In mid-September as global stock markets melted, a young Indian company was in the thick of fund-raising discussions with a venture capital, or VC, firm headquartered in the US. MCarbon Tech Innovation Pvt. Ltd was just a year old and operated in what was a crowded marketplace of mobile value-added services, or VAS, providers.
Strong fundamentals:(left) Vijay Shekhar Sharma, managing director, One97 Communication; and Kunal Sinha, founder and CEO, Rx HealthCare Magic. Ramesh Pathania and Hemant Mishra / Mint
The New Delhi start-up had initiated formal discussions with early-stage VC firm
Canaan Partners two months before and had just received a termsheet (a legal document outlining the terms of a business agreement), the first step towards closing a deal. “The mood was definitely negative and sombre, though it didn’t affect us directly, and people were asking us what would happen,” says mCarbon’s co-founder and director Rajesh Razdan.
Razdan’s company received an undisclosed first round of funding in January, but says the bar is much higher today than a year ago. MCarbon convinced investors of its viability by showing customer deals with at least four telecom vendors and continued progress in the four months between the termsheet and the actual closing of the deal. Razdan may have been lucky. “It is far more difficult to convince VCs now, they want to see more defensible action,” he says.
As the impact of the economic slowdown seeps across industries and capital is hit at the source, it is a sentiment venture capitalists are echoing. Firms active in the Indian VC circuit, such as Draper Fisher Jurvetson, or DFJ, Helion Venture Partners, Llc., Kleiner Perkins Caufield and Byers, or KPCB, and Sherpalo Ventures, Llc., have predicted fewer venture investments this year.
The data for the quarter gone by illustrates this. In the first three months this year, venture capitalists invested just $49.2 million (around Rs243 crore) in Indian companies, according to calculations made from Thomson Reuters data. Compared to the $116 million in the first three months of 2008, this is a decline of 58%.
The capital invested in a company on average has also dropped in the downturn. From $6.44 million in the first quarter of 2008, the average deal size fell to $3.5 million in this quarter. This is attributed to lowered valuations due to which companies will have to dilute far more stake now to raise the same capital they would have in a boom market. VCs also say companies are raising only what they need to tide them over in a downturn, rather than for the long term.