May 2010
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Foreign venture capitalist funds bet big on Rising India


Mumbai: Early stage funding for promising start-up firms appears is set to receive a boost with local and foreign venture capital (VC) investors lining up investment plans as the economic recovery gains strength both in India and abroad.

Over 30 new VC funds have started putting money in start-ups across various sectors such as clean technology, micro finance, rural technology and genomics apart from conventional segments, a marked contrast to the bleak days of 2007-08 when the global financial crisis hit these investors hard.

The pace of economic recovery now coupled with factors such as higher investment returns and easier exit options have triggered off fresh interest among both domestic and foreign VC firms to invest in India. Amongst foreign VC (FVC) firms, funds such as Artiman Ventures, BAF Spectrum, ATEL Ventures, Blue Orchard, Mercatus Capital and Foundation Capital have already made the initial investments in Indian start-ups.

Newly-set domestic venture capital (VC) funds such as Aavishkaar Goodwell, Ambit Pragma, Axis Holdings, Rabo Equity and VC Hunt are also cutting deals across sectors, according to data maintained by private equity tracker- Venture Intelligence.

“The economic slump has not hit India as badly as it has impacted the West. Early-stage investing is a risky proposition in indecisive markets. This is where India scores well over other markets. Venture funds are seeing limited downside potential while investing in Indian start-ups,” said Harshal Shah, CEO, Reliance Technology Ventures.

VC firms invested $475 million over 92 deals in India during calendar 2009. In the quarter to December alone, VC firms logged 42 investments worth $265 million — significantly higher than that during the same period in 2008. According to analysts, one of the main reasons for VC gathering pace in India is higher returns and easier exit options.

Most VC funds expect a return of 25-30% on their investments annually. VC funds that invested in listed companies — or had investments at the time of going public — exited these stocks at high prices when markets were climbing in mid-2009.

Companies such as Gayatri Bio-organics, First Solutions, Excel Glasses, ESS DEE Aluminium. Punj Lloyd, Motilal Oswal Financial and Gujarat State Petronet have seen an exit of VCs from their shareholding scrolls. Companies such as Compulink Systems and Spanco and groups that recently came out with public offerings such as Pipavav Shipyard and Indiabulls Power still have VC holdings between 7% and 20%, according to ETIG’s database.

“The risk aversion attached to early stage investing during economic downturn has come off by a good measure. Once the start-up is validated, venture capital funds do not have any reservations to invest in them these days,” said Gaurav Saraf, director, Epiphany Ventures.

While domestic VC funds have it easy in respect of receiving licences, the majority of foreign VC funds are investing in India through the foreign direct investment (FDI) route. RBI is granting approvals to funds to exclusively invest in nine specified sectors (with tax pass-through benefits) namely IT, biotechnology, nanotechnology, poultry, dairy, biofuels, hotels and hospitality centres, seed research and chemical research & development.

Foreign funds would want to invest in India through the foreign venture captial route as it allows them an easy exit at the time of an IPO. Funds investing through the FDI route will have to hold on to their investments for one year after the listing,” said Pranay Bhatia, partner, Economic Laws Practice.

According to Mr Bhatia, foreign VC funds, at the time of exit, will have to adhere to the valuation guidelines if they are investing through the FDI route.

RBI’s valuation guidelines is not applicable to funds that come through the foreign VC route. Foreign funds investing in domestic venture funds (that are incorporated as trusts) will have to obtain approvals from the Foreign Investment Promotion Board. This is not needed in the case of funds investing through the FVC route.
 
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