Venture capital (VC) investments in the country are growing, driven by a new-found confidence among VC firms in early stage companies, but, on the flip side, valuations are on the rise as well. Early stage companies currently in the market for their second round of funding, dubbed Series-B investments in VC jargon, are, according to executives in the industry, valued at a 30% premium to similar businesses a year ago. Some go as high as 400%, according to an informal poll of venture capitalists here. Deals in this stage are typically in the $5-10 million (Rs19.65-39.3 crore) range. Most of the inflation has happened in the Internet and mobile sector, which continues to enjoy the most attention from VC firms.
Deals, however, are not yet seeing a slowdown because of the higher valuations. “We are not reaching a stage of panic or deal concern,” says Kanwaljit Singh, managing director, Helion Venture Partners Llc. While some investors say they are walking away from deals, companies with valuations considered premium still do manage to find investors.
According to informal industry estimates, venture capitalists have invested more than $500 million in the Indian market since January 2006, when the current phase of early stage investing got under way. But this is a fraction of the estimated $2 billion that has already been raised or is in the pipeline for investment here.
Most of this money is being driven by US-based investors, notably from Silicon Valley. Leading venture capitalists active in this market say that limited partners (institutions that invest in VC funds) are likely to wait for the bulk of this money to be deployed before allocating fresh funds. But with India’s early stage and start-up environment still nascent, deal-flow is restricted to a few sectors, notably Internet and mobile, consumer businesses and information technology-led outsourcing services.
Still, one venture capitalist’s over-priced valuation is another’s next portfolio firm, and the difference in how they assess the market and how badly they want to make an investment. Srini Vudayagiri, managing director, Lightspeed Advisory Services India Pvt. Ltd, says the potential growth of the Internet space leaves room for various companies and concepts. “What is important is the progress that has happened between Series A and Series B,” he says. “Have some of the risk factors been taken out?”
The concern centres around Series B partly because the business stage lends itself to inflation and partly because of India-specific conditions. A Series-B company is neither as risky as it was at the Series-A stage, nor does it have clear traction based on hard financial targets typical to a Series-C company. This interim stage makes valuations more of an art than a science.
That said, companies going for Series B are in high demand. Many VC firms (particularly new ones) are keen to invest because the risk is lower. New VC firms also are under greater pressure to close deals. In addition, venture capitalists who invested in Series A push up valuations since that would imply a profitable exit for them.
“You see the cycle all over. It is amazing how things repeat themselves,” says Sumir Chadha, managing director, Sequoia Capital India, referring to how events now are similar to those at the beginning of this decade. “We see crazy valuations in the Internet space, weak entrepreneurs, flimsy business plans, companies getting too much cash before they get to revenue. Just a lot of signs that there is going to be an impending blow-up.”
However, few venture capitalists expect a correction in the market. Overall, there is more concern about returns than the viability of the businesses. “They are genuinely sound companies—they have a distinct future,” says G.B. Prabhat, founder and CEO, Anantara Solutions Pvt. Ltd, which received $6.5 million in Series-A funding in May from a syndicate led by Helion.
“The question is only whether the value is right or not.”