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Venture Investors In India Must Rethink Bets

According to Venture Capital deal data released late April, investment in India doubled to $259 million compared to the first quarter of 2009. While more than $210 million was invested in business services and financial servicescompanies, very few companies from cleantech or health care made the cut.

In contrast, U.S. cleantech venture investment for the first quarter more than doubled compared to last year, proving to be more resilient that other investment sectors, with 72 deals attracting over $730 million in capital.

The other revealing aspect of the India data was the median deal size, which more than tripled to $10.4 million. This is rather curious, that Indian services companies are absorbing as much capital as U.S. cleantech companies even though dollar for dollar, salaries, overheads and other startup costs in India are much lower.

The data also suggests that the surge in venture funding was for growth-stage investments (investments targeted at companies that already have products and substantial revenue) in services companies, while there is ample room for allocating capital to early-stage companies building products.

There are three reasons why investing in early-stage startups would be optimal for maximizing long-term returns.

First, in many cases, promising companies are not able to reach the stage where they can justifiably raise the minimum level of a few million dollars that most VC firms in India like to deploy in each investment. More early-stage funding will increase that deal pipeline for growth equity investors, expanding opportunities for the entire ecosystem.

Second, as Sanjay has pointed out, VCs have been playing it a little safe, shying away from home-run bets and settling for lower but more predictable returns. And as Internet entrepreneur Rajesh Jain wrote in a blog post recently, VCs in India act like private equity investors, and private equity investors act like banks – and as fellow panelist Sanjiv Bikhchandani has noted, India’s nationalized banks are not known to lend easily to new ventures and to small and medium enterprises. Venture capitalists must not abdicate their role of providing risk capital to ideas and sectors which more conventional investors would not touch.

And finally, funding directed at technology-driven, product companies offers the prospect of outsized returns for investors, though this demands patience. A casual survey of the best exits for venture investors suggests that some of the biggest hits have been product companies with a strong technology differentiation – Google and Genentech come to mind. In a developing country like India where tens of thousands of people enter the workforce month after month, new ventures and small businesses have an important role to play in creating jobs.

While the increased venture investments in India is encouraging, it also highlights an investment deficiency in sectors like cleantech and life sciences. Venture investors should introspect on where they are placing their bets. Adjusting strategies towards early-stage funding for product companies is in everyone’s interest and would grow the entrepreneurial ecosystem manifold.


Originally Published: WSJ