This year is turning out to be quite the year for Mohit Dubey. The 32-year-old internet entrepreneur has finished the first round venture capital (VC) funding for his auto classified portal Carwale.com and now expects his business to turn cash positive by July.
Last year was not so lucky. Half a dozen VC firms, all wary of investing in a business with no established revenues, had turned Dubey down.
But as 2006 drew to a close, the far-reaching Indian consumer boom was staring investors in the eye.
There were over a million transactions in the used car segment that Carwale.com operates in, and with 10,000 cars listed from across 200 Indian cities, the portal was clearly riding a wave. A fact that the investment team at Seedfund, an early stage VC fund, caught on to quickly.
“The rising confidence of the Indian consumer can no longer be ignored,” said Bharati Jacob, one of the fund’s founding partners.
In December, Seedfund picked up a 30% stake in Carwale.com for less than Rs2 crore, signalling the growing availability of capital for start-ups just off the drawing board.
Venture capitalists are keeping their eye on the growing consumer confidence stemming from an Indian economy expanding at 8% for three years running and record credit growth.
As a result, transaction-oriented businesses such as travel services, matrimony, jobs, information listings, media, entertainment or community models ,which encompass social networking as well as applications for mobile phones, are turning out to be hot favourites.
India is today home to 30 million internet users, a seven-fold rise from seven years ago, and 150 million mobile phone customers, a user-base that has grown 25 times since, says Avnish Bajaj, managing director, Matrix Partners India, an investment fund focused on consumer services.
“These are sound reasons for investors to be confident,” said the former founder-chief executive of Baazee.com, an Indian online flea market acquired by Ebay.
Some of the businesses that have raised seed capital include Picsquare, an online digital photo service that received Rs 38 lakh from three undisclosed tech entrepreneurs; Madhouse Media, a DVD rental company, which raised Rs1.05 crore from the New Delhi-based Band of Angels; and jigrahak, a mobile payments service that saw an infusion of upto Rs11 crore by Helion Ventures.
Among others beginning to focus on early stage funding are: Erasmic Consulting, Linus Capital, Clearstone Venture, New Enterprise Associates, Sequoia Capital, Sherpalo, Norwest Venture, and even Silicon Valley’s venerable Kleiner Perkins Caufield Byers .
From the dotcom bust of the late nineties until last year, say industry insiders, the only way to walk into a venture capitalist’s office was to present a profit-making business with an investment need of over Rs25 crore.
A $150-million (equivalent to Rs 663 crore) fund, for instance, would prefer to invest $5-10 million each in a small set of companies that it can manage rather than spreading itself thin over, say, 100 start-ups.
Only profit making companies with a three to four year track record would need investments that size, says Deep Kalra, founder-CEO of India’s largest travel portal MakeMyTrip.com, making access to seed capital difficult for new entrepreneurs.
What has changed today is the entry of investors, some of them veteran backers and businessmen, with smaller appetites.
A ‘fund of funds’ approach is being tried out in Seedfund, a fund with a corpus of Rs65 crore. Formed in late 2006 with investments from a group of established investors including Sierra Ventures, Reliance Capital, and Mayfield Ventures, Seedfund invests small amounts from Rs1.25 crore to Rs5 crore in early stage start-ups that would not get on the radar of the average VC firm.
The six-month old Band of Angels in Delhi brings together successful first generation entrepreneurs interested in investing in early stage start-ups, has built up a portfolio of five start-up investments.
“We aim to typically invest between Rs3.5 to Rs4 crore to help get ideas off the ground,” says Saurabh Srivastava, a Band of Angels investor who has led investments in intellectual property rights consultancy firm Sanshadow Consultants, hospitality start-up Quila, and KnowCross, a hotel management software firm.
With over 40 members, the fund has the time, and experience to invest in and manage more start-ups.
Apart from helping ideas get off the ground, early stage investors also help in drawing in new rounds of funding for start-ups.