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Venture funds shift attention to seed investments

Venture funds shift attention to seed investments
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First Published: Tue, Oct 25 2011. 01 03 AM IST

Updated: Tue, Oct 25 2011. 01 03 AM IST
Mumbai: Seed stage has become the new battle ground for investors. Relatively large venture capital investors are focussing their attention to small investments as at least seven new firms seek to build a business out of funding early-stage companies.
Competition in the space is intense, but deal-making activity has been robust. Seed-stage deals nearly tripled in the first 10 months of the year compared with the corresponding period of last year. Until 20 October, 24 seed-stage investments worth $12.6 million (around Rs 63 crore) took place, up from nine such deal worth $2.8 million in the same period the previous year, according to VCCEdge, which tracks venture capital and private equity transactions.
Seed investments refer to deals anywhere between $500,000 and $750,000 in startups, which are typically less than two years old.
It’s for the first time that big funds are diverting their attention to seed-stage investments.
“For big funds, it’s a bit of a spray and pray kind of an investment approach, where they write small cheques…..amounts that do not really matter to them much,” said Deepak Srinath, director of Bangalore-based boutique investment bank Viedea Capital Advisors.
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One winner out of these small investments can offer them stellar returns, covering all potential risks, he said.
Large investment funds in India such as Sequoia Capital India, Norwest Venture Partners India (NVP), Nexus Venture Partners and Draper Fisher Jurvetson India (DFJ) have started focusing strongly on their “seed” initiatives. Over the last one year, Sequoia has made at least nine such investments.
Helion Venture Partners, SAIF Partners and a few others incubate start-ups and continue to back them in their next rounds of funding.
NVP, Nexus and DFJ India have started their own seed capital programmes. Blume Venture Advisors has done more than a dozen deals even as it is still in the process of fund raising.
Prominent seed-stage deals include My First Cheque’s investment of an undisclosed sum in MeriCAR Workshops, which runs MeriCAR.com, India’s first dedicated car servicing portal.
Adepto Solutions Pvt. Ltd, Mumbai-based developer of the social commerce platform Trol.ly, raised $300,000 from Blume. Gurgaon-based Bright Lifecare Pvt Ltd, which runs India’s first e-health store healthkart.com, raised around $1 million from Sasha Mirachandani’s investment firm KAE Capital and Sequoia Capital.
MeriCAR plans to expand its network further across the country and service a larger base of car users. “It is not easy for yet-to-be validated business ideas to attract funding. I had to convince the investors to have faith in my and my business ,” said Rakesh Sidana, chief executive officer, MeriCAR.com.
The seven new investors that have made their debut deals this year are Nirvana Capital Advisors, Omnivore Capital, My First Cheque, KAE Capital, Hyderabad Angel Ventures, Blume Advisors and Seedfund II.
According to Mohanjit Jolly, managing director, DFJ India, seed investments have become crucial as valuations are on a steady rise even in the so-called Series A or first round of venture capital investments for companies that begin to show market traction.
“This interest is a function of fear and greed. Investors are afraid that they would miss (out) on a great deal if they do not enter early,” he said, adding that it also builds a pipeline of deals for later stages.
The dynamics of the VC industry are changing in India as well as in mature markets such as the US. In the US, large funds with deep pockets have now shifted their attention to start-ups after small funds, which reaped sizeable returns on VC investments, showed the way.
“Now, they want to be the ones to get in early,” Jolly said.
No casual approach
Investors say while more investments are being closed in the seed stage, it doesn’t indicate that they have a casual approach to start-ups in terms of due diligence or consideration of the risk-reward ratio.
Abhay Pandey, managing director of Sequoia Capital, said the space has evolved quite fast.
“We can’t wait for winners to emerge; better approach is to do these deals early,” added Pandey. “We are not as casual about these investments as the term ‘spray-and-pray’ denotes; we have a thesis on what companies, sectors, business models, and teams need to be backed.”
Investors say it is yet to be seen if the dedicated or relaxed investment approach will pan out well in the longer run.
“Such a strategy tends to be more successful at seed stage or at incubation, where it is the survival of the fittest,” said Niren Shah, managing director, NVP India.
However, seed deals are not an easy investment spot. Seed stage investing requires a very different focus and commitment as these companies are very small and at times merely a business idea.
“An investor needs patience and expertise of a different kind to make these investments work,” said Prashanth Prakash, partner, Accel Partners India, one of the seed-stage investors in the country. “Entrepreneurs are smart, they will choose funds that specialize in true seed-stage investing over others whose core early stage strategy is spray and pray”.
Experts say the number of managers in a fund can be a constraint for handling these investments. While having five-to-six companies is optimal under one partner, there could be more depending on the stage of investments.
“It’s only in the last two-three years that segmentation is becoming visible and hence even the VC firms’ strategy is changing,” said Sanjay Anandaram, an entrepreneur-turned-investor, who also mentors start-ups.
Deals India, published jointly by Mint, Dow Jones Newswires and The Wall Street Journal, is a one-stop destination for investment professionals following deal flow, deals news, private-equity and venture-capital activity in India.
Graphic by Sandeep Bhatnagar/Mint
deepti.c@livemint.com
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First Published: Tue, Oct 25 2011. 01 03 AM IST