For the past seven years, a small group of people has been working round-the-clock to shape a unique investment asset class in India — venture capital or money that is invested in early stage and high-risk companies. The group is an odd mix of former first generation entrepreneurs, career executives and investment professionals. They helm the country’s most active venture capital (VC) firms and their goal is to entrench risk investing in the emerging world’s second-largest startup economy.

The hard work seems to be paying off. During 2004-10, venture capitalists invested $3.96 billion in Indian startups. Another $621 million has been invested this year, according to Chennai-based research firm Venture Intelligence. There is an established line of VC firms who have consistently invested through this period. Some are local arms of Silicon Valley firms such as Norwest Venture Partners and Draper Fisher Jurvetson. Others, such as Helion Venture Partners and Inventus Capital Partners, are independent startups themselves. By 2015, total investments will touch $10 billion, projects Bangalore-based VC firm IDG Ventures India.

The numbers underline a few important facts about the Indian startup economy. First, there is enough innovation at the startup level to encourage risk capital to make bets over a sustained period. Second, if VC investments are advancing towards the $10-billion mark, investors clearly see many more latent pockets of innovation. So far, the money has gone into myriad sectors including e-commerce, consumer services and clean tech. The net will be cast wider into areas such as cloud computing, mobile infrastructure services, healthcare, education and rural businesses.

The mood in the VC industry, as BW found speaking to 15-odd investors, is unmistakably upbeat. Confidence levels are up as several move close to completing a full investing cycle with their debut funds, an event that is itself a milestone. The last major VC outing in India ended in the dotcom bust of 2000-01 and investors retreated from the market nursing huge losses. Much of the renewed confidence has to do with the kind of entrepreneurs leading the current charge of startup activity. “The need to address the customer and the market, and not just focus on the technology or product has become internalised with entrepreneurs,” says Samir Kumar, co-founder and managing director of Bangalore-based Inventus. Another big factor is that most VC firms that sprung up after 2004 have successfully raised second funds or are well on their way. This means the startups that have been funded so far have access to follow-on funding. The dotcom bust saw several startups die because their investors had run out of cash.

Also, several investors have shown a number of profitable exits. The first notable one came last August when Delhi-based travel portal Makemytrip listed on Nasdaq to raise $70 million. SAIF Partners, Sierra Ventures, Helion and Tiger Global had invested $39 million in Makemytrip during 2005-07 for an 83.41 per cent stake. In November, when German media company Axel Springer bought online auto classifieds startup CarWale, Seedfund exited its 25 per cent stake. It had invested $690,000 in 2006. This year, Nexus Venture Partners, Index Ventures and Draper Richards exited Dimdim, a Web conferencing startup in Hyderabad, on its $31-million acquisition by Salesforce. Dimdim had raised $8.4 million from the three investors.

The investment and exits have laid the foundation for the industry’s next phase of growth. “This was a phase of discovery. Now investing strategies will become more specialised,” says Kanwaljit Singh, co-founder and managing partner of Helion. The firm is part of a select group of seven investors who stand out from peers for their exclusive focus on early stage deals. Such deals form the bedrock of a stable VC industry. These seven funds will be the first generation of VC firms in India to raise successive funds and show exits as an industry. Their success or failure will define the future of VC in India.

While most of these companies started with the intent to focus on early stage technology businesses, several have diversified into non-technology sectors. Nexus has an organic commodities producer, Suminter Organics, in its portfolio, while IndoUS Venture Partners has invested in e-waste recycling firm Attero Recycling. Helion has bet on serviced apartments with HummingBird, while Accel Partners India has invested in quick service restaurant chain Kaati Zone. Through such deals, Indian investors have carved a distinct identity for themselves. Technology, though, remains the highest funded sector, cornering 2.5 billion in VC dollars during 2004-09, according to IDG.



As more money flows in, valuations will get dearer. The e-commerce sector, which has attracted over $200 million since January this year, is an example. Online books retailer Flipkart is reportedly in line for a $150 million funding round at a valuation of $1 billion. To sustain the current momentum, India’s second generation of VC adventurers will need to find new white spaces. This means investing in younger firms and taking bigger risks. It also implies bigger returns in the long term. VC returns here have averaged between three to 10 times the original investment. The ideal is at least 50 times. If investors are able to move closer to those kinds of returns in the next five years, the VC industry can claim that this time it is here to stay.

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