Once the proof of concept is established, there is a financing option in the form of higher angels, who are typically high-networth individuals. And then there are venture capitalists. Debt and bridge financing are not available to Internet companies in India.

AHG: How do you go about identifying angel investors?
Amitava Guha-Roy: There is very strong network of these angels. Today any good idea will find resources. Then there are contacts or networks or intermediaries who help in identifying angels. I don't think any good idea would fail because it cannot find accessories.

Pravin Gandhi: If you are in the technology sector, you should go to an angel who has made money out of the same business. The network of these angels is pretty strong. Then there is this entrepreneur online group which brings people together. There are other informal forums such as Bombay Computer Club. There are intermediaries who have a list of potential angel investors. The broking community, which is trying to figure out where to put its money, has quite a few angel investors.

AHG: How about raising debt finance for funding dot-com operations?
RV: There are some innovative ways of structuring equity. There are performance-related debt convertibles. Technically speaking, debt is not advisable for an Internet startup company.

PG: Yes, debt is neither available nor advisable for Internet startups.

AG: Internet companies do not want to touch debt. Debt has an impact on cash flows, there is the interest cost and what’s more you do not have a revenue model.

PG: Unfortunately the Indian economy has been built on debt. And excess equity too is not good because you need to service it. However, it takes time to build revenues and you need to concentrate on building the business rather than paying interest. And then you want to take your dot-com company public and get its shares listed on the bourses. So, you need a strong equity base. It is a good idea to start with a healthy equity.

AHG: Should an Internet company be driven solely by equity?
PG: Yes. Who will give debt? There are no hard assets other than intellectual capital and a few fast-depreciating assets such as computers. Software is not a tangible asset qualifying as collateral.

AG: Moreover, Internet companies do not have cash flows. Debt is taken on the strength of hard assets or cash flows. Startups do not have cash flows, which can be securitized. So, sources of debt are few. And even if available, it is not advisable. For, you have to service it.

Sanjay Mehta: There is a place where this question has some relevance: where an angel investor does not know what to value, how to value and how much equity should he invest in. In such a situation, he can give an instrument proportion to equity.

AHG: As a venture capitalist, what do you look for in an Internet company before investing?
PG: The most important criterion is the quality of the team. The venture has to be solid. Finally, clarity of the business idea. A good team with a bad idea has a better chance of survival than a good idea with a bad team. For, the biggest challenge is execution. We examine whether the business has a clear focus, whether there is a revenue model that is sustainable and finally whether the concept gives the entrepreneur a sustainable advantage and a leadership position in the years to come.

AG: The team is the most critical factor. Scalability of the business is another important criterion.

SM: Entry barriers need to be examined before investing in an Internet startup. If there is a good idea which is going to be replicated by ten others, the business would find it difficult to sustain.

PG: The Internet company should have either a technologically-savvy idea or domain competence which cannot be easily replicated. Is Infosys more successful because it has a great team compared to DSQ? I believe so.

AHG: As a venture capitalist, how do you evaluate the strengths of an Internet team and an Internet idea?
PG: You should be a good judge of people, must know who will deliver and who will not, who is a lot of gas and who is substance.

RV: You look at the team in the Internet venture. A startup is like a high-speed sports car, one speed breaker and the car can go to pieces. Make sure an Internet venture has clear role definitions.

Idea is another important thing. People say the music industry is an US $45 million dollar industry and we are a part of that. But, what you must look at is this: how big is the target segment you are getting into. And then compare that segment with its off-line version. If you are targeting the Indian music market, you are targeting only a small percentage of that and its on-line version might be still smaller. In that case, the idea is not amenable to Internet. Since investors are taking large risks in Internet ventures, returns need to be commensurate.

AG: There are quite a few people around who are investing in Internet ventures not for earning profits but for making quick capital. If people are looking at Internet ventures as mere opportunities to exit through market cap, then I am sure the idea will not work.

PG: Tragically, exiting after making a quick buck out of valuation has happened not only here but in the US as well. It is natural for any retail investor to get tempted if the stockmarket is booming. For, this is a gamble. I feel such get-rich-quick-exit entrepreneurs will not be able to get out. For, they never built an enterprise.

