Indian VCs feel global meltdown heat

Bangalore: In the midst of global slowdown in financial markets, even though the venture capitalists (VCs) are confident about not having any slowdown in the number of deals in the short term, still it cautions the investment firms.

"VCs will overall be a bit more conservative with their investments and look for solid teams with reduced execution risk with some level of customer or market traction at a bare minimum," Mohanjit Jolly, Executive Director, Draper Fisher Jurvetson, India told Mint.

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Also, due to the financial crisis expected to run well into October, limited partners (LPs) investing in venture capital funds are asking for higher returns, which may not go down well with the entrepreneurs.

Investment bankers are seeing an early slowdown in the pace at which venture capital-entrepreneur deals are made. The drying up of liquidity could be critical for venture capital funds, particularly those on the verge of exhausting their current corpus or looking to raise a new fund next year. Lightspeed Advisory Services India, Managing Director Srini Vudayagiri says, LPs, particularly in the U.S., are, for the first time, paying attention to an investee company facing a downturn. Small funds may not be able to meet the capital demand of portfolio companies, with the option of going public being ruled out for at least a year.

Ziva Software, a Bangalore-based mobile search company, is already anticipating difficulties in raising its second round of funding." In the short term, there's been no impact. But in six months' time, when we will start talking about second round funding, the real impact will be observed and felt," says Ajay Sethi, co-founder of Ziva, which raised $1.7 million seed capital from Ojas Ventures in 2006. The firm is taking steps to counter the long-term market conditions, such as cautious spending, and accelerating work to get a quicker cash flow.

Faced with such a situation, some entrepreneurs are taking to short-term debt to tide over their working capital needs of six months. A few firms have completely given up on the idea of raising capital from VCs.

A Mumbai-based online portal, which was looking at raising $6 million, was asked to dilute 45-50 percent stake. The firm, instead, is now raising $0.5-1 million from angel investors to fund its immediate working capital needs, and will look at raising funds after six months or so, when the market is expected to settle down.