India

India's GDP is growing at 8% to 9% annually, it is projected to double from its current $700 billion (equivalent to $3 trillion on a PPP {purchasing power parity-adjusted basis) over the next eight years, easily surpassing the 2% to 3% growth of the U.S. which will take 30 years to double.

This growth has been triggered by the stability of the government, privatization of industries, low interest rates and low inflation. In addition to the booming Indian stock markets, foreign exchange reserves have reached over $150 billion.

Foreign Institutional Investments (FII) and Foreign Direct Investments (FDI) have also increased substantially. India now ranks second on AT Kearney's FDI confidence index, surpassing the U.S. It received $30 billion in FDI in 2005. This is further supported with capital allocations for expanding operations by corporations like Microsoft ($1.7 billion), Cisco ($1.1 billion) and Intel ($1 billion).

India has a combination of low capital requirements, abundance of talent and a wealth of "white space" opportunities to serve the emerging consumer middle class presents the opportunity to create new industry leaders. Most importantly, with a healthy and well-regulated exit environment, investors can see significant returns.

Human capital

With a population of 1.1 billion people, India has an abundance of human capital. Over 2.2 million English speaking students graduate each year, of which 250,000 are engineers, 120,000 are doctors and up to 40,000 are MBAs, making India an ideal region to develop new products and services. The entrepreneurial ecosystem is supported by Silicon Valley expatriates and organizations such as The Indus Entrepreneurs (TiE) and the National Association of Software and Services Companies (Nasscom), which have helped foster growth and development of world-class companies. Fueling this computer literate pool of talent are the excellent engineering and management schools in India.

Emerging middle class

India not only is a valuable source of innovation in technology oriented products and services for the global market. At the same time it is witnessing an exponential increase in the aggregate purchasing power of its emerging middle class. The growth of middle class India is similar to the growth of the middle class in the United States in the 1950s and 60s. The consumer middle class in India comprises of two types of households-the consuming category ($970-$4,600 in annual income) and the climber category ($470-$900 in annual income). Combined, they have doubled over the last 10 years to over 150 million households. More and more Indians have something that only a short time ago was not available: disposable income.

That is fueling the demand for new products and services across the board in areas such as wireless, financial services, consumer electronics, automobiles and retail. Mobile phone growth has taken off with more than 70 million mobile subscribers today vs. 5 million three years ago. About 2.5 million subscribers are being added monthly, creating opportunities in the mobile application and infrastructure space. Banks have also benefited with close to 50 million credit cards in circulation today vs. 1 million in 2001. Retailers are capitalizing on the new trend of branded consumer goods, with shopping malls and department stores springing up around the country.

Offshoring

Analysts estimate the market for offshored Indian IT and IT- enabled services will grow to $80 billion by 2009 and $140 billion by 2014 from its current size of $40 billion. For capital efficiency reasons, nearly 50% of Silicon Valley startups now offshore work to India. India supports and enforces intellectual property and contract law, providing confidence to not only Silicon Valley startups but thousands of companies that depend on India for IT, software and IT enabled services.

Transparent capital markets

Any successful venture is measured by the speed and value of liquidity. March 2005 was important to the Indian stock market as well as to the international investment community. Warburg Pincus sold a $560 million stake in Bharti Tele-Ventures on the Bombay Stock Exchange (BSE), a transaction marking the largest block trade to date in India. The stock was absorbed in 28 minutes, displaying the depth and maturity of the Indian public markets. The BSE has grown over 180% since 2003, compared to the Nasdaq, which has grown by 65%. With U.S. GAAP-like accounting practices and SEC-like regulatory bodies, the Indian equity markets provide the confidence to foreign investors and have liquidity opportunities that are essential for successful venture type investments. Further, there are 9,000 listed companies in India, making it one of the few markets in the world with the largest number of both small and mid cap public companies. It is much easier to go public in India today than it is in the United States if you have revenue of just $15 million to $50 million.

Challenges

India has a clogged bureaucracy which slows business progress.  India's infrastructure behind that of the United States.  India's tax and legal systems provide an entirely different set of issues for foreign investors. Legal reviews can last for several months, and are unfamiliar to U.S. investors. Tax laws and corporate structures are also very important to understand. Even the Indian GAAP accounting system differs from U.S. GAAP, requiring reorientation and reconciliation. Including the cultural differences, time zone difference, and travel distance, running a successful venture in India is no simple feat and is impossible to run remotely over the long run, ultimately requiring a VC firm to have a local presence.