Mumbai: Reflecting the current economic slowdown, venture capital (VC) firms invested just $49.2 million (around Rs245 crore) in 14 companies in the three months to 31 March, contracting nearly 58% from the $116 million invested a year ago, calculations made from Thomson Reuters data show.
Reflecting slowdown: Harish Gandhi (left), executive director, Canaan Partners, and Suvir Sujan, managing director, Nexus India Capital. Valuations of venture capital deals have dipped over the last few months. Photos by Hemant Mishra and Abhijit Bhatlekar / Mint
All new companies took a hit when it came to deals. However, early-stage companies accounted for a majority of deals in the January-March period. At the beginning of the year, VC firms had predicted a slowing of deals, citing the welfare of existing portfolio companies as their biggest concern for 2009.
In 2008, venture firms are estimated to have invested $740 million in Indian companies, according to a report by Venture Intelligence, a Chennai-based deal tracker. If investment in 2009 continues at the pace set by the first quarter, then Indian companies are likely to see less than one-third the amount invested in the previous year.
Over the last few months, VCs say, valuations have dipped, particularly for companies raising second and third rounds of financing, even though the number of deals remained mostly unchanged across stages. In the first three months of the current year, the average size of a deal, for instance, fell to $3.5 million, nearly halved from some $6.44 million averaged in the first three months of 2008, and compared with the $4.5 million in first quarter of 2007.
“The VC appetite has gone down for companies with futuristic products or services that are nice to have rather than a must-have,” says Harish Gandhi, executive director, Canaan Partners. The firm invested an undisclosed first round in Delhi-based mobile network services company mCarbon Tech Innovation Pvt. Ltd.
Other companies that received venture funding for the first time include Gurgaon-based ValueFirst Messaging Pvt. Ltd, funded by New Enterprise Associates (India) Pvt. Ltd, Bangalore-based beauty salon chain R&R Salons Pvt. Ltd (operating under the brand YLG), funded by Helion Venture Partners, and New Delhi-based recruitment training company Global Talent Track Pvt. Ltd, funded by Intel Capital and Helion Venture Partners. The $12 million received by Bangalore- and San Jose, California-based Si2 Microsystems Ltd from Jafco Asia and Ventureast was the largest venture deal during this period.
While VC firms intend to broaden sector focus in the coming days, the erstwhile favourite technology and tech-enabled services still remained the areas of highest investments. Mobile value-added services, the sector to receive the maximum venture funding here over the last three years, saw three deals this quarter—mCarbon, ValueFirst and One97 Communications Ltd, backed by Intel Capital partnering Silicon Valley Bank.
While venture firms intend to broaden sector focus in the coming days, industries that are capital intensive, or directly affected by the slowdown, have fallen out of favour with VCs. “Broadly speaking, we will stay away from sectors tied to economy and execution, such as retail stores, which are not easy to scale,” says Suvir Sujan, managing director, Nexus India Capital.
The quarter gone by also saw the beginning of mergers and acquisitions activity among venture-funded companies.
In a cash-starved market, stock-swap deals involving exchange of equity came to the fore. Chandigarh-based mobile voice services company Altruist Technologies Pvt. Ltd acquired Mumbai-based mobile value-added services provider Mobile2Win India Pvt. Ltd in one such deal. Mobile2Win had received multiple rounds of funding from investors such as Nexus India Capital, Norwest Venture Partners, Softbank China and Silicon Valley Bank earlier.
Social networking site Apnacircle Infotech Pvt. Ltd, backed by Sabeer Bhatia, the founder of Hotmail.com, was acquired similarly by French site Viadeo SA.