Online ads grow; more firms in digital space seek VC funding

Online ads grow; more firms in digital space seek VC funding

Mumbai: Two Internet shopping sites are raising money from venture capital (VC) firms, in a continuing trend that has seen increasing investments in the digital space in recent years., an online group buying platform that offers discount deals on restaurant, recreation, health and beauty services, is in the final stages of signing a deal and expects to close it in less than a month, said founder and chief executive Anisha Singh. “Earlier, such models didn’t take off, but now the social commerce space has taken off because of social networking," she said. Singh declined to give more details but said the deal size would be smaller than $10 million (Rs46.8 crore).

Click here To listen to Mahesh Murthy, Founder, Pinstorm, a Mumbai-based digital marketing company, who talks about VC investments in online firms

Fashion and You India Pvt. Ltd is another online shopping company looking to raise funds. “We’re a fast-growing company and within seven months of operations, we have four lakh (400,000) members already and have registered a 50% growth in revenue, month-on-month," co-founder and CEO Pearl Uppal said.

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“There’s a lot of interest in this business and we are constantly in talks with several people looking to invest into it, including PE (private equity) and VC firms," she said, adding that Fashion and You is a cash-hungry business that requires deep investments in marketing, supply chain management, technology, production of catalogue, and sourcing and merchandising.

VC investors say online advertising is gaining in importance in the marketing and ad budgets of many firms. As a result, the revenue growth of online firms in the past year has been strong, said Rahul Chandra, director at VC firm Helion Advisors Pvt. Ltd.

So far in 2010 there have been six VC deals worth $40.25 million in online advertising and marketing firms. In all of 2009, there were only four deals worth $20 million in online firms, and six deals worth $42 million the previous year, according to data compiled by Chennai-based research company Venture Intelligence.

The deals concluded this year include the $7.5 million investment in PubMatic by Helion Ventures, Nexus Venture Partners and Draper Fisher Jurvetson; and $6 million in Quikr India by Matrix Partners India, Norwest Venture Partners and Omidyar Network.

To be sure, not all online firms are keen on VC funding. For instance, Pinstorm, a Mumbai-based digital marketing firm, wants to tap the capital markets instead of taking the VC route. “We’ve said no to several strategic offers so far and are focused on organic growth. We’ll consider raising funds from the public and markets sometime later," said Mahesh Murthy, founder and CEO.

PE and VC investments in the digital space are providing good returns. A case in point is InMobi, a mobile advertising firm. Kleiner, Perkins, Caufield and Byers, and Sherpalo Ventures invested $8 million in InMobi and provided an exit to the angel investor Mumbai Angel Network., a website that tracks the PE and VC sectors, reported in January that Mumbai Angel Network had invested $500,000 in InMobi in 2007, and the firm’s valuation has since risen by 20-30 times. The return on the investment is tipped to be the best in recent times for an angel investor.

Typically, online firms give VC firms returns of five times the investment. “We’re beginning to see good teams and all the factors to make this industry work are coming together," said Harish Gandhi, executive director, Canaan Advisors Pvt. Ltd, a VC firm.

India has around 100 million Internet users, with 35-40 million accessing the Web through cellphones and 60 million through PCs and laptops, says Gandhi. Investors still face some hurdles in the online space. For instance, entry barriers in the business are low, “so after a point a company needs to offer a unique proposition", he said.

Graphic by Yogesh Kumar/Mint