Bangalore: In spite of an economic slowdown, a larger number of technology start-ups are approaching venture capital (VC) firms for early-stage funding compared with last year, some VC firms said.

Growth area: Indus Khaitan, general partner at Morpheus Venture Partners. Hemant Mishra / Mint

These firms said the number of people turning tech entrepreneurs in the country has not slackened. VC firm IDG Ventures India, for instance, said they have considered as many as 250 proposals in the first eight months of this year, compared with the 68 in the year-ago period.

“Lots of VCs are moving into the PE (private equity) space. So there is a void left for us to fill," said Sudhir Sethi, managing director, IDG Ventures India. “Many technology-focused VCs have also moved away to non-tech deals, investing in growth and late stage firms. It’s good for us."

Sethi was referring to investors such as Helion Venture Partners and Norwest Venture Partners, which have started investing significantly in non-technology companies.

To be sure, VC investment in India has slackened between January and August, which saw 38 deals worth $167million (Rs814.9 crore), according to Venture Intelligence, a Chennai-based researcher that focuses on PE and VC. This compares with 108 deals worth $617 million in the same period last year.

“For large investors, the appetite for early stage has become smaller," said Sarath Naru, managing partner, Ventureast Fund Advisors, adding that no investor likes to admit that it is not funding early-stage ventures.

Early-stage funding typically refers to an investment of $1 million or less in firms that have a prototype but not yet have a product for the market. Sometimes investors refer to a deal of $2 million as an early- stage investment.

VC firm Draper Fisher Jurvetson (DFJ), for instance, is now scouting for late stage deals in India. The firm’s managing directors Josh Stein and Andreas Stavropoulos, who visited India last week, said there would be no stage constraints for DFJ India.

“For us, quite large companies that have the potential of making it big and give back venture returns to us are fine. If we can get large companies like that, we would not exclude investment possibilities in them," said Stavropoulos.

Stein said the firm is not interested in returns of two or three times. “We are looking for 10x or better in all of our investments," he said.

It is good that investors are accepting they are looking at growth stage and late stage kind of deals, say early-stage investors. “Quite a few of them were never really doing sub-$1 million deals but were calling themselves early-stage investors," said Indus Khaitan, general partner, Morpheus Venture Partners.

Backing a fledgling firm is very different from supporting a growth stage or a firm that is poised for an initial public offering. The background of the people who operate in the early stage space needs to be operational and entrepreneurial, with a long history of venture investing. “Many of the investors who came into this space in 2000 did not have these backgrounds, hence (they) moved on to late stage funding, which is an area they know better," said Samir Kumar, managing director, Inventus Capital India.

“Theoretically, their deviation has created a large market for us, opportunity to funding increases by decrease in number of investors," said Rajesh Srivathsa, managing partner, Ojas Venture Partners.

Srivathsa said the real impact of such a deviation would be visible in 6 to 12 months.

This deviation, however, could be a double-edged sword, warn early-stage investors. “The early-stage investors who are able to find a deal because of less competition today, will find it harder to get another VC to put in money into the next round (since existing funds would be stretched across more stages)," said Subrata Mitra, partner, Accel Partners. “So, it would be okay for some people to move up, if the ecosystem was more robust, which I don’t believe is the case in India right now."