AHG: How should Internet companies prepare themselves for better valuation?
SM: If you are going to do a good job out of your business, valuation will happen automatically. In this context, I must say that the Indiaworld deal has done tremendous damage. People have begun looking at Internet companies purely from the valuation perspective. Everybody wants to be a portal. You hear about B2B, B2C, telephony and wireless. If you are looking just at valuation, you will keep changing your operational area every few weeks. One week it would be B2C and another week it would be B2B. You have a business to run and so you should have a focus. If today B2C is your focus, no matter whatever happens to Maxtouch, you know you have a good idea and you will keep running it. At the end of the day, if it is a good business you are sure to get value.

RV: I think people are very conscious of the type of investors they go with. For, in today's world capital is a commodity. Getting a credit of one to two crore in today's market is not a difficult task for a good team. The choice is between getting it from a person who is just a moneybag and getting it from a person who brings in experience and adds value to the business. Even if it means lower valuation, many are preferring people who bring in value than money. Smart money is more valuable.

AG: Today, more and more people are turning concerned about who is investing. Venture capitalists get a standing because they are adding value and not because they have invested in the venture.

RV: There is a significant difference in the quality of the latest websites. Their models are well planned and they are better prepared with teams. Valuation or no valuation, there is definitely a big thrust in the Internet sector.

AHG: But, venture capitalists are more stringent evaluators of business?
RV: Well, they are. Most venture funds are experienced in running their business. Many venture fund experts are financial people who are on company boards. They have seen companies through their entire life cycles and thus they bring in a lot of experience.

AHG: Do you think that mergers and acquisitions can help Internet companies overcome their financing problems?
PG: There are clear warning signals from Nasdaq. It is time to look at similar companies and see whether the teams can be strengthened, whether customers of each other can be acquired and whether it is possible to create a value which is larger than what they are able to do within their own teams. So, the time has come to start looking at complementary companies that can be put together under one umbrella in a bid to create a higher value.

AG: Fragmentation should go away completely. For, now in a given space you have any number of players. M&A might be a necessity for survival.

RV: I think M&A will help Internet companies face their finance problems to a certain extent. Consider scalability. There are many who do not have the wherewithal to scale their businesses. If there are 90 portals on women, I dread to think how many of them actually have the ability to scale up beyond a certain level. At that stage entrepreneurs need to ask where do I go from here.

PG: I think if you are smart, you would do it voluntarily early in the day and not later when you would be forced to do it.

AHG: As a venture capitalist, what revenue model you are comfortable with while financing Internet startups?
PG: The Internet startup should be profitable. We have to evaluate Internet companies like we evaluate any other old economy companies. Whether the company is making profit, whether it has surplus cash and whether it is building value. In the Indian Internet scene, you can be a little more lenient in terms of which year they could start earning.

SM: There are two revenue models, the advertising model and the e-commerce model. And if it is an e-commerce model, one should begin looking at the gross profit model. Many Internet companies especially in the West and in the USA do not even have gross profits. This model is questionable. Today you are investing much more than what you are earning as gross profits, so you are not making any net profit. For earning more revenue, you have to keep spending more and more.

AG: I think eventually you need to have a revenue profit center and revenue stopline. How that can be done will obviously depend on your operations. I am not a believer in the advertising revenue model, not yet at least in India.

Look at B2B where you are doing a trade exchange. You don't have to pay for everything, which is linked. If you have a model, which is not only based on subscription but also on transaction fees, you can actually do the transaction off-line. So how are you going to make sure your revenue model is actually what you think it is?

PG: Everybody will agree that you will earn revenues if you have a business that is relevant to somebody who uses it. If I am a corporate on a B2B exchange and if I believe that I can save money from increasing my business by being a part of the B2B exchange, I will go there and happily pay my way through.

RV: At times, people have unfair expectations of profitability. Consider companies like Kellogs, which have gestation periods as long as 13 years. To assume that Internet companies would make profits within a couple of years is impractical. The gross margins should be better than what is typically enjoyed in the off-line industries. The growth which people look for in Internet company revenues is much higher than they expect from old economy companies.

Actually companies setting up the necessary infrastructure today without earning profits for three to four years should be given the benefit of doubt because they may be leaders after five to ten years.

SM: Eyeball-driven models depend on somebody monetising the eyeballs. Maybe your company does not have products or services to offer to be monetised. In that case, the only option is to allow somebody else to monetise them. There are strong models with eyeballs, which do not depend on advertising. You have a specific audience and a specific demography for an audience, which comes to your site. You can give a small space on your site to somebody for, say, US $ 150 million.

