WALL STREET JOURNAL
Thursday, October 14, 2004

Venture Capitalists Book a Passage to India; Expatriate Repatriations Fuel Booming Investment Back Home; 'It's Payback Time for Us'

By ANN GRIMES and JAY SOLOMON

Staff Reporters of THE WALL STREET JOURNAL

For a long time, Vinod Dham thought of his native India as a nice place to visit but not necessarily a great place to do business. For 16 years, he kept busy in the U.S. as a chief engineer at Intel Corp., ultimately overseeing the creation of its famous Pentium series of chips.

Now Mr. Dham is a multimillionaire venture capitalist. His NewPath Ventures LLC oversees $40 million earmarked for the creation of "crossborder" companies in the U.S. and India. And he isn't alone. Private-equity money pouring into India this year from across the globe is on course to nearly double what it was four years ago, with $405 million invested through June, most of it from the U.S., according to the Centre for Asia Private Equity Research, of Hong Kong.

"More and more, Sand Hill Road money is moving to India," Mr. Dham says, referring to a key location for venture capitalists in Silicon Valley. "It's clear India's time has come."

For two decades, Indians and Indian-Americans have played a pivotal role in powering Silicon Valley's digital revolution. Ethnic Indians were at the heart of many of America's premier technology firms, including Sun Microsystems Inc., Juniper Networks Inc. and Hotmail, now a unit of Microsoft Corp. They also have taken senior posts in Silicon Valley's top venture-capital firms, such as Kleiner Perkins Caulfield & Byers and Norwest Venture Partners.

But until recently, the heaviest hitters expressed little interest in investing in their homeland. The Indian government had earned a reputation for impeding foreign investment with tariffs, investment caps and tons of red tape. Past governments voiced hostility toward expatriate Indians as disloyal. The country's infrastructure -- roads, electricity and airports -- still leaves much to be desired.

Today, however, New Delhi is increasingly opening India's borders economically. Successful Indian entrepreneurs and financiers in Silicon Valley are discovering that going back to their roots is good business. As the U.S. technology sector has slowed, many Indians say they prefer to invest in the dynamic subcontinent rather than the mature U.S. The rise of the Internet-based global communication and sharp declines in Indian long-distance charges because of telecommunications deregulation also make investment easier and less risky.

Sanjay Kumar, a former senior executive at Microsoft, now shuttles back and forth between Kirkland, Wash., and New Delhi as chief executive at vCustomer Corp., one of India's largest call-center operators. Mr. Kumar persuaded some of Wall Street's biggest blue-chip investment houses, including Warburg Pincus LLC, to put nearly $20 million into the company, which has 4,000 employees and is seeking to buy call centers in the U.S.

In Santa Clara, Calif., The Indus Entrepreneurs -- a 12-year-old global Indian networking group known as TIE -- meets regularly to assess dozens of investments they oversee in India. TIE has set up 13 offices across India in recent years to push the country's high-technology revolution.

"Biotech firms in Boston have to have a position in China and India now," says Hemang Dave, a Boston investor and TIE member who helped organize a trade trip to Bangalore, Bombay and New Delhi this month for 25 venture capitalists and senior executives. Mr. Dave's firm, Celerity Ventures LLC, recently invested in a Bombay investment firm.

In Foster City, Calif., Sumir Chadha and his partners have set up WestBridge Capital Partners, a venture-capital firm with a mission to bolster India-Silicon Valley ties. So far, the firm, with offices in Bangalore, is putting a $140 million fund to work backing technology companies with branches in India and headquarters in Silicon Valley. "We can create a company in India for half the cost of in the U.S.," Mr. Chadha says. His firm is syndicating partnerships with well-established U.S. venture-capital firms eager to invest in the subcontinent.

Promod Haque, managing partner at Norwest Venture Partners, returned to India only four times since he left New Delhi for the U.S. in 1972 -- until this year. He says he has taken four more trips in 2004 to look for opportunities and to "open doors for our companies," especially in telecommunications, a sector that is struggling in the U.S. but taking off in India.

Vinod Khosla, among Silicon Valley's best-known venture capitalists, has gone part time at Kleiner Perkins to devote more time to business and charity in India. Vish Mishra, a senior partner at Clearstone Venture Partners in Menlo Park, Calif., and other venture capitalists are vetting "pitch" sessions with Indian start-up businesses via Web conferences.

Other entities are bolstering the Silicon Valley-India infrastructure, too. Chip maker Intel now makes 40% of its investments abroad, up from 5% in 1998, says Intel Capital Managing Director Sriram Viswanathan. "The pain level has gone down" in India, he says. "The offices look the same in Bangalore and Santa Clara."

Silicon Valley Bancshares has opened a subsidiary in Bangalore, and Cisco Systems Inc. said in September that it plans to open a venture arm there. Silicon Valley's legal powerhouse Wilson Sonsini Goodrich & Rosati now has a full-service India practice. "On average, we are forming one subsidiary in India per week for U.S. companies," says Raj S. Judge, who heads the India practice team. "Three years ago, it was one every quarter."

Mr. Dham left Intel in 1995. Plunging into the chaos of a start-up business, he helped develop a computer chip that soon was acquired by Intel competitor Advanced Micro Devices Inc. He moved on to a second start-up company that sold for $1.2 billion. Two years ago, he started NewPath. He says he investing in India as a way to help his native country. "It's payback time for us," he says.

Mr. Dham and his partner have backed four companies so far. They follow an 80/20 formula: basing 80% of research and development in India and 20% of the work force in the U.S. to tap markets and capital. All the start-up companies are set up as Delaware-based corporations, meaning they are subject to U.S. laws and can trade easily on U.S. stock exchanges. Mr. Dham is mainly interested in companies that create products, not services such as call centers.

Indian financiers, meanwhile, are thrilled by the surge in interest from their overseas diaspora. Just a few years ago, India was largely seen as a low-cost labor market. Now the Silicon Valley Indians are helping local firms create world-class products.

Venture firms also are starting to pop up in India, looking to team up with Silicon Valley firms. Gaurav Dalmia's First Capital India Ltd. venture firm in New Delhi oversees $140 million.

The Indian diaspora also is seeking to advise the Indian government on policies to promote investment. Mr. Dham and TIE board member Kanwal Rekhi traveled to New York last month to meet with India's new prime minister, Manmohan Singh. And Mr. Rekhi has played a public role in pressuring New Delhi to deregulate its telecommunications sector.