Bangalore: Stage- and sector-focused venture capital (VC) funds could go from being the norm to a rarity in India. Looking at ways to diversify portfolios and minimize risks from being exposed to just a few sectors, investors are increasingly blurring investment specifications.
So much so that they intend to have a single hybrid or blended fund to invest in deals that could be in any stage or sector. This would give investors more flexibility to go where the action is.
VC investors across the globe have multiple funds focused on early, growth or late stages. These, in turn, could be specific to sectors or even nations and regions. Many VC firms entered India in 2005-06 as technology-focused, early-stage funds, hoping to ride the growth in the country’s information technology start-ups.
But now, with no exits in sight, a lack of differentiated deals in one sector and the growing impatience of limited partners, or LPs—the main investors in such funds—are prompting these funds to adopt a blended approach.
“If investors strike some late-stage deals and make some reasonable exits in shorter spans, it will reinforce the blended approach that is being adopted,” says Mohanjit Jolly, executive director, Draper Fisher Jurvetson India. “The idea is to see liquidity in three-four years, and it will come. My feel is that once we see some early-stage VC-backed companies giving exits, traditional VCs doing early stage will come back into force again.”
Positive note: Mohanjit Jolly of Draper Fisher Jurvetson India. The company is looking at growth-stage deals in India. Hemant Mishra / Mint
Draper Fisher Jurvetson (DFJ), primarily an early-stage investor, recently announced it would look at growth-stage deals in India in sectors such as microfinance, clean technology, healthcare, logistics and new media. The California-headquartered Canaan Partners, another VC firm focused on early-stage technology deals in India, announced in late November that it was open to early-to-mid-stage deals in microfinance, clean tech and healthcare.
“The idea is to mix, say, four-five early-stage deals with two growth-stage deals,” says managing director Alok Mittal. Nexus Venture Partners, another primarily early-stage fund, too, has changed its investment focus. On 9 December, it invested nearly $8 million (Rs37 crore) in mChek India Payment Systems Pvt. Ltd, and on 7 October, it invested $10 million in Eka Software Solutions Pvt. Ltd, touted to be one of the biggest VC deals in the country this year.
“Investors are realizing they are a little better off with later- stage deals,” says managing director Sandeep Singhal.
There are firms such as Walden International, which will have varying investment strategies for different geographies. For instance, it will look at very early-stage consumer Internet firms in Singapore, but would be both a venture and growth capital investor in India.
“In India, we would evolve as both venture and growth capital, given where the valuations are right now, which are a lot more reasonable,” says Rajesh Subramaniam, managing director and head at Walden’s India operations. “Even in China, our focus is in getting into expansion-stage capital because valuations have become reasonable.”
In the meantime, there are upcoming funds that have decided to be stage-agnostic on the bidding of their LPs.
“Risk-preference has become zero; there is a decline in patience for exits,” says Srini Vudayagiri, who is raising a fund. “Also, LPs are saying that they are not seeing enough opportunities in one sector. In such circumstances, India will increasingly see lesser pure-play stage-specific funds.”
Experts say a mix of early-, growth- and late-stage deals can lend balance to a portfolio and return better results in tough times such as now.
“People want to see results and exits. If you are investing in a mixed manner, one can see periodic exits and shorter horizons,” says Raja Sujith, partner, Majmudar and Co., a corporate law firm. “This will balance out the portfolio, which is a good thing at a time when people cannot predict what will happen next.”
Sujith, however, said this is not without negatives. “Availability of un-constricted capital (in terms of stage) would be good for companies seeking funds. The flip side, however, is that while stage-specific funds like those focused on early-stage do a lot for the fledgling firms they invest in, their attention may get diluted as they change focus to other stages.”
Shraddha Nair in Mumbai contributed to this story.