By Deepti Chaudhary & C. R. Sukumar
When venture capital (VC) investors entered India some five years ago, their bets were primarily on technology start- ups. Today, they are struggling to find tech companies to strike deals with because of a dearth of winning ideas.
VC firm Ojas Venture Partners' last investment in a tech start-up was 18 months ago. Canaan Partners India's last deal was in October, IDG Venture India's most recent deal was in January, Inventus Capital Partners' last deal was in July 2009 and Intel Capital's three deals announced in March were struck over a period of six months.
What's striking about the break in deal-making is that these VC firms are a rather robust group of investors who typically make three-four deals a year.
But what's stopping them is a lack of innovative ideas and a plethora of me-too business models, said Ojas' managing partner Rajesh Srivathsa. Ojas' last investment was in New Delhi-based education software firm VIA Human Re- source Solution Pvt. Ltd, which runs CoCubes.com.
“By and large, there are not enough opportunities for early stage investors to tap into,” said Srikanth Narasimhan, director at Bangalore-based investment bank Veda Corporate Advisors Pvt. Ltd. “Telecom, mobile (and the) Internet have not played out as well as was expected. Unless some fundamental shift happens in a space, there is going to be a dearth of good opportunities,” he said.
Many Indian tech start-ups are into developing applications for products or services rather than creating market- grabbing technologies, which leaves VC firms wanting at least a first-mover advantage even if the firms aren't very different from others in the space.
“We look at the market and the management team, gauging if the company can reach a scale of $50 million (Rs233.5 crore) to $75 million in the time frame of four-six years to give us exits,“ said T.C. Meenakshisundaram, founder and managing director of IDG Ventures.
In January, IDG Ventures invested Rs15 crore in business intelligence firm iCreate Soft- ware Pvt. Ltd--its 11th since late 2006, when it launched in India.
Also, after the slowdown of 2008-09, there's less appetite for long-term investments of 7-10 years and VC firms have turned wary of putting in a lot of capital in one start-up. Investors now want good re- turns in a shorter time, which means start-ups that need $15-20 million for two-three years may find it difficult to find backers.
“We are only looking at capital-efficient firms,” said Samir Kumar, managing director, Inventus Capital Partners India, whose last deal was in Red-Bus.in, an online aggregator of bus tickets.
Entrepreneurs are indeed feeling the punch. A Bangalore-based start-up developing value-added services (VAS) for cell phones has been turned down by three investors in the past eight months. “We guess the general perception of the mobile VAS space is that every offering is me-too in one or the other way,” said a promoter of the firm, requesting anonymity as he is still trying to raise funds.
The other issue for investors is that there aren't many large companies on the hunt for IT start-ups. “That has been traditionally a problem for venture investments in India,” said Harish Gandhi, executive director, Canaan, that invested in MXC Solutions India Pvt. Ltd, which runs an online market for used cars, in October. “We don't have large-scale acquirers like in the technology space in the US such as Google Inc., Yahoo Inc. and Microsoft Corp. In India, we don't have that scale of companies as acquirers.”
That means the only other exit option for VC firms is initial public offerings (IPOs). “For IPOs, you need to have revenue at a certain scale and you need to have growth at a certain scale. It depends a lot on global markets and IPO environment,” said Gandhi. “So the exit scenario tends to be harder.”