Mumbai: State government-backed venture capital firms, once among the few sources of seed and early-stage capital for Indian start-ups before the current round of venture investing got under way less than two years ago, have started privatizing themselves in order to remain relevant in the changed environment.
Their moves come ahead of a Rs1,500 crore fund-raising exercise—the largest aggregate corpus such funds have raised in the last 15 years. The new funds in the pipeline will see private asset management teams being brought in to invest and manage them.
Some of this is already under way. Punjab Infotech Venture Fund (PIVF) and Kerala Venture Capital Fund (KVCF) have plans to privatize, while Hyderabad Information Technology Venture Enterprise Ltd (Hitvel), which is increasing its current fund corpus from Rs50 crore to Rs150 crore, recently entered into a partnership with Srei Infrastructure Finance Ltd. Srei holds a 76% stake in Hitvel. Other state government-backed outfits that are in fund-raising mode currently are those from Karnataka, Maharashtra, Rajasthan, Andhra Pradesh and Gujarat. The last two are pioneers in the public-private partnership model and have set the rules of the game.
GVFL Ltd (earlier known as Gujarat Venture Finance Ltd), whose shareholders include Zydus Cadila, HDFC Bank Ltd and ICICI Bank Ltd, has earned its investors a 10% and 20% profit, respectively, on two IT-focused funds raised in 1995 and 1997, according to Vishnu Varshney, its managing director and chief executive officer. It has raised Rs136 crore over five funds till date. GVFL was started in 1990 as a World Bank initiative under the aegis of the Gujarat Industrial Investment Corp. Ltd (GIIC), which remains a shareholder.
Investors in Andhra Pradesh Industrial Development Corp. Venture Capital Ltd’s (APIDC VCL) $9 million (Rs35.37 crore) fund, raised in 1997, have gained fivefold returns, said Sarath Naru, managing director, APIDC VCL. Started in 1997 as a partnership between APIDC and Ventureast Funds, with the latter holding 51% stake, it has raised close to $150 million till date.
After the first fund, APIDC has gradually reduced its stake to a nominal 1% now.
State-owned venture capital outfits gained momentum in 1997, when the year’s Union budget mandated the Small Industries Development Bank of India (Sidbi) to contribute 50% capital to the corpuses of such funds. The nine funds subsequently funded by Sidbi invested in sectors such as IT and IT-enabled services (ITeS), and biotechnology. When the Internet bust saw foreign venture capital investors desert this market, the state-owned funds continued to invest. With the return of mainstream, foreign investors, money has come back to popular sectors such as technology and consumer businesses. “The role of state-owned funds is to step into sectors where there isn’t enough VC activity, but which can lead to huge economic growth,” said Naru.
Nascent sectors such as nanotechnology and biotechnology, where the government wants to promote investments, have not found much popularity with mainstream venture capitalists (VCs). Most of the new state-owned funds in the pipeline will focus on these sectors; investments in these were given a tax incentive in the 2007-08 Union budget.
Such VCs also typically invest smaller amounts in a company. While privately owned venture capital funds have an average deal size of $2-5 million, the state-backed funds average Rs1-3 crore. This is a space traditionally served by angel investors, institutional and individual, and one that is severely underserved in India.
Going private, even partially, has several advantages for state-owned funds. First, they can hire professionals who are sector specialists, at market rates. Second, they get greater operational flexibility. Currently, state-backed funds are subject to Comptroller and Auditor General of India audits, which makes them answerable for their investments. The funds also depend on government resources, which restricts their corpus size or delays fund-raising. Karnataka Information Technology Venture Capital Fund, which had announced plans for a second fund of Rs50 crore last August, is only launching it now.