With the 3G bids round the corner, venture capitalists (VCs) are lining up to exploit the vast potential of value added space or VAS in India.

The VCs say that once telecom operators are allowed extra spectrum, quality of service will be the prime differentiator. “3G bids will give a major boost to the VAS space. It will create more opportunities for entrepreneurs as the number of applications would increase,” said Saurabh Srivastava, president, India Venture Capital Association. At present, the market is estimated at around Rs 8,000 crore.

Harish Gandhi, executive director of Canaan Partners, said, “I expect the market to grow at around 40-45 per cent over the next three years.” He estimates that by 2012, the Indian VAS market could be worth Rs 25,000 crore.

Manik Arora, founder and managing director of IDG Ventures India, said that not all VAS verticals would be attractive to investors, but only a select few that throw open investment opportunities. “We are looking around for VAS companies who would provide gaming and mobile TV services to customers,” he said.

A major roadblock could be the faulty revenue sharing model between operators and VAS players. “There needs to be a clear business model. In 2006, there was a lot of excitement about the VAS space. However, the operators take away a very high percentage of revenues thereby making it (VAS) a low-margin business,” Arun Natarajan, founder and CEO of Venture Intelligence, said.

Agreeing with this, Srivastava said that at present the carriers or telecom players demand a major chunk of the revenues. “Around 70 per cent of revenues go to the carriers. That’s very high,” he added. In the west, it’s just the reverse, with telecom players pocketing only 25-30 per cent of the total revenues from VAS.

Romal Shetty head of Telecom at KPMG said, “VAS will take time to grow at high rates, at least two to three years, because initially all operators would want to use 3G only for voice purposes.” The rationale being that among the top operators, only 11-12 per cent of the revenues comes from VAS services. “In Japan and Korea, it’s as high 35-40 per cent, while in the US it’s about 25 per cent,” he added.

According to data compiled by Venture Intelligence, in March 2009, Norwest Venture Partners invested $15 million into Bangalore-based OnMobile.

This was the second round of funding for the company. In January 2008, the company raised $30 million. Similarly, in July 2008, Helion Ventures and Charles River Ventures invested $11 million into Mumbai-based Webaroo.

In 2008, the VAS industry received investments worth $121 million, almost twice as high as the previous year ($64 million).