of growth, and gives itself a fair chance of 80 percent for closing deals with VCs. 

Interestingly, some players in the sector are not so enthusiastic about VC funding. Nimish Tolia, Managing Director, MD Tolia, which has its fingers in CRM operations, considers VC funding a good opportunity for growth but feels that MD Tolia doesn't need it right now. "If the VC terms are fair enough, we may go in for VC funding, but at a latter stage. We are not looking at huge investments and would settle for a VC stake of some 25-30 percent." 

Likewise, Accel Software Solutions, a group company of Accel, says that it won't be looking at VC funding in the immediate future though it has expansion plans. "Though we are planning to enter the call center and data center business and expand into the CAD/GIS market in Europe, Australia and Japan, we would not be looking at VC funding as an option right now. But we might look at it subsequently," says Wing Commander, K Krishnan, General Manager, Accel Software Solutions.

It seems that entrepreneurs are willing to wait and make their business a success, then take it to the VCs and get funding for further growth. Servion Global Solutions echoes that sentiment. "If the industry thinks that VCs will give the necessary fillip it wants to reach the heights, then it is mistaken. VCs never give thrust. VCs come in only after a few successes are reported in the sector to provide funding," says S Madhavan, Director,

Servion. 

However Rajesh Jog, Managing Partner, eVentures India, feels that the ITES sector offers tremendous scope and will see increased VC activity to approximately $500m over the next 18 to 24 months. "Outsourcing to India is becoming mainstream phenomenon as firms in the US and Europe come under pressure to cut costs. We see the need for over $0.5 billion in funding over the next 24 months in this segment alone. I would expect at least $200 m funding in this segment this year." "

The expected $200 million figure is double the amount estimated to have been invested in the segment by VCs last year. For the time being, though VCs seem content of having found a segment that would give them good returns on investment, it remains to be seen whether the ITES sector would pay them rich dividends or not. 

Priya Mathew in Chennai (CNS)