Mumbai: India saw an increase in the number of new funds in 2012 although there was a sharp drop in private equity (PE) deals due to the lack of exit options, subdued investment sentiment, and slowing growth.

With the emphasis shifting to investments in the so-called early stage, more start-ups are getting money, albeit in a smaller quantum. This brightens the chances of their survival in a slowing economy.

The number of new or active funds increased around 120 in 2011 to nearly 160 in 2012. Including existing funds, the number of funds in 2012 rose from 238 to 285, according to Bain and Co.’s India Private Equity Report 2013, released last week. In 2012, the total funds mandated for investments in India were $3.5 billion, nearly half of $6.9 billion committed in 2011, the report said.

Venture capital (VC) deal value fell 30% to $10.2 billion in 2012 from $14.8 billion in 2011, as promoters were unwilling to divest, faced with what they considered to be low valuations.

According to the report, funds investing for the first time in India include First Light India Accelerator Fund, Lhotse Investments and Srijan Capital. These new, actively investing funds have come up at a time when the overall money coming to Indian general partners (GPs) has shrunk.

Many new funds are focusing their attention on very-
early-stage companies, including incubation, acceleration and angel investing. A handful of those who invest in this pace include Kae Capital, Seedfund, Indian Angel Network, Mumbai Angels and Blume Ventures, leaving the space open to new entrants.

“There is a huge gap in the very-early-stage funding and angel investment space. Not many serial entrepreneurs are developing the ecosystem as angel stage is risky and returns may not be high," said Ravi Trivedi, founder, Srijan Capital, which focuses on angel investments and invests in the 2-15 lakh range.

Srijan Capital has backed four companies since mid-2012 and plans to make two-five investments in a year.

To be sure, early-stage growth and venture capital played a critical role in deal-making in 2012.

The number of early-stage deals that were less than $10 million nearly doubled from 125 deals in 2011 to 244 deals in 2012. This subset now accounts for nearly half of total deal volume (44%), up from 24% in 2011 and 16% in 2010.

Anand Lunia’s investment firm India Quotient (IQ) invested in 10 deals over the last one year. IQ’s investment strategy is to back pre-revenue start-ups that need funds between the angel and Series A stage. Their investment sweet spot lies between 50 lakh and 1 crore. “Angels do not do follow on rounds, that’s where we are different. We will do reinvestments. The largest investment we have made is of 2 crore and the smallest cheque has been of 25 lakh," said Lunia, IQ’s co-founder, adding that it will do six-eight deals a year.

Meanwhile, there is an increasing overlap between VC and PE investors, which is blurring the lines of distinction between them. Deal size alone is no longer a parameter. Small deals that would previously have been within VC parameters now see competition from both VC and PE firms.

VC investor Accel Partners, for instance, invested about $20 million each in online ventures BookMyShow and Myntra, the report said. Sequoia Capital participated in multiple consortia, investing more than $10 million, with investments including Manappuram Finance and Leasing and July Systems.

Bala Deshpande, senior managing director, New Enterprise Associates (India) Pvt. Ltd, said the class intervals are rapidly moving upwards as VCs are participating in follow-on rounds as well, and thus VC investors end up doing deals of $12-15 million.

“It’s no longer $2-3 million; the average deal size now is $6-8 million. In today’s world, follow-on rounds are a necessity not an option if the company has to realize its growth potential." she said.

VC and PE firms are also increasingly co-investing and there is a very high probability that this will continue as many large PE firms are looking at VC-backed companies to do primary and secondary rounds.

Deshpande said PE money has become a good source of capital to take a company to the logical level of revenues and profits. She added. “Co-investing helps as it enables access to different pools of capital, different contact networks, and of course perspectives."

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