Corporates lead India VC into the light

India Market for start-up investments is finally stirring. The stumbling start experienced by venture capital firm India Innovation Fund (IIF) to some extent reflects the challenges faced by the industry as a whole. Over three years ago, IIF announced plans to raise a $22.5 billion debut fund, but a string of personnel problems mean that it is still only halfway there.

With investments in two start-ups being finalized and three more in the pipeline as of June, however, IIF’s fortunes may now be turning – as are those of the industry.

Jai Das, managing director of SAP Ventures, an investment arm spun out from the software giant, says the early-stage market is taking off. “I can count at least six different smaller funds that have been set up and there are probably a lot more,” Das tells AVCJ. “People have realized the need for angel investors. We get calls from successful Indian entrepreneurs wanting to work with us.”

Small beginnings

It is generally agreed that, while progress is certainly being made, it is incremental. Sudheer Kuppam, managing director of Intel Capital India, estimates that India’s venture capital industry is four to five years behind China. This view is corroborated by AVCJ Research. Start-up investment in China peaked in 2008 at $3.7 billion, accounting for around 24% of all private equity activity. Indian start-ups drew $1.5 billion the same year, 14% of the total.

In 2010, start-ups in China and India received investment of $1.4 billion and $685 million, respectively. As a proportion of total activity, India overtook China, with 8% to 7%, but the numbers are distorted by the explosion in growth capital in the latter nation. Venture firms were very much part of this movement, having started to pursue larger value deals.
India’s slow start is largely blamed on investor conservatism. After a wave of tech-focused VC deals made around 2008 failed to perform, funds fled to the perceived safety of traditional businesses and established business models. Suddenly, restaurants and coffee shop chains became the order of the day; investments clearly aligned with wider economic growth and rising disposable incomes.

“They went for small- and medium-sized enterprises that already had business plans, scale and size, and were looking to scale up,” says Nikhil Khattau, director of Mayfield India fund, a growth capital vehicle.
This left a funding gap in the early-stage tech space, typically among companies or entrepreneurs that had ideas but not the means or the track record to commercialize them. The gap has been filled by a combination of corporate funds and small operators who struggle to raise capital from conventional channels. IIF is a case in point: Investors in its latest vehicle include Tata Consultancy Services, Bharti Airtel, the Small Industries Development Bank of India, and the Department of Science and Technology, a government entity.

On the corporate side, the funds may be domestic entities, created by the likes of Tata and Reliance Capital, or the investment arms of multinational tech firms looking for exposure to new markets and technologies.
Intel Capital is the longest standing of the foreign players; it made its first investment in India in 1998 and since committed capital to around 60 companies. It set up the $250 million Intel Capital India Technology Fund in December 2005, which is about 60% deployed. SAP Ventures covers India via its $355 million global fund and two of six deals completed so far this year have been in the country. Das expects 20% of the total capital to be channelled into Indian companies.

Google, Nokia and Siemens also run global venture units that target India. Unilever – which already has one venture unit that focuses on tech investments Western Europe and North America, and part-owns another that looks for European consumer sector deals –  is planning a fund dedicated to emerging markets, particularly India and China. According to a Unilever spokesperson, the vehicle will make strategic direct investments as well as investing in funds that pursue small- to mid-size companies.

Creating an ecosystem

Aside from these corporate activities, an ecosystem that facilitates start-ups is emerging. Many of the Indian Institutes of Technology now sponsor incubators, creating the kind of cross-pollination between business and academia that worked well for Silicon Valley and Stanford University. Entrepreneurs of Indian origin are returning from the US armed with VC experience, so the still-shallow talent pool is deepening.

Das is confident that, given three or four years, India will have several established versions of US commercial incubators like Y Combinator or TechStars. “Some of the CEOs of our portfolio companies are already thinking about it, but the biggest challenge is successfully scaling this business,” he says.

For more evidence of the industry’s strong growth prospects, look no further than rising valuations among early-stage companies as capital chases a limited number of deals. “Last year we walked away from half a dozen deals post term sheet [after entrepreneurs asked for more money],” says Kuppam. “But when you look at what is happening with 3G services and internet penetration, our view remains quite bullish.” 

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• Topics
• South Asia
• Venture
• Early-stage
• Greater China
• Intel Capital