India’s venture capital industry witnessing a surge of activity
13 Jun, 2014, 0555 hrs IST, Biswarup Gooptu & Madhav Chanchani, ET Bureau
The quantum of new funds raised by India-focused venture capital firms in the last three years – $ 3 billion – is drawing attention from both local and overseas investors.
The last three years have seen a significant expansion of the venture capital industry in India, as nearly a dozen funds raised billions of dollars to invest in local startups.
Even as several of these funds witness a steep rise in the valuations of portfolio companies, large global investment firms too are stepping in to bet on fast-growing companies in sectors ranging from consumer internet to online retail, enterprise software and healthcare.
This surge of activity is making venture capital – defined as money used to back new ideas – the frontrunner in the Indian risk capital industry, which has so far been dominated by private equity typically used to fuel growth in more mature companies and industries.
In terms of investments made, the share of venture capital is still minuscule with about $630 million invested last year compared with private equity inflow of $8.5 billion.
But it accounted for 46% of the total deals in 2013. Early stage deals have steadily risen from 110 in 2010 to 179 in 2013, while private equity and buyout deals have fallen from 262 to 213 in the same period, according to data from EY. But it is the quantum of new funds raised by India-focused venture capital firms in the last three years – $ 3 billion – that has turned the spotlight on an asset class that is drawing attention from both local and overseas investors.
Sequoia Capital, the Silicon Valley fund famous for its early bets on iconic companies such as Google, Apple and messaging app WhatsApp, is the latest to announce an India fund of $ 530 million, which it unveiled in May.
“We are big believers in global technology companies being built out of India,” said Shailendra Singh, a managing director at the India office of the fund that now manages a total corpus of $2 billion. The new fund will have a “disproportionate focus on early and growth stage technology companies”, says Singh, whose fund was amongst the biggest gainers from the public listing of internet classifieds firm Just Dial last year, earning returns of over 10 times on their partial exit.
It is the promise of such exits that fuels the confidence of venture firms. Billion-dollar companies are being built in India, “at a much faster frequency than ever seen before”, said Subrata Mitra, partner at Accel Partners, an early investor in the country’s largest online retailer Flipkart. The firm is widely expected to float an initial public offer of shares on Nasdaq next year.
While it took companies like Just Dial and InfoEdge, which owns jobs portal Naukri, over a decade to reach the $1-billion mark, e-commerce players like Snapdeal and Flipkart have crossed the milestone in less than seven years. Others such as mobile advertising platform InMobi and data analytics provider player MuSigma- also backed by Sequoia-have hit the magic number in less than a decade.
This has served to change the perception of Indian venture capital amongst both fund managers and Limited Partners who back these funds. While growth capital funds have largely failed to deliver returns equivalent to what peers in other Asian countries have, “some VC firms in India have delivered returns equivalent to what you can generate elsewhere in Asia”, said Wen Tan, partner at FLAG Capital, which invests in venture funds.
Experts are of the view that this turnaround has been made possible by multiple factors including greater internet and smartphone penetration, a rising middle class looking for convenience and quality as well as the confidence of Indian technology entrepreneurs who are building global companies.
“While the nature of VC investing is extreme risk and extreme reward, they (VCs) are getting better at what they are doing,” said Sanjeev Krishan, who heads private equity and transaction services at PwC India.
Increased venture activity will also offer clear benefits for entrepreneurs, who can now hope to derive better value for their companies, particularly in sectors such as consumer internet and mobile technology. “While we used to pay $2 million for a 40% stake earlier, now we pay $3-5 million for taking a third of the company,” said Sequoia’s Singh, who expects his fund to invest up to $200 million every year in technology companies.
Other funds such as Matrix Partners and Bessemer Venture too are increasing their focus on early stage venture deals. “We will have about 18-20 companies in the next 2-3 months in our portfolio, out of which 70% odd will be internet focused,” said Avnish Bajaj, managing director of Matrix Partners India which has backed companies such as classifieds firm Quikr and cab rental service firm Olacabs.
Bessemer, which closed several infrastructure deals since it began investing in India in 2006, has now moved focus primarily to technology investments. “I decided to move to Bangalore a few months back to further build on our success there,” said Vishal Gupta, managing director of BVP India, which has backed online e-tailer Snapdeal and marriage services portal Bharatmatrimony.
The challenge for all these funds will be to provide their LPs with a minimum return of 2-3 times of capital deployed. “While several funds have done well at a portfolio company level, not many have been able to deliver at the fund level,” said Tan. Providing returns in an exit market, which is still not as vibrant is one of the biggest hurdles according to VCs.
“I think the velocity of how the industry evolves is going to be a function of how quickly we see the exit cycle play out,” said Karthik Reddy, cofounder of Blume Ventures, an early stage investment firm that raised `100 crore fund in 2012.
Mitra of Accel Partners is of the view that India is still a market where only the market leader can have a reasonable exit. “Even a decent number two or three don’t make it,” he said.
Most exits will need to come through acquisitions as IPOs continue to be rare. “Smart global companies are sniffing and are making their plans as we speak,” said Sanjeev Aggarwal, senior managing director of venture firm Helion Advisors, one of the most active venture funds this year with investments in mobile payment company Ezetap.
With a more business-friendly regime in place, several investors believe the best is yet to come for the venture industry, where leadership positions are being clearly drawn up just as in mature markets. “Leading firms have better deal flow and access to networks that create value for portfolio companies,” said FLAG