PG: If I cannot get eyeballs to my side, there is no way I am going to make any revenue. If I go to Homeindia.com and my experience is good, I will keep going there. So it is clear that eyeball stickiness is a must.

AG: Ultimately, you are talking to customers. The customer will only come to you if they see value propositions. If you can attract customers, then eyeballs, call it advertising or whatever you may, will follow automatically.

RV: If you start selling products lower than their cost on the Internet, you will definitely see values. If I go into the street and start selling free, I am sure there will be people running a kilometre long to get the products. I might offer free Internet services, but it is not sustainable in the long run. Tomorrow, when everybody gets into that model, what extra do I have to offer which others cannot. So, monetising eyeballs is actually a hallmark of quality.

AHG: Of late, Internet companies are issuing shares in lieu of cash payment for services. What do you think of this financing?
PG: Shares have become currency. They have a value. What everybody is doing in America is this: they do not have cash but they go ahead and acquire companies by just doing a stock swap.

RV: Basically, these service companies are playing the role of venture capitalists. They are putting down their own funds to buy equity from Internet companies and evaluating those Internet companies themselves. I think there is a need for someone who can evaluate Internet companies for them.

AG: Service companies want to be a part of the Internet economy. They are accepting Internet stocks as they feel it is helping to cement an association.

This practice also ensures that the service companies offer exemplary services so that the value of the Internet stock they hold moves up. Startups are both incapable and reluctant to settle their bills fully upfront. There is also some sort of lock-in.

AHG: But then the Internet company has taken up so much equity. It has to service that equity after all?
PG: These share allotments do not add up much. Just one or two per cent.

RV: You value your services as per your rate card and our valuation is done as per our rate card. So that is the internal understanding these people have.

SM: Servicing with equity is probably much easier than settling the full amount upfront.

AHG: There are many Internet companies such as Indiainfoline.com which are content-providers with strong business models but weak revenue models. When can these companies come out with their IPOs?
SM: Depends on the IPO. In India, no revenue means a question mark. If you are looking at a Nasdaq IPO, can you convince the underwriters there? If you are a good IPO material, what numbers do you have? It all depends on what value you want and what value your underwriters are ready to pay.

AHG: What is the attitude of financial institutions when it comes to financing dot-com companies?
RV: Smarter FIs such as ICICI have gone off the block and are pursuing e-commerce and other Internet opportunities. Other institutions are slow to get off the ground.

SM: It is a question of mindset. That has to change.

AG: It boils down to changing the mindset and nothing else.

RV: There a many private equity funds overseas who do not have the mindset but bank on promoter's track record. Many of them were found wanting when it came to financing Internet companies. For, they were geared to fund short-term needs. Quick decisions were needed, risks were greater and promoters were not bringing everything to the table.

Many venture capitalists were also found wanting when came to financing Internet companies.

AHG: Is there any scope for financial joint ventures in Internet companies?
RV: I was looking at ISP investments a couple of years ago. We did not have the numbers to justify a JV. With some companies having established themselves and with some valuations getting the benchmark, people are keen to have joint ventures

.PG: This has to happen.

AHG: What is the ideal time for launching an Internet IPO?
SM: Attaining critical mass is the issue. If a good premium is desired, one must have something to show. But then the primary market should also be bullish.

AHG: How does a Nasdaq listing help Internet companies find finance?
PG: Nasdaq is the most valuable currency akin to the dollar.

RV: Nasdaq fetches recognition. If one has an Internet model and is globally stable, you might as well acquire that currency.

AHG: Do Indian Internet companies realise this? What are the hurdles?
AG: Of course, Nasdaq listing is not something which you can decide on right tomorrow. It is not just the listing process which is stringent, the post-listing process is even more stringent. So, you need to beef up disclosure standards and have corporate governance in place.

RV: Before listing on Nasdaq, it is essential that you have some international revenues and some international recognition too. Satyam's acquisition of IndiaWorld did change the game. For, IndiaWorld had a lot of non-resident eyeballs.

Today, if I have only Indian subscribers and I decide to go to Nasdaq how much understanding will Nasdaq have about my idea. If you are just an Indian model, Nasdaq will not understand and give you the desired value for your company.

AHG: Finally, what should we do now to make more finance available for Internet companies?
AG: I do not think there is dearth of funds available today for the right idea and a good team.

PG: For dot-com companies, equity is a good model.