Bangalore: A new study comparing investment exits in early stage tech and non-tech firms quantifies the known—that tech start-ups fetch better returns. What it doesn’t do is settle the debate on which of these segments is a better bet.
Technology start-ups in India have earned their venture capital (VC) investors average returns of 5.6 times, shows a study by IDG Ventures, an early stage tech-focused VC firm. Non-tech start-ups fetched returns of 3.3 times.
IDG studied 114 reported sales of investments between 2004 and 2009, 45% of these being in tech firms.
India’s VC industry has shown a preference for tech firms but investors are beginning to pitch for non-tech start-ups as stable options. These investors say IDG’s study is premature as investments in non-tech firms are recent and have to evolve.
The concept of non-tech investments is relatively new not only in India but also in mature investment markets, said Kanwaljit Singh, managing director, Helion Venture Partners, which began focusing on consumer businesses in 2008 after spending two years in India investing in tech firms.
“We have seen large, good exits in non-tech as well, but these were more in the PE (private equity) side than VC, as early stage investments have been low in this segment. It will be a bit before we see non-tech early stage VC exits,” said Singh.
Helion made the shift to consumer businesses after it realized the huge potential of domestic consumer demand.
Prominent among its tech investments is MakeMyTrip Ltd. Its non-tech deals include HummingBird Suites and R&R Salon.
Focus on tech firms has been a core theme for VC firms in any geography. In the US, the VC industry has been driven by investments in technology firms such as Google Inc. and Oracle Corp. the past 25 years. The new fads there are clean-tech and, more recently, social media.
Traditional VC investors in India say they prefer tech start-ups as these firms can scale up fast on tight capital and may attract a global market for their offerings.
“Why we like tech is because the scale of outcome one can get is huge,” said Alok Mittal, managing director, Canaan Partners India, a tech-focused VC firm.
Mohanjit Jolly, managing director, Draper Fisher Jurvetson India, concurs that the prospect of returns on each dollar invested in tech start-ups is higher than in non-tech firms. “Tech companies have a better likelihood of giving non-linear returns than non-tech, which needs physical infrastructure, hence, more investment.”
Non-tech firms such as those in the hospitality, retail and education sectors require heavy investments and need time to scale up because of the nature of their businesses.
Several tech firms, though, have been able to find sizeable markets fast and companies such as MakeMyTrip and Mango Technologies Pvt. Ltd have offered exits through successful share sales or acquisitions.
According to IDG’s research, initial public offerings paved the way for 15 exits in the period studied; the balance came through mergers and acquisitions and the sale of investments to other VC firms, known in the industry as secondary sales.
“M&As gave the highest returns,” said T.C. Meenakshisundaram, founder and managing director of IDG Ventures.
Investors say the right time to compare the two segments will be after two-three years when several VC firms will reach the end of the first full cycle of investments.
“I would say tech and non-tech is neck-and-neck,” said Jolly. “The next two years will show that sizeable entities can be created in non-tech” as well.