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May 31, 2000
The Rediff Business Special/M D Riti
Second Home, Alone & Alert: Dollar don loves life and business in India
When media baron Rupert Murdoch visited Bangalore in April, he was astonished to find in the city wealthy American investment banker Norman Prouty. "Hey Norman, what are you doing here and why haven't I been seeing you on the New York circuit?" he asked.
Prouty recalls the meeting with joy these days. "At first, he (Murdoch) thought I was visiting here, like him," says Prouty, grinning. Murdoch discovered, over a leisurely dinner with his old friend, that Prouty not only lived in Bangalore, but was actually investing all his personal savings (millions of US dollars) and those of several rich Americans in business in India's infotech capital. Murdoch promptly decided he too wanted a piece of the Great Indian Infotech Pie. The immediate beneficiary was a Bangalore-based start-up dot-com that publishes Indian city guides on the Net.
American businessmen knew Prouty when he was in New York working as a senior global credit officer at Citibank, and later as a general partner of venture capital firm Lazard Freres. They now wonder why he has moved to Karnataka, leaving behind a cushy life in the US.
Is India such a hot investment destination that he has to trade in his Bentley for the second-hand Contessa for use in Bangalore? "I just decided I wanted to start investing my own money as I liked," says Prouty candidly. "And since I was familiar with the global market, having dealt with global investment for decades, it was very simple for me to zero in on India. My other option was China, but I thought that India offered a more friendly business climate for an American investor. So here I am."
He did not come to India with just his money, though he admits he is a major investor in India Capital Fund (Mauritius) Limited, the venture capital fund that is managed by Prouty's company ICF Ventures Private Limited. Prouty brought with him billions of dollars belonging to three kinds of US (institutional) investors: insurance and pension funds, venture capital funds and a whole range of individual investors who are amongst America's most wealthy, including the chief executives of big companies and banks. However, he is unwilling to reveal their names or identities.
Weren't these people wary of investing in the unfamiliar Indian businesses? "They really invested in me and my business sense," says Prouty, who himself knew next to nothing about the living conditions or culture in India before he moved to Bangalore three years ago. "They were very sceptical about India and its problems."
So he began by taking on an Indian partner, Vijay Angadi, a founding member of TDICI, India's first venture capital firm. Now, they have a third member on board, to wit, Amit Kulkarni, who had stints in the IT industry, including one at Hewlett Packard. Kulkarni later started his own firm before joining ICF Ventures as vice-president.
"Knowing how complex the markets in India are, I realised the importance of having strong local partners," says Prouty who organised more than $ 200 billion worth of mergers and acquisitions for Lazard and Citibank. "Citibank too was the first overseas bank to make heavy use of local people, and integrate them into the management system. Now, the president of Citibank is an Indian too. I think the combination of talents that we put together at ICF Ventures with Vijay, Amit and me, gives our business a global perspective. That is what Indian entrepreneurs need."
Indian entrepreneurs in the US, he says, are a tremendous source of funds and business acumen. About 40 per cent of the companies going in for an IPO (Initial Public Offering) in Silicon Valley are run by Indian entrepreneurs. "So I thought it is worthwhile to try and tap the tremendous resource right at its source, by bringing venture funding and business acumen from the US to India. India has the same people as in the US, but India only accounts for one per cent of the global software market.
"I think it's just that India has been isolated from the US and European markets. When Indian businessmen emigrated to these countries, they quickly learnt the law of the land and understood how business is conducted, and then they were able to design software and other products to meet the needs of those markets.
"India's isolation has prevented it from coming up the value chain, and kept it at the level of working on Y2K and commodity type of work.
"I've found Indians to be very skilled and creative: they just need to understand what needs to be done to reach overseas markets. We see ourselves as providing that bridge between companies and skilled people here and markets in the US and elsewhere."
Interestingly, even as Prouty knocks out this low-end software service work ("commodity type"), he adds that ICF Ventures does like the service model in the companies it funds because this brings in quick and substantial returns.
However, Prouty says they will invest in companies that are willing to go beyond offering services and develop their own intellectual property in terms of software. "We hope that they will develop ideas and solutions of their own, even as they work on the day-to-day problem-solving, which is what the IT service industry does," he says.
ICF Ventures now describes itself as a management group of three people. They have a core fund of Rs 750 million, but say that they can tap investment of any size and scale. ICF Ventures also has the capability of taking investment decisions in just two days as they are taken in Bangalore -- they do noy have to consult their investors or anyone else.
