Photo: Aijaz Rahi/AP Photo

Big Deals in Bangalore: Venture capitalist Promod Haque [right] listens as Claudia Fan Munce, IBM Venture Capital Group managing director, strategizes with IBM India’s chief scientist, C. Mohan.

Having discovered India’s inexpensive engineering ­talent years ago, nearly every big tech company has a ­subsidiary there. Now the venture capital (VC) groups of these multi­nationals are discovering India’s independent start-ups. Venture capital investment in India is on the way to a substantial increase this year, with US $341 million committed in the first half of 2007. That ­follows VC’s nearly doubling in 2006 to $508 million spread over 90 deals. Nearly 15 ­percent of the 2006 money came from the venture capital divisions of companies like Cisco Systems, Google, IBM, Intel, and Yahoo, according to Arun Natarajan, CEO of Venture Intelligence, a Chennai-based firm that tracks VC investments. That’s a much higher proportion than in the United States, where in 2006 big companies accounted for less than 8 percent of VC financing.

The amount of VC funds coming into India from big corporations is increasing on top of a general growth in foreign VC investment, he says. The research services company, Evalueserve, in Gurgaon, India, says that 40 VC firms are planning to invest $4.4 billion in India in the next four to five years.

“We will continue to see more money flowing into India,” says Promod Haque, managing partner of Norwest Venture Partners (NVP), a Palo Alto, Calif.–based VC firm that has coinvested with Cisco, IBM, and Intel. “This is definitely part of a global trend, but India offers some unique opportunities.” In a survey of U.S. venture capitalists released in July by Deloitte Touche Tohmatsu and the National Venture Capital Association, India stood with Canada, China, and Israel as the country most favored by VC investors. Respondents wrote that India is particularly attractive due to “its emerging entrepreneurial environment” and R&D and engineering opportunities.

India’s traditional strengths, notably inexpensive and availa­ble talent, are now backed up by a growing domestic market and the emergence of start-ups with transnational business models, says Haque. Add to that an increasing penetration of mobile phones and broadband Internet connections, and India looks very attractive.

Traditional VC outfits work by pooling money from wealthy individuals and institutional investors such as pension funds and foundations, and investing the money in start‑ups. VCs typically play an active role in the management of the firms they invest in. Any return on ­investment—usually from the start-up being acquired or going public—doesn’t come for five to seven years on average.

Corporate VCs get their funds from the parent company itself. Firms like Intel, which are subject to investor pressure to profit in the short term, use their VC divisions to make longer-term investments. “Corporate venture arms can leverage the strategic and operating resources of their parent corporations,” says NVP’s Haque. “And they often fund companies that are related to their own strategic competencies,” making India’s booming technology sector a natural fit.