The Venture Capital market
in India seems to be getting as hot as the country’s famous summers.
However, this potential over-exuberance may lead to some stormy days
ahead, based on sobering research compiled by global research and
analytics services firm, Evalueserve.
Evalueserve research shows that an interesting phenomenon is beginning
to emerge: Over 44 US-based VC firms are now seeking to invest heavily
in start-ups and early-stage companies in India. These firms have
raised, or are in the process of raising, an average of $100 million
each. Indeed, if these 40-plus firms are successful in raising money,
they would garner approximately $4.4 billion to be invested during
the next four to five years. Taking Indian Purchasing Power Parity
(PPP) into consideration, this would be equivalent to $22 billion
worth of investment in the US. Since about $1.75 billion (or approximately
40% of $4.4 billion) has already been raised, even if only $2.2 billion
is raised by December 2006, Evalueserve cautions that there will be
a glut of VC money for early-stage investments in India. This will
be especially true if the VCs continue to invest only in their current
favorite sectors such as information technology (IT), BPO, software
and hardware products, telecom, and consumer Internet. Given that
a typical start-up in India would require $9 million during its first
three years (i.e., $3 million per year) and even assuming that the
start-up survives for three years, investing $2.2 billion during 2007-2010
would imply investing in 150 to 180 start-ups every year during this
period, which does not seem practical if the VCs continue to focus
only on their current favorite sectors.
In contrast to the emerging trend highlighted above, Indian companies
received almost no Private Equity (PE) or Venture Capital (VC) funding
a decade ago. This scenario began to change in the late 1990s with
the growth of India’s IT companies and with the simultaneous
dot-com boom in India. VCs started making large investments in these
sectors; however, the bust that followed led to huge losses for the
PE and VC community, especially for those who had invested heavily
in start-ups and early-stage companies.
After almost three years of downturn in 2001-2003, the PE market began
to recover towards the end of 2004. PE investors began investing in
India again, except this time they began investing in other sectors
as well (although the IT and BPO sectors still continued to receive
a significant portion of these investments) and most investments were
in late-stage companies. Early-stage investments have been dwindling
or have, at best, remained stagnant right through mid-2006.
This article is based on Evalueserve’s experience, which includes
several hundred research engagements focused on India and the Indian
market for our globally dispersed client-base over the last five years;
and also interviews with VCs, Indian entrepreneurs, consultants, and
experts within this ecosystem, along with our analysis of data from
the Indian Venture Capital Association (IVCA) and Venture Intelligence
India. It examines whether this new, very large total investment can
actually be ‘absorbed’ by start-ups and early-stage companies
in India. We will also describe some of the ‘ground realities’
and highlight a couple of ‘best practices’ that may help
VCs to invest more effectively in India.
Note: Most of this article is restricted primarily to
early-stage VC investments, i.e., investments in a start-up or a small
company when the total amount of external money invested is typically
$9 million during its entire period of existence. This will be followed
by a separate article, which will focus entirely on Private Equity
investments in India.