Venture capital firms, led by Silicon Valley’s best of breed, have raised close to US$2 billion (Rs8,000 crore) for investment in India since January 2006, according to informal industry estimates.
The money will be invested in seed and early-stage companies over the next four to five years. This is indeed small compared with the estimated US$10 billion that private equity firms have allocated for India during the same period, but an important step towards reviving start-up funding in the country. Start-up funding almost disappeared after venture capitalists burnt their fingers in the 2000-01 Internet bust.
The current round of fund-raising is being led by a class of investors who have been the chief drivers of entrepreneurship in the Silicon Valley (specifically the San Francisco Bay area in Northern California). During the 1999-2000 Internet era, the experienced start-up investors stayed across the ocean in the US and funnelled their funds to local teams, who had experience in doing deals, but were new to investing in start-ups.
In most cases today, however, investors with VC experience and local market knowledge sit under one roof in India. “The US venture funds that are coming in now have a significantly higher understanding of the local market,” says Avnish Bajaj, managing director, Matrix Partners India.
More than 60% of the funds raised so far will go into technology and technology-related businesses. Key target areas include product development, the Internet and mobile, and next-generation outsourcing services. Some of it will fund consumer services businesses in the retail, hospitality, healthcare, entertainment and media sectors. Most are looking to invest between US$200,000 and US$5 million per company.
The typical investment model would be to enter a company with seed funding, which could be as small as US$75,000, and scale up as the company grows. The investment horizon in each company would be three to five years.
The list of firms that have either raised or backed India funds includes Sequoia Capital, Sutter Hill Ventures, New Enterprise Associates (NEA) and Matrix Partners. There are others such as Kleiner Perkins Caulfield & Byers, Draper Fisher Jurvetson, Norwest Venture Partners, Battery Ventures, Canaan Partners and Mayfield Fund, who have not raised specific India funds, but have local teams on the ground to drive investments. Some of the start-ups that have been backed by these investors in the Valley include Apple Computer, Google, Yahoo! and Sun Microsystems.
These investors have deep pockets and bring experience on the table.
“Most of these investors work almost on a day-to-day basis with their investees. Some of them have been entrepreneurs themselves at some stage in their careers. In India, this is a new concept,” says Ashish Gupta, managing director at Bangalore-based Helion Venture Partners. Gupta started and sold two companies and angel funded others before Helion. The same goes for the co-founders of NEA Indo-US Fund, also in Bangalore. Serial entrepreneurs Vinod Dham and Vani Kola moved back from the US last year to start the fund.
The return of venture capital investors to India is not restricted to foreign players alone.
A number of local VCs, encouraged by their overseas peers, started raising new funds for India. Nexus India Capital Advisors and Seed Fund in Mumbai, GVFL Ltd in Ahmedabad and Helion Venture Partners and Erasmic Venture Fund in Bangalore fall in this category.
Helion and Nexus, in fact, have followed the Valley model in terms of structuring their teams. Their founders have either been entrepreneurs or operating managers and have 10-12 years of experience in running businesses. Nexus managing director Sandeep Singhal, for instance, co-led eVentures India’s investments in 2000-01 and later went on to co-found outsourced healthcare services start-up Medusind Solutions.