VCs nudged out of comfort zone as deals become rare

VCs nudged out of comfort zone as deals become rare
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First Published: Tue, Mar 24 2009. 12 30 AM IST

Survival bid: Norwest’s Niren Shah says investors are becoming more flexible to market changes. Hemant Mishra / Mint
Survival bid: Norwest’s Niren Shah says investors are becoming more flexible to market changes. Hemant Mishra / Mint
Updated: Tue, Mar 24 2009. 03 48 PM IST
Bangalore: Last week, Helion Venture Partners Llc. invested Rs20 crore in R&R Salons Pvt. Ltd, a Bangalore-based beauty services company which runs the YLG Salon and Spa chain. The announcement came weeks after a similar-sized deal the venture capital, or VC, firm signed with GETIT Infoservices (P) Ltd, a New Delhi-based publisher of phone directories and yellow pages.
Survival bid: Norwest’s Niren Shah says investors are becoming more flexible to market changes. Hemant Mishra / Mint
The pace at which Helion struck the deals was not new. What was new is that the transactions marked the entry of the VC firm into sectors—beauty and publication—that it never had a presence in.
There are others too striking what could be called first-of-its-kind deals for investors. The last three months have seen venture capitalists investing in companies outside sectors they have backed and at least seven such investments have taken place so far.
Some such deals this year include Norwest Venture Partners’ under 5% stake in OnMobile Global Ltd, a provider of value-added services for mobile phones, last week; Mumbai Angels’ investment in an English training institute; Accel India’s investment of $2.5 million (Rs12.6 crore) in Rx HealthCare Magic Pvt. Ltd, which runs a health care portal; Battery Ventures’ $1 million funding of High Mark Credit Information Services Pvt. Ltd, a credit information company; and VC Hunt Advisor Pvt. Ltd’s two deals including an investment of Rs1 crore in fashion retail chain Avisya and Rs5 crore in robotics firm Artintell Systems.
“Investors are becoming more flexible to market changes,” said Niren Shah, managing director, Norwest Venture Partners India. “I think people are finding that opportunities in India are not just limited to technology.”
Norwest, Shah said, is now looking for a lot more of investment opportunities in late stage, PIPE (short for private investment in public equity) and secondary deals. Also, “there are other sectors which have huge opportunities, be it hospitals or hotels, or infrastructure or banking and financial services or education”, he added.
Helion says its investments in YLG and GETIT are a part of its move to get into the consumer services sector. “YLG is our first play in the health and beauty services industry. We are very bullish about the consumer services sector. Our bias is towards services companies than product firms,” said Kanwaljit Singh, managing director, Helion. Healthy margins in consumer services—as much as 70%—is a sure attraction.
The move at venture capitalists to broaden their approach has been prompted by a decrease in investment opportunities, primarily over valuation issues.
Venture capitalists, who are sitting on cash raised in the last few years, are under some pressure to deploy capital. “Their limited partners are questioning them about investment plans, and there is some concern about drawn down money having to be returned back. As such, increasingly, more VC investors in India are taking a broader market view,” said Akil Hirani, managing partner of international corporate law firm Majmudar and Co.
Also, in India, a lot more generalization prevails when it comes to investment, unlike in the US, where there is significant specialization and stricter mandates from investors. For example, an early stage technology fund will not invest in late stage firms or in a non-technology company in the US.
Norwest, which has companies such as Adventity Global Services Pvt. Ltd, Sulekha.com and Yatra.com in its portfolio, took stake in a listed company for the first time in India this month, paying about $15 million for a under 5% stake in OnMobile.
Valuations in public space seem more attractive as compared with private space right now, said Sohil Chand, managing director, Norwest. “We will continue to look at both private and public companies which come our way, across sectors.” Norwest expects to make more such investments in secondary markets.
Though investing in varied sectors is good for companies which are looking for funding, how will venture capitalists bring expertise to the companies which fall out of their core area of expertise remains to be seen.
Norwest’s Shah insists expertise is not just about domain know-how or domain specialization skills. Venture capitalists help companies hire talents and get them connected with head hunting firms. “Help is also extended in financial management, business planning strategy; we open doors for them, be it through networks or potential clients,” he said.
Accel Partners brings outside expertise (using its global networks) to help with diligence on companies that fall out of its core information technology and related areas, said Subrata Mitra, partner.
Companies that have raised funds from investors, who have invested outside their core areas of expertise, meanwhile, say it’s more about their comfort level with the VC team than domain knowledge. “We never thought if Helion had experience in the segment. It was their openness and willingness to our business that made us comfortable,” said Rahul Bhalchandra, chief executive, YLG.
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First Published: Tue, Mar 24 2009. 12 30 AM IST