Mumbai/Bangalore: Over the last 12 months, slowly yet firmly, there has been a twist in the prism through which venture capital firms view the Indian market. Venture capitalists (VCs) are moving out of their comfort zone—technology and technology-enabled businesses—into unfamiliar sectors. The earlier focus on sectors such as IT and IT-enabled services, Internet and mobile value-added services (VAS) has now broadened to businesses as varied as voltage stabilizers (Servomax India Ltd funded by Mayfield Fund), logistics (Elbee Express India Ltd funded by Clearstone Venture Partners) and even organic farming (Sum-inter India Organics Pvt. Ltd funded by Nexus India Capital).
Two VCs who set up shop in 2006 raised fresh funds in the last six-eight months and broadened their original intent. Matrix Partners India, which expanded into growth firms with fresh capital of $350 million (Rs1,449 crore), had started out with consumer services as its main theme. It is now looking at investments in ancillary companies in infrastructure and power sectors. Helion Venture Partners, which raised a $210 million second fund last month, will expand beyond tech and look at domestic consumer services across multiple sectors.
Helion Ventures Partners’ Kanwaljit Singh (left) and Matrix Partners India’s Avnish Bajaj (Photos by: Abhijit Bhatlekar and Madhu Kapparath / Mint)
Mint surveys what, as commonly referred to in VC speak, is hot and what’s not:
New kids on the block
Products: Given its potential to disrupt existing technologies and rapidly grow, VCs have always preferred backing products. As domestic consumption goes up, VCs are hopeful product companies catering to home markets will emerge in the next few years. The last year saw some investments in software product companies such as 3D Solid Compression Pvt. Ltd, which was funded by IDG Ventures India, and hardware product firms such as Trivitron Diagnostics Pvt. Ltd that got funded for $11 million by ePlanet Ventures and JSBC Private Equity Asia Ltd.
Energy: Despite all the hype around clean technology, very few investments have been made on-ground here. VCs say that while the demand-supply gap is obvious, the gestation period (for the sector to mature) is long. “It is a sector that requires (government) intervention and policy-setting,” says Rahul Khanna, director, Clearstone Venture Partners.
Infrastructure-enabling firms: Investors are bullish on ancillary companies plugging into the booming infrastructure scene in India. While few deals have happened, VCs say they are beginning to see deal flow in this space. “Infrastructure and power used to be late-stage PE play, but now we are finding small and mid-staged companies (catering to) these industries,” says Avnish Bajaj, managing director, Matrix Partners India.
Nexus India Capital’s Sandeep Singhal (left) and Clearstone Venture Partners’ Rahul Khanna (Photo by: Abhijit Bhatlekar / Mint)
Niche Internet plays: While several sub-sectors within the Internet have been well-funded, VCs remain keen on certain niches such as e-commerce and others that solve specific consumer problems.
With more venture capital firms turning to domestic-led deals beyond technology, companies targeting the middle class Indian with broadbased consumer service offerings will get funded in the coming months. “The playing field is growing beyond tech. VCs are seeing very non-sexy businesses, which are doing extremely well and looking to expand,” says Kanwaljit Singh, MD, Helion Venture Partners. Some VC favourites:
Education: This may well be the most sought after sector for VCs this year. While opinions vary on whether offline business models work better or online, the overall theme is a hot one. Five companies have received funding in the last seven months alone—the latest being Studyplaces Inc. by KPCB and Sherpalo Ventures, and Info Edge (I) Pvt. Ltd and Educational Initiatives Pvt. Ltd by Footprint Ventures—and, according to VCs, the trend will continue.
Health care: From preventive health care and diagnostics to medical equipment and value-added pharma chains, VCs are keen on various businesses in the sector. Investments in the last nine months include medical equipment makers Perfint Engineering Services Pvt. Ltd, funded by IDG Ventures India; health care services start-up Vaatsalya Healthcare Solutions Pvt. Ltd, funded by Seedfund and Aavishkar India Micro Venture Capital Fund; and ambulance start-up Ziqitza Healthcare Ltd backed by Acumen Fund.
Retail: VCs are placing bets on two kinds of companies in this sector: speciality retail chains catering to a fairly big niche of customers and ancillary companies providing services such as inventory management or analytics tools to large retail chains. There have been at least 8-10 investments in speciality retail chains such as food chain Kaati Zone, printing retail services Printo Documents and Services, and furniture store Dovetail. Retail-enabling businesses will follow next, say investors.
Mobile VAS: Once a hot favourite among VCs, investments in this space have slowed down considerably. In 2006, it got more than $100 million funding. Since mid-2007, however, deals have dwindled and counted for less than $40 million in the last 10 months. The issue of revenue share with phone firms continues to nag investors. Another reason for the slowdown is that VAS players funded two years ago have scaled up. Firms offering ringtones to IVR (interactive voice recognition, for customer care) to SMS (short messaging) services will find it more difficult to get funded than niche players in mobile search or advertising.
Web 2.0 start-ups: Here, the story is of unfulfilled hype. A few social networking sites managed to get funding in late 2006, such as Minglebox Communications Pvt. Ltd and Fropper.com (wh-ose parent People Interactive (I) Ltd was funded by Sequoia Capital India). But while social networking and user-generated content were buzzwords in the start-up circuit in the first half of 2007, VCs have since done a reality check. As large, global social networking sites struggle to grow revenues, local peers with not much differentiation will find it difficult to get backing.
IT, IT-enabled, BPO services: The verdict was unanimous on this one. Plain old IT and business process outsourcing (BPO) companies, which were key funding focus areas earlier , no longer attract VCs. While niche outsourcing such as legal processing or high-end analytics firms will continue to get funded, those among first generation firms that have not scaled up will either go belly up or get consolidated, predict VCs. “Their main (market) is the US and with the uncertain economy and depreciating dollar value, VCs will shy away from funding them,” says Srini Vudayagiri, MD, Lightspeed Venture Partners.
Online classifieds (selective sub-sectors): Several online businesses in matrimony, jobs and travel/ticketing have been funded regularly in the last few years. Now with leaders taking positions in each of these sectors, VCs say they will not infuse capital into new firms with similar offerings (although existing players will get further rounds of capital) unless they have significantly different business models. For example, a number of travel information search sites such as HolidayIQ.com owned by Leisure and Lifestyle Information Services Pvt. Ltd and online bus ticketing site Ticketvala.com, owned by Travis Internet Pvt. Ltd, have received funding.
Out-of-home digital screens: In the last 18 months, at least 10 companies putting up digital screens at malls, airports and similar public places, received backing, including Digital Signage Networks, vJive Networks owned by Digital Music India (P) Ltd and Tag Media Network Pvt. Ltd. The frenzy, VCs say, has stopped as too many companies have now been funded.
Besides Matrix India’s Bajaj, Helion Venture’s Singh, Vudayagiri from Lightspeed and Rahul Khanna of Clearstone Venture, this list was compiled based on interviews with Canaan Partners India’s Alok Mittal, Nexus India Capital’s Sandeep Singhal, IDG Ventures India’s T.C. Meenaxisundaram, Norwest Venture Partners’ Promod Haque and Niren Shah, and Trident Capital’s Venetia Kontogouris.