Since it raised a $100 million (Rs397 crore) fund in July, Nexus India Capital Advisors Pvt. Ltd has invested in seven companies, six of them with other investors.

Like Nexus, peers such as Helion Ventures Pvt. Ltd, Draper Fisher Jurvetson India Advisory Services Pvt. Ltd (DFJ) and Matrix Partners India have taken the co-investment route more often than not. Such deals, known as syndicated deals, have gained prominence in the last 12-18 months.

Draper Fisher Jurvetson India Advisory Services executive director Mohanjit Jolly says the company feels that a lot of help and handholding is necessary for start-ups, and the value that a syndicated partner provides more than offsets equity dilution

A vast majority of VCs active in India hail from the US and this market is still new territory. Many, therefore, co-invest with VCs with local experience as an entry strategy. Silicon Valley-based Kleiner Perkins Caufield & Byers, for example, co-invests with Sherpalo on all its deals in India. VCs also apply this tactic to gain a foothold in sectors, for example, to rope in more expertise on high-risk, technology-intensive start-ups.

When it comes to deciding on co-investment partners, VCs say there is a “quid pro quo" system. But on top of returning favours, the other VC must stack up on the experience, contacts and, especially, the money needed by a given firm. Most VCs have a shortlist of peer companies they would prefer to have as partners.

Mohanjit Jolly, executive director of DFJ India, says: “We share directly and discreetly to ones we truly want to be in the deal." And they will pitch their preferred partners to the entrepreneur.

See: Top 5 syndicated deals in 2007

Chandrasekar Kandasamy, managing director of ePlanet Ventures (ePlanet Advisors Pvt. Ltd), says: “I don’t force a company to accept a co-investor."

But, the syndicate approach, which essentially plays out in the form of exclusive VC clubs hunting for deals in packs, could complicate matters for entrepreneurs. It usually means more outsiders on the board and more agendas to tend to.

Atul Jalan, a fourth-time entrepreneur, doesn’t recommend it for first-time entrepreneurs. “It creates overheads in terms of managing multiple constituencies and thinking that would add pressure and stress (for a first-time entrepreneur)," he says.

Jalan has Draper Fisher Jurvetson ePlanet Ventures (a technology-focused partnership between DFJ and ePlanet) and IDG Ventures co-invested in his current start-up, retail sector software firm, Manthan Software Services Pvt. Ltd.

On the other hand, VCs look at a first-time entrepreneur in an early stage business as a good time to reduce risk and bring on a co-investor. DFJ, which set up its India office only three months ago, has done two syndicated deals worth $2 million alongside NEA-IndoUS Ventures (IndoUS Capital Advisors Pvt. Ltd) and FootPrint Ventures. “We felt strongly a lot of help and handholding would be necessary (for start-ups). The value that a syndicated partner provides more than offsets equity dilution," says Jolly of DFJ.

For many entrepreneurs, more investors can also mean more contacts and guidance. Quentin Staes-Polet, chief executive and co-founder of multiplayer online gaming company Kreeda Games India Pvt. Ltd, says: “It validates their investment, as online gaming is a hot topic, but still a risk because it doesn’t exist as a market right now." IDG Ventures India Advisors Pvt. Ltd and SoftBank China & India Holdings are investors in Kreeda.

For others, a second investor helps in raising the next round of funds, and also to mitigate risk. Voice short message service company, Kirusa, Inc., which recently closed its third round of funding from five investors, had an earlier round of funding from Innovacom SA, the VC arm of France Telecom, and DB eVentures, the strategic investment arm of Deutsche Bank AG. “In our case, syndication worked out well since Deutsche Bank shut down its VC arm sometime after the investment," says Inderpal Mumick, chairman and chief executive of Kirusa.

Despite the risks of early stage, most of the syndicated deals in India happen in the company’s second round of funding called Series B. At this stage, capital requirements are higher and a single investor may not be able to, or want to, fund the entire amount.

VCs such as ePlanet Ventures prefer to invest between $5 million and $10 million, so if they need to do a deal for $15 million, they are likely to bring in another investor.

Because deal sizes are only getting larger, some VCs say 2008 will see fewer syndicated deals. Srini Vudayagiri, managing director of Lightspeed Advisory Services India Pvt. Ltd, the India arm of Lightspeed Venture Partners, adds that the newer funds will now be ready to go it alone.