Late-stage VC funding may get squeezed

Bangalore: The slowdown in the US economy, the single largest source of venture capital or VC financing in the country, could affect such funding in India, particularly for late-stage companies, say leading VC firms.

Falling stock markets in the US, soaring oil prices, continuing housing and credit troubles, and rising inflation have led to a lot of uncertainty among investors in VC firms, or limited partners as they are called. VC firms say their investors are growing cautious and would like to refrain from taking risks, particularly if a company needs a significant amount of capital like typical late-stage companies do. For investors in such companies, an initial public offering of shares is the preferred exit route.

Venture capitalists predicted there could be a slowdown in the number of investments in the country too. “The number of late-stage companies being funded will come down this year. The deal size will also become smaller compared with last year,” said Alok Mittal, executive director, Canaan Partners, an early-stage VC firm focusing on technology companies. According to a Dow Jones VentureSource report, in 2007, VC investments added up to about $928 million or Rs3,654 crore in 80 deals in India.

Mittal said even early-stage companies could find it difficult to raise capital if volatility in the US markets continues.

“I will not be surprised if investments go down by about 15% this year,” said Helion Venture Partners’ managing director Ashish Gupta. Helion is an early-stage independent India focused fund that invests in tech-powered businesses and consumer services. Gupta added that “more realistic” valuations could redeem some of that contraction.

Still, one VC said its limited partners were not alarmed yet. “None of our investors has advised us to not go ahead with our investment plans. They have been in the field for long and know that upswings or downswings are a part and parcel of the investment cycle,” said Srini Vudayagiri, managing director, Lightspeed Advisory Services India Pvt. Ltd. A few other VCs even feel that in the absence of attractive investment opportunities in the US, some funds could be directed towards avenues in India, China and Israel for long-term gains.

With a recession-like situation on the horizon in the US, VCs said they are trying to help portfolio companies through both financial and management expertise. NVP’s Haque said companies which still need the next round of funding should keep their expectations about valuations realistic, watch expenses, and ensure that the money lasts for two years. And, for early-stage companies, Haque’s advice was: raise capital to last for at least 18 months and rope in at least two investors. “Two investors have better and higher capacity for investing,” he said.