Mumbai: Venture capital (VC) firm Draper Fisher Jurvetson (DFJ) is finding business plans on its table here that are a far cry from the early-stage, technology start-ups it typically funds out of its Menlo Park headquarters in California, US. It is currently evaluating two companies—a jewellery company and a turbine machinery maker—for funding, and is also keen to invest in organic farming.
New opportunities: Managing director of Draper Fisher Jurvetson’s India arm Mohanjit Jolly. Hemant Mishra / Mint
Over the last few months, the firm says it has seen a surge in investment opportunities for VC firms in industrial and agricultural businesses.
In an economic downturn, VCs that traditionally invested in early- to mid-stage technology firms which were typically consumer-focused are now looking at more mature companies in unfamiliar sectors.
“Typically PE (private equity) deals such as manufacturing and engineering services companies are now coming to VCs,” says Sandeep Singhal, managing director, Nexus India Capital Advisors Pvt. Ltd. The Mumbai-based firm, which has invested in organic farming company Suminter India Organics Pvt. Ltd, says it will not rule out more such investment opportunities, despite its focus on early-stage ventures.
While US-headquartered venture firms such as Sequoia Capital, Matrix Partners and Mayfield Fund had been investing in growth companies in India in the past, the downturn is expected to increase PE-like behaviour among VC firms, both by sectors and stages they back.
This is reminiscent of the days following the dot-com bust of 2000-01, which saw VC firms such as ChrysCapital and ICICI Venture graduate to PE investments. Sequoia Capital expanded focus to include both early-stage and growth investments through dedicated funds.
Firms such as Norwest Venture Partners (NVP) and Matrix Partners are also looking to invest in publicly listed companies, known in the industry as private investment in public equity, or PIPE deals. NVP recently made its first such investment in mobile services company OnMobile Global Ltd, listed on the domestic stock exchanges, buying less than 5% stake for $15 million (Rs77.4 crore). The firm, which hired former Goldman Sachs executive Sohil Chand as managing director last year, plans to invest in more growth equity than early-stage deals this year.
PE turf: Nexus India managing director Sandeep Singhal. Abhijit Bhatlekar / Mint
Two factors are contributing to this shift. The first is that lowered valuations and bad market conditions are making companies sensitive to dilution. Promoters are now seeking smaller rounds of capital so they do not have to give away too much stake to investors. VCs say there has been a 40-50% reduction in the amount of money promoters are now looking to raise, compared with what they would have raised in a boom market. “We are seeing a lot of companies that have brought down their raise,” says Vikram Godse, managing director, Mayfield Fund. “Instead of raising, say, Rs200 crore for four years, promoters are choosing to raise how much they really need now.” The firm says it has seen an increase in deals in traditional sectors such as agriculture and ancillary businesses.
The other factor is that VC firms are looking to de-risk their portfolios with investments in companies that can show financial data on past performance and predictability of revenues. While later-stage deals may lead to lower returns, VCs are hoping for faster exits in return and lower risk. “There is definitely a sense of urgency on the part of VCs to show exits, as LPs (limited partners) are craving for cash right now,” says Mohanjit Jolly, managing director, DFJ India, “For us, there is a diversification push both internally and from LPs.” While it has added manufacturing and agri-businesses to its focus areas, the firm plans to stay away from sectors such as real estate, pharmaceuticals and traditional commodities businesses.
Not all VCs, however, are looking at such diversification. Bangalore-based IDG Ventures says it will continue to focus on early-stage ventures in areas such as mobile services and technology product firms. Says Sudheer Sethi, managing director, IDG Ventures: “We may do a few large deals to balance our fund, but we like doing early-stage deals and haven’t changed our strategy.”