Bangalore: In the face of a global meltdown, some venture capital firms are planning to shift from early stage start-ups to backing companies that have been around for some years and need capital to push growth.
Seeking non-tech investments: Srini Vudayagiri, Lightspeed Advisory. Ashesh Shah / Mint
“There may happen a shift away from earlier stage investing to later stage safer investments simply because of shifting risk profiles,” says Mohanjit Jolly, executive director, Draper Fisher Jurvetson India Advisory Services Pvt. Ltd (DFJ). The firm, which started as a pure early stage technology focused fund in India, has now decided to take decisions on a case-to-case basis.
This would be a repetition of what happened between 1999 and 2001, when the fortunes of dot-com firms, whose basis of valuation was eyeballs rather than revenues, nosedived and several Indian investors such as ICICI Venture and ChrysCapital (then Chrysalis Capital) moved away from funding early stage companies.
Mumbai-based Matrix Partners India says the stage shift will be visible in the number of deals in the near future. “There will be a decrease in the number of deals in early stage, while the deal flow in growth investment is actually improving,” says co-founder and managing director Rishi Navani, adding that as risk aversion is rampant currently, growth equity will appear safer.
Growth equity seems safer: Rishi Navani, Matrix Partners India. Ashesh Shah / Mint
Matrix began with a $150 million (Rs721.5 crore today) India fund focused on early stage investing. Last year, it raised an additional $300 million to invest in growth equity deals as well. So far, it has made two growth investments—Murjani Group, a luxury retailer, and Tree House Education and Accessories Pvt. Ltd, a Mumbai-based preschool chain. The company has also made five-six early stage investments in firms that include Quickr India, Itz Cash and Yo! China.
Matching the drop in risk, growth stage investments come with lower returns, but venture capital firms seem comfortable with that. The liquidity horizon for a seed stage company is 7-10 years, while a growth stage business provides a shorter exit period, generally about three-five years.
DFJ’s Jolly says investors will be willing to take a reduced exit value of four-five times of their investments in growth stage firms compared with as much as 10 times for early stage companies because there is more uncertainty around exits for the latter.
More emphasis will now be given to profitability and cash flow of a company rather than its revenue growth, says K.P. Balaraj, managing director, Sequoia Capital India. The venture capital firm is now looking for late stage investment opportunities in real estate and infrastructure as entrepreneur valuations have come down.
Data from a research firm tracking deals confirms the trend. Provisional figures from Venture Intelligence shows $9.7 billion has come into India by way of private equity and venture capital investments until the end of September, compared with $9.5 billion a year ago.
“Venture capitalists have been very active in this market. Their total share of investments going up from 25% over the whole of last year to 35-40% this year so far,” Arun Natarajan, chief executive of Venture Intelligence said. “This is because many of them have also been doing growth type of deals, rather than just focusing on early stage funding.”
Investors, who fund both early stage and mid-stage companies, will also try to diversify their portfolio and make it an equal mix of both risky and not-so-risky investments.
“Some venture capital firms may stop doing early stage investment and do only mid- stage funding. Others, at this point, would look at having a portfolio of about 50:50 for risky and non-risky investments,” predicts Lightspeed Advisory Services India Pvt. Ltd’s managing director Srini Vudayagiri. Lightspeed, whose portfolio till date has been primarily around technology, is now scouting for non-tech investments, as are Canaan Partners and DFJ.
Still, diversifying into new sectors and stages may not be easy for funds that have a smaller corpus and have until now focused on early stage investments.
Harish Gandhi, executive director, Canaan Partners, says his fund cannot diversify into new sectors at the moment as they have a small corpus and getting into a new sector could be more riskier due to a lack of expertise in new areas.
Namitha Jagadeesh and Sanat Vallikappen contributed to this story.