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Venture capitalists view early stage prospects realistically
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BANGALORE: When venture capital (VC) firm Draper Fisher Jurvetson (DFJ) first set up operations in the country around five years ago, the plan was to focus on early stage investments. However, a few years into business the company also began investing in growth stage companies even though the core DNA of the US headquartered firm has been early stage investments.
Mohanjit Jolly, ED at DFJ, said that when the firm first entered India, the expectations in terms of finding attractive early stage startups were much higher. "We can expect 10x returns only from a few companies," he said.
VC/PE investments can be classified into seed/angel stage, early stage, and growth and late stage capital. Investments in early stage companies generally range between Rs 5-Rs 20 crore. At this stage, most companies do not have well-defined business models and are looking to develop clients, suppliers and markets. While investors in mature markets are very active in this space, in India, interest levels haven't been as high because payback periods are much longer, and more uncertain. And some say that's one reason why the four Sequoia Capital MDs who quit the company earlier this week have chosen to now focus on PIPE (private investment in public equity) deals.
Sequoia Capital is said to have been among the first VC firms in the country to launch a dedicated growth fund in 2006. This broadened the firm's historical focus on early to mid stage companies to include investments in late stage businesses and PIPE deals in India.
Norwest Venture Partners (NVP) and Accel Partners are some others who have now diversified beyond pure play early stage funding into late stage funding in India. There are only a handful of VC investors such as Ojas Venture Partners and IDG that remain dedicated early stage funds in India. According to Venture Intelligence data, the number of early stage investments over the last few years has shown a decline. From 117 deals in 2008, it fell to 77 deals in 2009 and 76 deals in 2010. Early stage VC investors in the country are said to receive about 500-1,000 proposals in a year of which they invest in only 5-10.
Sachin Maheshwari, director at growth stage VC firm Zephyr Peacock, said that VCs have begun to realize that the Indian startup ecosystem is very different from the US. Most early stage funded startups in India are service-oriented as opposed to product or IP driven. Hence it is accepted that the returns are more linear and payback period is longer.
The investment payback period in Indian early stage companies is seen to be about 5-7 years as compared to 3-5 years in the US. "There have been 400-500 early stage investments in the last 5 years with only 5-10 giving significant exits," added Maheshwari. Some good exits include those in Tutorvista, Makemytrip and Pangea 3.
Kanwaljit Singh, MD of Helion Ventures, said that as companies with good business models twinned with strong managements are few, valuations for promising startups are high. Singh added that many startups in the country are finding it difficult to scale up operations due to infrastructure bottlenecks as well as regulatory hurdles such as FDI investment caps.
Though the VC community's expectations since the mid-2000s have changed, VCs and investment bankers say that early stage investments will continue to remain integral to their plans in India. Some good exits last year and the new early stage VC investments struck this year are signs of optimism. "Though early stage investments have certain constraints, the growth of the Indian economy and a more mature ecosystem are keeping VCs interested in early stage deals. We have nearly closed three early stage deals already this year," said investment banking firm Viedea Capital's director Deepak Srinath. Even DFJ's Jolly says the firm remains committed to early stage investments as the entrepreneurial ecosystem is now maturing.
Read more: Venture capitalists view early stage prospects realistically - The Times of India http://timesofindia.indiatimes.com/business/india-business/Venture-capitalists-view-early-stage-prospects-realistically/articleshow/7518465.cms#ixzz1EhfU5f4X |
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