Global venture capital insights and trends report 2011
Venture capital perspectives - India
"VC funds are trying to invest across sectors that allow them to tap into the rapid growth in domestic consumption." Mayank Rastogi,
India VC Leader, EY
Outlook: strong with continued growth
- High VC investment levels are anticipated for the next few years, with India's 8% GDP growth rate, existing VC funds making attractive exits and an increasingly active VC/angel investor community seeding young companies.
Overall, 2012 and 2013 should be exciting years for India's VC investing as new innovations and business models in areas such as e-commerce, mobile applications, health care delivery, medical devices and technology, ﬁnancial inclusion, clean technology and IT are likely to drive most of the activity.
The availability of ample funds for India investments augurs well for the VC industry in the next few years.
- However, the growth capital venture space in India is getting overcrowded. With about 400 VC funds in operation, this glut has driven up valuations, prompting concerns by many investors, although there is still plenty of room for early-stage VC funds.
VC industry is healthy and active
VCs have been particularly lively since 2006, with the industry just a little more than a decade old. In 2011, US$1.5 billion was raised in 155 rounds, while in 2010, US$1.1 billion was raised in 103 rounds.
Recently, the country has been primarily a growth-capital market, with a median deal size of about US$5.5 million in 2011 and US$7.9 million in 2010 across PE/VC investments, making it difficult to distinguish between pure VC and PE investments in India. If VC is deﬁned as seed and early-stage funding, since 2008, India has seen close to or above 100 deals each year.
India VC investment, 2005–11
- VC deals make up 7% to 10% of the total annual PE/VC deal value in India. At least 610 VC deals, worth more than US$6.5 billion, have occurred since 2006. After the slowdown due to the global ﬁnancial crisis, investment activity is again picking up.
- A hybrid strategy of growth and late-stage investments has been adopted by many VC ﬁrms recently, expanding the ﬁeld of businesses they can support and diversifying risk. The smaller growth-capital check sizes in India have supported this trend.
- Key growth drivers include high GDP growth, a growing middle class, a large and vibrant entrepreneurial ecosystem, entrepreneurs and fund managers paying increased attention on early-stage investments, and the emergence of a domestic network of angel funds. Thus, both demand- and supply-side factors should support healthy activity in the industry.
- Bangalore remains the hotbed of the VC industry, but activity is spreading across the country, especially to Mumbai, Hyderabad and Chennai.
IT and other domestic consumption sectors prevail
The technology sector has led VC activity in India since the advent of the PE/VC industry in India in the late 1990s, and it still accounts for more than 50% of deal activity. VC activity has focused on the internet and telecom-related businesses. In the last couple of years, health care, ﬁnancial services and cleantech have also been active.
Domestic consumption is a key theme. VC funds are closely pursuing companies that are capitalizing on the proliferation of wealth, a burgeoning middle class, greater ﬁnancial inclusion and superior and differentiated health care delivery models. Such trends are expected to continue, with VC funds trying to invest across sectors that allow them to tap into the rapid growth in domestic consumption.
Fund managers' conﬁdence in India is apparent in their willingness to seed and help manage new businesses in their formative years. This is especially true for sectors that have not seen much VC activity in the past, such as consumer products, ﬁnancial services and logistics. This is a departure from the conventional VC model of ﬁnd and fund.
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