by Madhav Chanchani & Snigdha Sengupta
MUMBAI: Venture capital funds, which invested a record sum in India last year, are doubling their efforts on potential winners and backing very young companies with small amounts of money as they seek to differentiate themselves from more deep-pocketed investors.
The strategy has led to an increase of nearly 50% in venture funding to $2.1 billion in 2014, with technology and consumer internet startups receiving the lion's share of the money, according to private equity research firm VCCEdge.
"There is an increasing 'winner takes all' mentality in the venture capital community," said Manik Arora, cofounder & MD at technology investment firm IDG Ventures India. The Bengaluru-based fund, which sold its stake in fashion portal Myntra earlier in 2014, has closed nearly a dozen deals in the year.
The fund has also made repeat investments in portfolio companies such as niche online retailers Lenskart, Firstcry and eShakti. Arora expects a wave of consolidation as leaders acquire smaller competitors and mergers ensue in the lower rungs of sectors such as ecommerce and consumer internet.
Last year, venture funds were a part of 246 deals compared to 227 deals in 2013. This indicates an increase in the size of investments rather than an increase in new investments, said investors who chose to back what they believe will be sure-fire successes. Overall, average deal sizes jumped by 36% to $8.6 million from $6.3 million in 2013. The jump is sharper in late-stage deals — $20.6 million compared to $7 million in 2013.
Venture capital funds are being forced to adapt to competition from private equity investors and hedge funds which are stepping onto what used to traditionally be their turf. For example, taxi-booking app Ola has won funding from Hong Kong hedge fund Steadview Capital and real estate portal Housing from Falconedge.
"The amounts have definitely increased as investors show a lot more confidence in deploying larger sums in (later stage) investments than before," said Rajesh Raju, MD at Kalaari Capital, which is an early investor in Snapdeal and has also backed furniture portal UrbanLadder.
This trend was more marked in sectors such as consumer internet, ecommerce and mobility, where funding is being used to back aggressive growth.
Several large venture capital firms also made a beeline for seed and angel funding deals. Funds like Sequoia Capital, Matrix Partners, SAIF Partners, Nexus Venture Partners and Accel Partners have increased their outlay for very early stage investments.
"There is essentially a bunch of capital available for deals below $1 million or less at seed stage," said Rishi Navani, managing partner at Matrix Partners, which has invested in at least 6-7 seed-stage companies so far.
Overall, investors deployed $109.35 million across 283 angel and seed-stage deals in 2014 compared to $69.14 million in the preceding year. This momentum is expected to continue in 2015 with the venture industry confident about the positive macroeconomic climate. However, the industry's ability to deliver exits will play a key role. The past year has not seen many significant exits and most players are hoping the tide will turn this year.
"All this money that has got invested will seek exits. Whether that is in 2015 or 2016, we are certainly set to see far more exit activity now," said Samir Kumar, managing partner at Inventus Capital Partners which has backed companies such as Cbazaar and Power2Sme and closed around six deals in 2014.
“We are also starting to see many institutional funds now active in the early stage and an emerging trend of hybrid deals beginning to happen,” said LetsVenture CEO Shanti Mohan, referring to the ph enomenon of an institutional fund co-investing with a strategic group of angel investors. IDG, which recently invested in mobile re-targeting start-up SilverEdge and recruitment portal MyNoticePeriod, said that it will look to make investments in companies in sectors such as enterprise software, consumer and healthcare.