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Venture investments defy gravity

Unfazed by fears of a slowdown, Venture capital funds continue to pump money into tech startupUnfazed

31 July 2008

If dismal quarterly results and hammered stocks are painting a bleak picture of the tech sector, here is the proverbial silver lining. Venture Capitalists (VCs) are surprisingly upbeat. Last week alone, five companies in India have raised funds from VCs like Intel Capital, SAP Ventures, Canaan Partners, Helion Venture Partners and SVB India Capital Partners (venture fund affiliate of Silicon Valley Bank).

"There is a lot of money chasing good technology stories," according to the promoters of companies like iYogi and United Lex who have just raised money. While iYogi raised $9.5 million in Series B financing from SAP Ventures, Canaan Partners and SVB India Capital Partners; United Lex raised $6 million.

And so far data bears that out. ln an otherwise tough economic environment, VC investments  in the first half of 2008 are broadly at par with the numbers last year. In the six months to June, VC firms invested $340 million in 51 deals compared with $363 million in 55 deals in the same period last year, according to VC tracking firm, Venture Intelligence. Other investors, however, have not been able weather the slowdown.

Private equity (PE) deals, for one, have shrunk to almost half in the first half of 2008. The total value of deals announced in the first half of 2008 was $760.17 million against $1.47 billion during the first half of 2007 respectively. Number of deals has also shrunk to 25 from 37 in first half of 2007. Mergers and acquisitions also reduced to deals worth $627.7 million compared to $1.02 billion in first half of 2007.

"VC investments this year are quite similar to what we saw last year. About half of our people are based outside US. So it's only natural that we look for investment opportunities in other parts of the world," explains Intel Capital president, Arvind Sodhani. Intel Capital pumped in $17 million into an online portal Yatra, events-oriented social network Buzz in Town, and an out-of-home (OOH) advertising company Emnet Samsara.

And Intel Capital is not alone. Several VC bigwigs have set up set up India-focused funds worth $300-400 million, besides investing senior partners time on evaluating Indian firms.
While everybody seems to be chasing innovation, 'me-too' type of business models have takers too. Portals like Yatra, for instance secured a funding though half a dozen VC-funded travel portals already exist in the country, simply because every VC fund wants a travel portal in its portfolio.

Similarly, specialised outsourcing story also continues to sell. Legal process outsourcing firm United Lex claims it could complete the entire funding cycle in 90 days. "We won't invest in a vanilla call centre but we are amazed by the way this BPO onion keeps peeling itself in so many different ways," says Canaan Partners managing director, Alok Mittal.

While IT companies continue to account for most of the investments, VCs are increasingly focusing on alternative energy, retail, healthcare, media and other consumer-led sectors, mainly mobile and online services.

Alarm bells have been ringing for VC deals for long now. Slowdown in exit market is worrying many investors. For the first half of 2008, PE players made six exits through initial public offerings (IPO). Last year, 16 exits took place via IPOs while the number for 2006 was 19. Tough exit market and fear of tech slowdown have shrunk the VC universe in the US to 844 from about 1,200 at the turn of the century. VC funding has also shrunk to about third of over $100 billion in 2000. Unfazed VCs continue with a steady flow of investments in India. "VCs are less impacted by the slowdown in exit options," explains Mittal.

Interestingly, VCs have never shown this kind of resilience during the slowdown earlier. But India was a different story then and most VC funds have the same level of commitment. "There were far fewer dedicated funds then and it was much simpler for global funds to simply pack off when they saw signs of trouble. There was no compulsion to remain invested in India then," says Venture intelligence CEO, Arun Natarajan.

Even as VCs continue steady with their deals, slowdown has made them choosier about their investments. Evaluation process is far more stringent now. Though they have committed huge funds, a VC today will wait and watch till a strong company comes its way.

While VCs are optimistic about India story today, there are many concerns like longer deal cycles. "India is very different from US. You don't get the kind of lawyers and investment professionals here and takes much longer to invest here," explains Sudeer Kuppam, managing director, Intel Capital, India, Japan, South East Asia and Australia.

Seasoned teams with strong credentials and impressive client base continue to attract VC attention. While startups looking for seed money might find it tougher to get huge bundles of money, second time funding deals are hot as they are seen to be safer than first time deals since these companies have proven themselves and some of the early risks have been taken off the table.

"It's easier for people who have raised money earlier and are going for Series B or C funding. But if you have a great idea, it is not tough for a startup to get audience with a VC," advises Uday Challu, CEO, iYogi.

Tech stocks might be wobbly but there is clearly no dearth of money chasing good ideas.