Mumbai: While the Indian equity markets melted 13.95% between April and June this year, the second quarter of 2008 was harsher on venture capital (VC) deals concluded in the country, even given the slow pace such transactions take.
Firms here invested about $80 million (Rs344 crore) in the quarter, according to disclosed investments culled from the Thomson Reuters database, about 31% less than the $116 million invested in the preceding quarter.
(A SLOW SUMMER) While in percentage terms, the performance was better than in 2007—in the first quarter of that year, $498 million of venture money was raised versus $132 million in the second, according to Dow Jones Venture Source—the sharp drop in the value was unexpected.
One of the reasons for this decline, said an industry insider, is worries related to inflation in India, which at 11.63% currently is at a 13-year high. Such levels of acclerating prices and its impact on household spending could affect consumer facing businesses (such as retail or related sectors) and has VC firms wary, said the Bangalore-based executive with a VC firm who did not want either himself or his firm to be identified.
And, as investments slow, exits through initial public offers (IPO), the preferred route for VCs, will likely become difficult, say investors. “Late last year, we expected at least some digital companies to go public in 2008, but VC-backed IPOs will take a back seat,” says Alok Mittal, managing director, Canaan Partners.
On the investing side, however, deals are expected to pick up. Given the overall market slowdown, VCs had expected a correction in valuations, especially in later-stage deals. But that is yet to happen. “It will take at least another three months, but we are hopeful,” says R. Ramaraj, senior adviser, Sequoia Capital India.
The Bangalore-based firm, along with Mayfield Fund and Silicon Valley Bank, funded a $25.8 million growth round in Genesis Colours Pvt. Ltd, the company that owns designer labels such as Satya Paul and Samsaara—the largest deal of the quarter.
Apart from this exception, most companies funded were in the digital media and technology sectors. The partnership of Kleiner Perkins Caufield and Byers and Sherpalo Ventures, Llc. struck the only two VC deals in the quarter, both in the mobile space. It put down $7.1 million in first round funding in mobile advertising firm mKhoj Solutions Pvt. Ltd, and participated in a $9 million follow-on round in mobile payment start-up Paymate India Pvt. Ltd along with lead investor Mayfield Fund.
Seed investing (before even the first round of VC funding) remained steady in the quarter, with at least seven companies getting investments from angel funds, networks or individuals. These included Bangalore’s Textual Analytics Solutions Pvt. Ltd that was funded by Mumbai Angels, and Fin-e-ssential Infotech India Ltd (brand name Cnergyis) backed by Erasmic Venture Partners and Mumbai Angels.
Corporate VC too saw some activity between April and June: Qualcomm Ventures, the investing arm of telecom company Qualcomm Inc., made its first investment in this market in Tessolve Services Pvt. Ltd. Internet company Rediff.com India Ltd funded short message service (SMS) blogging company Vakow Technologies Pvt. Ltd and Intel Capital invested $2.5 million in education venture Vriti Infocomm Pvt. Ltd.
In an unusual move for a company its size (2007-08 revenues of Rs570.21 crore and net profit of Rs39.4 crore), Sasken Communication Technologies Ltd turned limited partner in a US-based fund. It invested $1.4 million in early-stage technology fund Omni Capital.
Paradoxically, fund-raising picked up in the quarter. Lightspeed Venture Partners, which invests in India out of a global corpus, raised its eighth fund of $800 million, part of which it will invest here. Inventus Partners, a fund promoted by well-known angel investor and founder of The Indus Entrepreneurs group Kanwal Rekhi, closed its $125 million early-stage fund for Indian and Indo-US start-ups. Battery Ventures set up its India office, appointing Gautam Patel to manage operations.