Mumbai / Bangalore: While 2010 is expected to be a recovery year for most businesses, the wait could be longer for venture capital (VC) firms.
With the US venture capital industry shrinking, investors have turned sceptical about VC firms in general—and India is no exception.
Early-stage businesses, the traditional parking lot for VC funds, are also struggling in India, despite the general robustness of the economy. This is also driving VCs away to growth capital deals, venture capitalists say.
“People are not excited about the VC industry anywhere and they are not excited about India also,” says Alok Mittal, managing director, Canaan Advisors Pvt. Ltd.
VC investment in India virtually halved from 154 deals worth $841 million (Rs3,927.5 crore now) in 2008 to 82 deals worth $444 million in 2009, according to Venture Intelligence, a research service focused on private equity (PE) and mergers and acquisitions.
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The exit period of VC firms has also got delayed by 12-18 months, stretching the holding period from four-six years to five-seven years, putting off new investors.
“The last time the VC industry in the US generated returns was in the early 2000s. So, clearly, investors are rethinking where to invest,” adds Mittal.
This will have an impact on India, where most VC firms are US-based and invest out of a global fund.
Rajesh Srivathsa, managing partner, Ojas Venture Partners, an early-stage fund based in Bangalore, says Indian companies will also face stiff competition.
“Indian investment opportunities come head-to-head with those in China or the US. Fund managers need to defend their opportunities better as only one firm can be funded. No one can say India tops in such comparisons,” he says.
Early-stage investment has already been declining as VCs look at growth capital deals.
In 2007-08, VC investment in early-stage deals was around $800 million, which slipped to just $250 million in 2008-09, according to Canaan’s Mittal.
Although there are around 300 PE and VC funds in India, only a handful of VCs invest actively.
According to Venture Intelligence, only five of them carried out more than three early-stage deals each in 2009—Accel India, Helion Venture Partners, Nexus Venture Partners, Matrix Partners and Aavishkaar Venture Management System.
“The (global) proportion between VC and PE deals is roughly 20:80. In India, the proportion for VCs is about 10% because PE wings are too large,” says Sarath Naru, managing partner, VentureEast Fund Advisors.
Sandeep Singhal of Nexus Venture Partners agrees. “What will be different is that suitcase VCs or tourist VCs that were coming in from the US to invest in India will considerably shrink. The US VCs, which used to come down to do series B (follow-on funding) in India, has definitely declined.”
Ashish Gupta, managing director, Helion Advisors Pvt. Ltd, adds that these opportunist investors are returning to their core competence areas.
US-based companies such as Battery Ventures, Sierra Ventures and Charles River, which did not have a direct presence in India and invested out of the US, have been inactive over the past year.
In August, Battery Ventures shelved plans to develop an investment team in India when its two general partners quit.
“There were too many fly-in, fly-out kind of players. (So) the shrinkage was expected,” says Naru.
“It should have happened and may happen again in 10 years. It is what I would call myopia of not only fund managers but limited partners also,” he adds.
Graphic by Ahmed Raza Khan / Mint