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Bangalore: After nearly a decade of operating in India, venture capital firm Canaan Partners has stopped investing more money in the country and is likely to avoid allocating money to local start-ups from its next global fund, three people familiar with the development said.

Canaan, which set up shop in India in 2006 and has since invested nearly $200 million in firms including Bharatmatrimony.com, legal process outsourcing firm UnitedLex and technical support start-up iYogi, is also exploring the possibility of setting up an India-specific fund that would raise money from local investors, one of the people said. All three requested anonymity.

Until now, Canaan invested in India from its global funds.

“Canaan is looking at the possibility of setting up an India-specific fund," the person said. “No decision has been made yet."

VCCircle, an investment tracker, first reported the possibility of Canaan setting up an India fund.

In eight years, Canaan invested in 10-15 Indian start-ups but struggled to generate healthy returns, two of the other people cited above said. As a result, Canaan’s US partners are not keen on setting aside any separate allocations for India from its latest fund, the people said.

Canaan India’s managing director Rahul Khanna declined to comment on whether the firm was winding down India operations, but conceded that the firm was considering the possibility of not making fresh investments.

“Canaan Partners is raising its 10th Fund and we will decide on the India allocation from the fund later this year," said Khanna said. “Given this, we are not making any new investments in India from the Canaan IX Fund."

Canaan isn’t the only VC firm to struggle in India that is notorious for its complicated regulations, difficult business environment and, especially for start-up investors, the lack of exit options.

Over the past decade, some global VC firms such as Draper Fisher Jurvetson (DFJ), Sherpalo, Kleiner Perkins and IndoUS Venture Partners set up allocation funds in India in the hope of capitalizing on the information technology (IT) boom in India, but found the going tough.

redBus.in, makemytrip.com and JustDial are among a handful of start-ups that have given investors attractive returns.

As other start-ups struggled to go public or find a buyer, some investment firms were forced to change their India strategy.

IndoUS launched a brand new fund, rebranding it Kalaari Capital in 2012, while Sherpalo, which has invested in firms such as travel and expense management firm Concur, is launching two new funds focusing on early-stage investments. Sherpalo and Kleiner have re-focused their strategy on markets such as the US and Israel and exited India.

Canaan’s Khanna said there are two major challenges for institutional investors. “The first is the duration: here, the horizon of an investment can be as long as 10-12 years, which is significantly more than a country like the US where it is about eight years or so. The second is that domestic M&A (merger and acquisition) exits for tech companies are rare, as global majors such as Google, Yahoo and others have largely stayed away from acquiring start-ups here. This combination of long duration and difficulty in exits has made venture investing in India quite challenging," Khanna said.

Khanna highlighted the challenges Canaan and other VC and private equity (PE) firms face in India, most worryingly the macroeconomic volatility over the past few years that has deterred global investors, including the likes of billionaire Warren Buffett, from betting on India.

Canaan India’s other managing director Alok Mittal, a former entrepreneur who helped set up the firm’s operations in India, may decide to move away from VC investments, the people cited above said.

Mittal, the founder of Jobsahead.com that was bought by Monster.com, is planning to start his own venture, the people said.

“Mittal has been an entrepreneur before and, at this point, he doesn’t want to take an easy way out by joining another VC or starting another fund," one of the two persons said.

Earlier this year, Canaan had said some of its portfolio firms had matured for an exit and that it would look to sell its investments during 2014.

“In India, the lack of liquidity puts off a lot of investors. Either you do an IPO (initial public offer) or you hope for some magical acquisition—both these rarely ever happen. There’s practically no other exit option. So it’s logical for a PE firm to think that Indian start-ups should be funded by Indian capital. And quite a few PEs such as NEA-IndoUS Ventures and others have gone that way over the past few years," said Alok Kejriwal, CEO, Games2win, which was funded by Rahul Khanna’s previous VC firm Clearstone.

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