Investing in outsourcing

In the last of our features on India and outsourcing, we talk to a venture capital fund about the investment opportunities in the sector.
Helion Ventures is a venture capital fund with a focus on technology-driven businesses in India. We talk to Kanwaljit Singh, managing director, about the background of the fund and his views on the India opportunity.

What is HelionÆs size and who are your investors?
We are a $140 million 10-year fund and started investing in August 2006. We have reputed Ivy League endowments, foundations and family offices as our investors. We also have an investment, as a limited partner, from Sutter Hill Ventures.

What are your investment criteria?
We invest between $1 million and $10 million in ætechnology-powered businesses with India as a strategic contributionÆ. These are businesses that leverage technology but are not necessarily selling technology. We span the gamut from high-tech product businesses to services oriented businesses to businesses that leverage technology as a differentiator. India as a strategic focus is both as a market and as a provider for global solutions hence the outsourcing theme fits in.

What is your differentiating factor?
Our team has a combined pool of experience in entrepreneurship, technology, investments and global strategy. Our intent as a firm is to support our investee companies in areas such as strategy, leadership development and globalisation.

What is exciting about the opportunity to invest in outsourcing companies?
This is an industry where no one player dominates and it is not concentrated. Outsourcing is labour intensive so clients prefer a spread of vendors. As a company becomes larger in the space, smaller clients may fall out of their purview. Alternatively, larger clients may want to diversify to a larger number of service providers. Thus, it is our belief that there is no paradigm that there is no space for someone new to enter.

We also believe there is a lot more to outsourcing than entry level basic services such as commodotised call centres. For example, services related to domain (industry or sub-industry) specialists. A horizontal play could be a specialisation in certain functions, which cut across multiple domains but offer a value added service. A vertical play could be developing an understanding of a domain then adding value for example insurance and health care.

How is the move up the value chain to higher value-add outsourcing or knowledge work impacting investment opportunities?
As an investor we seek to identify businesses that will ultimately command the highest valuations. This could be because of premium realizations, higher margins, differentiation that creates an entry barrier, higher growth prospects or a combination of the above. But we have to balance this with the question of scalability. By definition, the highest value-added outsourcing businesses will be the most linked to human intervention.

There in lies the contradiction and perhaps the opportunity. The balance between these two is what I would define as an interesting investment thesis.

Does the future lie in the commodotised businesses or the knowledge services?
As an investor the future lies across the board! We ideally look for characteristics like total market opportunity thus a company that addresses a limited market size is less exciting then one that has a significantly larger market opportunity.

A small business with a very high growth rate and margin can still be a good investment thesis. The opportunity for such a business could be to get acquired for the access it provides to certain customers and an ability to target high-end customers like say WNS did when they bought knowledge analytics company Marketics earlier this year.

Can you discuss some of your investments in this space?
We seek out companies which can ôproductiseö some of these high-end services i.e. build a model which is scaleable, to become a larger player.

We invested last year in Gridstone Research, a company started by the erstwhile head of global sales at Infosys. Gridstone is a web-based content platform business like Thomson Financial. It analyses publicly listed companies on parameters beyond financials like operating metrics or client acquisition The firm then uses its Mumbai talent pool and patent-pending technology to put the analysis in pre-defined templates. The service is available as a subscription-service, priced per user per month.

In June we took a stake in an investment research outsourcing firm, Amba Research. Amba combines domain knowledge of the space with a proprietary training program to offer their clients ævirtual analysisÆ. Analysts are attached to a particular client on a long term basis and the client pays Amba on a per analyst per year basis.

In July we announced an investment in Mindworks Global Media. The firm provides editorial and design services to global media firms, utilising journalistic and design talent available in India. Mindworks CEO, Tony Joseph was editor of leading Indian weekly, Business World for eight years prior to co-founding Mindworks. Its clients include global newspapers and magazines - it uses technology to ensure clientÆs operations are offshored seamlessly.
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