"Our model is basically that of the Silicon Valley VC firms which believe in active partnerships with technology companies," says Prouty. "They get their money from successful investment bankers and individuals with high net worth, who have made a lot of money and want VC firms to invest it for them with high returns." Adds Angadi : "We also have sophisticated institutional funds investing with us."
However, the major benefit that ICF Ventures professes to bring to its portfolio companies is its tremendous network of contacts. "There is probably not a single Fortune 200 company around that one of our investors is not involved with or at least knowing the CEO of," says Prouty. "Many of the investors are very interested in what is happening in India. We are under no obligation to go to them, but they are ever willing to help any of our portfolio companies."
Prouty discerns a tremendous evolution and growth in the VC scene since he first came to India three years ago. "Indian businessmen have become much more aware of the positive role that VCs play," he says. "In the old days, if you wanted to expand your business, you went to a large family here who would give you the money, and take an interest in your company. And once they came in, they were there forever. The VCs have even more money than the families do, but we are pure financial investors with no second agenda, and have to leave quickly.
"The Indian stock market is basically very sound. Another good reason for being an investor in India as opposed to some other country is that you have a very strong capital market here.
"In a way, the VC is a very country-friendly and politically correct type of model for India. Our investments will get recycled back into the local market. The foreign investors here are just short term investors helping a company to get onto its feet before they hand it over to local investors in the form of an IPO. The companies end up being owned by Indian investors."
Although Prouty moved to India three years ago, the firm started financing firms only from last year. Unlike other VC firms, they are reluctant to reveal the names of companies in their portfolio. "We would rather the firms got publicity, not us: we are just incidental," says Prouty.
They will remain on the board of an investee company for three to five years, not more. Just how successful Prouty's investment decisions really are, will probably be seen only after two or three years. They are yet to start pulling out of the firms they have invested in.
Among the companies ICF Ventures has funded are: Linc Software Services (stake = 24 per cent), which specialises in insurance and banking software; MatexNet (49.5 per cent), a business-to-business portal; and Silicon Automation Systems, an IT software firm in Bangalore.
They also have a strong regional focus, and only deal with companies in southern and western India. "We need to be very involved with these companies both before and after we fund them," says Angadi. "We spend a lot of time in our portfolio companies, drawing up road maps for the companies, bringing in second round of strategic investments, filling key management positions, developing housekeeping like auditing procedures. We cannot do that all over India. The system we have adopted is the one used by Silicon Valley VC firms, which invest in firms that are within an hour's car drive or aeroplane ride from their own head offices."
Prouty says ICF does not take over a company and run it for the duration of its involvement. "We do not want to get involved in the day-to-day running of the company," says Angadi. "But if we bring in a lot of money, there is no way we can just hand over the cash and go away.
"For instane, we brought Rs 550 million to a company. There was no way its owner could have brought in that kind of money. Yes, we admit that its pressure money, and it's no picnic for the recipient, but that's the price he pays for it. If he cannot take the pressure, he should not accept money from an outsider. The moment someone else invests in your company, whether it's 20 per cent or 40 per cent, it ceases to be solely your company."
Prouty is confident about his judgement and evaluations, and is all set to launch another new fund by the end of the year, probably with help from a similar pool of American investors. "India has actually more than lived up to our expectations of it," says Prouty.
Although it was the business potential that pulled Prouty to India, other facets of life in India have gripped him. He intends to get involved with the Indian community through "selective philanthropy". Prouty says, "I am no longer able to consider buying myself a new car when I can see just what kind of difference that money would make to an orphanage."
Prouty has reconciled himself to the fact that, in order to remain committed to the cause, he has live in India alone, away from his wife Allison and nine-year-old daughter Annabel in the US.
Initially, they did move to India along with him, but his wife found that she could not work as a lawyer from Bangalore, so they went back after a while. She is now trying to work out a connection with a leading legal firm in Bangalore, so as to be able to spend more time in this country. They keep in touch by email every day and meet several times a year.
Meanwhile, Prouty, who could probably have retired comfortably to a life of comfort in the US, is all set instead to burn up the investment tracks in India over the next five years, and possibly return to the US richer than when he left it in 1997. "I was not in the New York circuit all these days because I was busy making money in India," he would perhaps tell Murdoch one day.
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