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Venture capital’s data problem

It's time to move past the numbers riddle and evolve more scientific ways to track venture capital activity in India

How much exactly have venture capitalists invested in India this year? In fact, how much have they invested in the country in the past 10 years?

Both these questions sound silly. After all, every year, multiple research and analytics firms that track venture capital activity in India publish the data with details on how investments are spread across sectors and stages. For instance, we already have a sense of how much has been invested this year. Delhi-based VCCEdge reports that venture capital investments this year have more than doubled to $5.3 billion. These are provisional numbers that have been compiled till 11 December.

Over the next couple of weeks, more data will be released. Chennai-based Venture Intelligence, the first to track private equity and venture capital data in India, will release its estimates. Consulting firm Grant Thornton’s Mumbai-based arm will come out with a set of numbers, though it doesn’t separate venture capital from private equity data. So will London-based Preqin and New York firm CB Insights.

For folks like me, who write on venture capital, all these sources of data are a huge blessing. However, the data released by these multiple research firms is also cause for great consternation for a couple of reasons.

One, each estimate varies from the other, often by a fairly wide margin. This is usually because of differences in methodology. Two, since most of these research firms rely primarily on secondary sources of information, such as media reports that often quote unconfirmed numbers, it’s hard to vouch for accuracy.

But, it’s also unfair to blame the research firms. After all, the venture capital industry isn’t the most transparent when it comes to sharing data of any kind. In the absence of regulatory obligations by investors to report deal activity, whether with respect to investments or exits, one can’t blame venture capital firms either. And, unlike in the US, the world’s largest venture capital market, India doesn’t yet have a robust industry representative such as the National Venture Capital Association that compiles and publishes quarterly and annual data that is sourced directly from the industry.

Given those factors, it’s entirely fair though to come back to our original question: how much exactly have venture capitalists invested in India till date?

Let’s try and answer that question in a somewhat different manner. We’ll go back 10 years to 2006, the year that marks the rebirth of venture capital in India. By VCCEdge’s estimates, since 2006, the Indian market has recorded venture capital deals worth nearly $16 billion.

Now, there are roughly 20 active venture capital firms in the country, give or take a few. Some of those firms invest from India-dedicated funds and others invest from global capital pools.

A simple back-of-the-envelope calculation will show that out of those 20 firms, the bunch that invests from India-dedicated funds has together raised about $7 billion over the past 10 years. This includes new funds that have been raised recently and are mostly yet to be deployed. For instance, Nexus Venture Partners raised a $450 million fund last week from which it has barely started investing.

Next, let’s throw in the investments made by global funds investing from global capital pools. New York hedge fund Tiger Global alone has deployed an estimated $2 billion from its global venture capital funds. Norwest Venture Partners has invested about $700 million. Lightspeed, before it launched an India fund, had invested about $100 million. The rest, such as Canaan Partners, Kleiner Perkins Caufield Byers, Draper Fisher Jurvetson (which no longer invests here), Mayfield Fund and Bessemer Venture Partners would account for another $1 billion, maybe a bit more.

All considered, that still works out to about $11 billion. And remember, a sizeable chunk of the $11 billion is dry powder. It’s not a bad number to have at the end of 10 years, but it is certainly far from the numbers that are currently floating around the market.

Inaccurate data can have two consequences for the venture capital market. One, entrepreneurs in the market to raise capital may be falsely led to believe there is more capital available than actually exists and that can impact how they value their companies ahead of a funding round. By all accounts, about 25-30% of investments that are reported by most research firms are inaccurate. Limited partners, who are investors in venture capital funds, are by and large better informed than entrepreneurs, but inaccuracies could also colour their view of the market.

Some may argue that quibbling over a few billion dollars is an exercise in futility. It’s more important to look at the big picture and see how far India’s venture capital market has come over the past decade. It has. No argument. But that’s also why it’s time to move past the numbers riddle and evolve more scientific ways to track venture capital activity in India.

Snigdha Sengupta is a freelance journalist in Mumbai and founder of StartupCentral. She contributes stories on private equity and venture capital to Mint.

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