A Typhoon Of Indian Venture Capital?

Successful emigres are paving the way for new tech companies

In Silicon Valley, he is just one of countless technology entrepreneurs who have hit it big. But in India, Kanwal Rekhi is a near-celebrity. When he and a group of other Indian-American tycoons spoke at an informal venture-capital seminar in Bangalore in December, for example, they were mobbed by aspiring software entrepreneurs. They saw 500 business plans that day. "I felt like a movie star," Rekhi jokes.

The incident says a lot about the changes percolating in India's long-repressed business scene. Frustrated by poor opportunities in their homeland, men such as Rekhi, who made his first big killing by founding software maker Excellan and selling it to Novell Inc. in 1989 for $250 million, have long deployed their money and best ideas in the U.S. Other U.S. successes include Cirrus Logic founder Suhas S. Patil, Exodus Communications founder K.B. Chandrasekhar, and Sabeer Bhatia, who sold e-mail service Hotmail to Microsoft for $750 million. Like Rekhi, these tycoons also helped launch dozens of startups as angel investors in the Valley's tight-knit Indian community.

But now, their brains and their money are in demand in India, which is spawning global-minded startups of its own. Successful expatriates are flocking back to help. A group of Valley veterans, including Rekhi, Chandrasekhar, and Bhatia, have joined forces to raise venture capital for Indian companies. They also are lobbying the government to revamp telecom policies and archaic laws that make it hard for tech startups to raise money. The group's goal is a venture-capital industry capable of generating up to $3 billion a year. "We've been hammering away to get a Silicon Valley environment so that Indians don't leave the country," says Chandrasekhar.

The Valley gang is getting a warm welcome from India's government, which now views info technology as a driver of growth. Over 10 days in January, the group jawboned bureaucrats and politicians in five cities. They also met with Prime Minister Atal Bihari Vajpayee, who backed their proposals and may implement some when the government unveils its new budget on Feb. 28. The proposals would eliminate red tape limiting investors' ability to buy and sell stakes in startups. They also would make the Securities & Exchange Board of India the sole regulator of venture funds, let insurance firms and pension systems invest in them, and give three-year tax breaks for financing startups.

"BIG OPPORTUNITY." There's plenty of demand for money. The number of tech startups is expected to double this year, to around 1,000. But few Indian banks lend to new software or Net companies because they lack physical assets for collateral. And because of onerous investment rules, only $500 million in venture capital has gone into startups since 1995. Reforms could unleash a torrent of money. Venture funds holding $1 billion already are "actively evaluating proposals," says Bombay investment banker S. Sriniwasan. He figures that sum could double in six months.

Multinationals like Intel Corp., which has stakes in 10 startups, are already active. But a takeoff isn't expected until major U.S. funds arrive. That's where rich expats come in. Besides touring India, Rekhi and his friends organize U.S. conferences on investing in India. They've also pooled $250,000 to pay for U.S. visits by Indian government, central bank, and regulatory officials.

The campaign is working. San Francisco venture capitalist David Blumberg, who joined the January tour, thinks India holds more promise than Israel, where he has invested for 18 years. "India represents a big, big opportunity in the Internet space," he says. If the gates open, the investors could come thundering in.

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