India is increasingly gathering attention in the world of global venture capital investing. In Deloitte’s 2010 Global Trends in Venture Capital Survey, 68 percent of Indian VC respondents expected the quality of deal flow to improve over next five years, and 76 percent expected LPs to be more inclined towards investing in India. And why not – with a PPP adjusted GDP of $4 trillion that grew at about 8.4 percent recession-proof average between 2006-10, and a 350 million middle class and 750 million working age population powering the economy, there seems to be no stopping the Indian economic juggernaut. It’s also heartening to note that VCs have put money where their mouth is, by pumping in close to $3 billion in India during 2004-09. Expectedly, the Indian VC environment is dominated by technology, with the space constituting about 70 percent of all VC investments during this period.

With the Indian VC industry witnessing about 140 venture-backed exits between 2004 and 2010, along with MakeMyTrip’s recent IPO providing excellent returns to investors, doubts about exit potential have been quelled to a large extent. The Technology VC space, in particular, witnessed 95 exits during 2004-10 out of which, about 70 percent comprised of M&As. With sectors such as Mobile VAS, Software and Internet providing return multiples in the range of 7x to VCs, the space has not disappointed from an exit perspective.

IDG Ventures India focuses on investing in technology and technology-enabled companies based out of India. Increasingly, we are seeing the rise of serial entrepreneurs and disruptive technologies in India, across sectors such as medical devices, business intelligence and Internet. Belief in scalable commercialization of these technologies is cemented by the financing trends of companies such as Perfint, a medical devices player that received Series A investment from IDG Ventures India and Accel, and that has now gone on to receive follow-on financing from quality investors such as Norwest Venture Partners (NVP). We are also seeing deep intellectual property being increasingly created by Indian startups.

Bangalore continues to be the nerve center of Indian technology VC space, comprising about 40 percent of deal volume during 2004-09, followed by Mumbai, Delhi NCR, Chennai and Hyderabad, along with Pune to a lesser extent. It’s getting extremely difficult for VCs that don’t have a strong presence in Bangalore, to do high quality technology deals.

In all these aspects, Indian VC space is gradually shaping up to be similar to Bay Area investing wherein VCs have access to game-changing and IP rich startups in select concentrated locations, and wherein large PE players are willing to step in as follow-on investors . IDG Ventures India has 11 portfolio companies across diverse technology segments, and continues to remain extremely positive on Indian technology investing. At this point, it might be useful to take a step back and analyze key drivers and emerging opportunities in this space.