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VCs increase stake, trim risk by financing portfolio firms

VCs increase stake, trim risk by financing portfolio firms
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First Published: Tue, Jun 02 2009. 01 21 AM IST

Staying invested: Viedea Capital Advisors Pvt. Ltd director and co-founder Deepak Srinath.
Staying invested: Viedea Capital Advisors Pvt. Ltd director and co-founder Deepak Srinath.
Updated: Tue, Jun 02 2009. 11 06 AM IST
Bangalore: A company that is performing well has typically no dearth of financial backers, especially if the business excellence comes in a bear market such as the phase Indian equity markets are showing initial signs of coming out of.
Venture capital (VC) firms, that usually invest in early stage companies (also the riskiest), are now trying to stay invested in firms already in their portfolios from earlier funding rounds, with or without co-investors, even as there has been a dip in the overall funding activity.
Staying invested: Viedea Capital Advisors Pvt. Ltd director and co-founder Deepak Srinath.
This trend among venture capitalists of funding firms they have already backed before, is partly driven by the high demand for investible firms that venture backers can fund. The paucity of such opportunities has led to VC investors, across the spectrum, eager to get a stake in these firms. Also, existing investors fear that they may soon become minority players in their own portfolio firms, if they don’t extend financial help.
At least nine firms in the last five months have received subsequent rounds of funding where their previous investors have also participated. These include:
** Hospital chain Vaatsalya Healthcare Solutions Pvt.Ltd, which raised its second round of funding from Oasis Fund and returning investor Seedfund
** Mumbai-based Ideacts Innovations Pvt. Ltd that raised second round funding from Sequoia Capital India and Silicon Valley Bank. In 2007, the firm had raised $5 million from Sequoia Capital
** Deeya Energy Inc., a US-headquartered developer of electrical energy storage platforms, closed a third round of funding of $30 million, led by Technology Partners and joined by return investors BlueRun Ventures, Draper Fisher Jurvetson, Element Partners and New Enterprise Associates
** Online revenue optimization firm PubMatic’s second round funding from existing investors including Draper Fisher Jurvetson, Nexus India Capital and Helion Ventures Partners.
“Most investors reserve between 50% and 100% of the initial investment for follow-on investing. As the company keeps growing, we invest additional money as well as help them raise money from other investors,” said Kanwaljit Singh, managing director, Helion Venture Partners.
The demand for capital by already funded firms has increased due to two reasons: one, as the slowdown wears on, it will take longer (even for firms doing well) to break even or reach their revenue projections. Two, receivables are taking longer to be realized with payments being delayed by 60-90 days.
So, there has been a shortage of working capital. “Repeat deals are a way of forestalling risk by investors. For them, a known devil is better than an unknown devil in this market,” said Deepak Srinath, director and co-founder, Viedea Capital Advisors Pvt. Ltd, a boutique investment bank in Bangalore.
Also, in a market where liquidity is still to return to the ease of financing of, say, 2006 and 2007, few investors may look at backing individually their portfolio company’s next round of funding. “VCs will take a call, particularly if a company is doing well and needs money to break even. They know there is no point in letting it out if it’s doing well,” said Samir Kumar, managing director, Inventus Capital Partners, India, adding that it’s not desirable for investors to put their money solely in the next round of funding as their financial risks blow up.
Meanwhile, firms say that having an existing investor return in the next round sends a positive signal to new investors. It, however, does not ensure that the next round of funding will come automatically. The company’s future plans and business model so far, always hold the key, said Neeti Malhotra, head marketing, Ideacts Innovations.
Internal funding by exiting investors also helps managements of portfolio companies to focus on their business rather than be distracted by a four-six month fundraising exercise. “The issue often, is around valuation divergence, when founders and the management feel that the company is significantly more valuable than the investors do,” said Mohanjit Jolly, executive director, Draper Fisher Jurvetson, India. This divergence can be minimized when both sides know each other better, he added.
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First Published: Tue, Jun 02 2009. 01 21 AM IST