Mumbai: Early-stage transactions rose to a three-year high in 2012 on the back of increasing angel and seed deals, despite weak investment sentiment.
In fact, angels and seed funds emerged as the key backers of early-stage companies in 2012 as venture capital investors directed their attention to transactions valued larger than their typical
sweet spot of $2 million to $4 million.
sweet spot of $2 million to $4 million.
There have been 156 angel and seed investments worth $66 million this year so far, compared with 78 such deals worth $24 million in 2011 and 32 deals worth $14 million in 2010, according to estimates by VCCEdge, an investment tracker.
Seed investments refer to deals of $500,000 and $750,000 in start-ups that are less than two years old. Angel investors, also known as angels, are people—CXOs, businessmen and wealthy individuals—who invest their own money—mostly between Rs.20 lakh and Rs.1 crore—in firms that are often nothing more than business ideas.
As far as venture capital deals are concerned, there have been 165 deals worth $856 million compared with 202 deals worth about $1 billion in 2011 and 141 transactions of $699 million in 2010.
“Overall, 2012 was a non-descript year. The sentiment changed, at least for large deals. There was hyper activity in the angel to pre-seed stage,” said Prashanth Prakash, partner, Accel Partners India, an early seed investor.
Accel Partners is the top VC investor in 2012, making 15 new investments. It has backed firms like Flipkart.com and Bigtree Entertainment Pvt Ltd, which runs online ticket company BookMyShow.com.
An interesting feature of 2012 has been entrepreneurial ecosystem beginning to take a firm shape. Clearly demarcated investments and mentoring stages emerged for the first time with incubators, accelerators, angel investors and networks, seed funds, early stage funds and venture capital funds.
Besides, a majority of angel and seed funds established operations over the past two years and have already become a noticeable source of funding for start-ups. Experts see the emergence of these investors as a critical step for entrepreneurs as only 10% of start-ups manage to survive and often die a premature death because of lack of capital.
“We will continue to see strengthening of these segmentations. There will be more accelerators in India; there is substantial interest from global accelerators and well-experienced senior executives to start such initiatives here,” said Sasha Mirchandani, managing partner at Kae Capital, which has done 12 deals this year.
The average VC investment ticket size was $7 million this year, higher than $6 million seen in 2011 and $5 million in 2010. The average angel and seed funding ticket doubled to $1.16 million, compared with $0.52 million in 2011 and $0.70 million in 2010.
Experts say while deal volume will continue to grow in 2013, angel and seed funding may taper off a bit. There is a paucity of capital at the series A stage and if follow-on funding doesn’t happen, it will impact angel and seed funding, said Accel’s Prakash. Series A stage refers to up to $2 million funding.
“A lot of angel capital has been invested and if desired returns are not generated, some of these investors may shy away from investing. Adjustments of this kind could be seen next year,” said Niren Shah, managing director, NVP India.
While e-commerce deals ruled the roost in 2011, private equity firms are expected to selectively invest in such firms towards the second half of 2013. It will mainly be follow-on rounds by VC investors in the e-commerce space, said Deepak Srinath, director, Allegro Capital Advisors, an investment bank. “PE funds are already looking at e-commerce and two or three companies may get funded, depending on their growth and sustenance,” Srinath said.
Exits continue to be a challenge in the early stage and will be an area of focus in 2013. Experts say lack of acquisitions of small technology firms or platforms by large companies is missing in India. “In the US, $15 million to $20 million acquisitions happen all the time by large corporates. When will corporate M&A start in India for early-stage companies is a big question,” said Mirchandani.
For 2013, mobile, Internet and software as a service are being seen as the new emerging areas of interest for VCs