VC funds loosen purse strings, dabble in big-ticket deals

Mumbai: Venture capital (VC) investors, who typically invest $3-5 million (Rs15-25 crore) in early-stage companies, are now willing to put up$40-50 million as fund sizes grow and expectations of returns from some key sectors increase.

Canaan India and Intel Capital have together invested $45 million in Happiest Minds Technologies Pvt. Ltd, an information technology services firm.

Alok Mittal, managing director of Canaan India, said it was his company’s biggest deal in the country.

Jasper Infotech Pvt. Ltd, a marketing solutions firm, raised $40 million from IndoUS Venture Partners Llc, Nexus Venture Partners and Bessemer Venture Partners India; Fashion and You India Pvt. Ltd, which runs an online shopping site, also raised the same amount from Sequoia Capital India Advisors Pvt. Ltd, Norwest Venture Partners, Intel Capital and Nokia Growth Partners.

“Like-minded VC funds are coming together and investing around $50 million or so upfront, which is usually done by private equity funds,” said R. Satish Kumar, senior-vice president, Centrum Capital Ltd, an investment bank.

Start-ups in sectors such as e-commerce, technology services, business outsourcing and clean technology may require a large amount of capital at the outset.

Mohanjit Jolly, managing director of VC firm Draper Fisher Jurvetson India, said valuations in some sectors are high and VC firms have to make large investments to gain a substantial ownership of 15-20%.

“In some cases, such exceptional investing is happening because VC firms are afraid they will miss out on the e-commerce wave and want more capital to work to get a piece of good deals,” Jolly said.

Another factor is the growing size of VC funds. Many of them have increased their fund sizes from $50-100 million to $150-200 million, industry experts say.

In addition, VC fund managers have more flexibility from investors, known as limited partners, to make one-off deals outside their focus areas that can yield high returns.

“In some of our past investments, we have written bigger cheques upfront and we continue to explore such opportunities because the returns expectation is also quite high, based on the high risk taken,” Jolly said.

Investors can expect as much as 8-10 times returns on such investments, he said.

Some executives, however, sound a note of caution.

“We had seen a phase in 2006-2007 when the online travel space was generating a lot of heat, with multiple players operating and large investments going upfront into such companies,” said Kanwaljit Singh, managing director, Helion Venture Partners. “Today, there is a strong expectation that some sectors like e-commerce are going to be successful. The risk is that there are several players and all may not be successful,” he added.

Deals India, published jointly by Mint, Dow Jones Newswires and The Wall Street Journal, is a one-stop destination for investment professionals following deal flow, deals news, private equity and venture capital activity in India.

shraddha.n@livemint.com