Focus on capital efficiency: VCs

By SiliconIndia   |    3 Comments
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Mumbai: Venture Capitalists (VCs) have started focusing more on marshaling their resources and have decided to wait and watch when it comes to chasing new deals. "In the first half of the year, we will focus on existing businesses and the second half depends on how the first half goes," says Sandeep Murthy, Partner, Kleiner, Perkins, Caufield and Blyers and Sherpalo Ventures. Firms such as Helion Venture Partners and Draper Fisher Juvertson too say that they will be doing lesser deals.

The year 2006 saw an increase in valuations when venture and private equity (PE) investing emerged in India following an equity meltdown in the market. Data from Thomson-Reuters reveals that PE and venture firms invested $3.75 billion in Indian firms until mid-December.

"Valuations are expected to slip further in the coming months. They have already come down by 30-50 percent compared to last year. We expect it to come down further by 10-15 percent in 2009," says Chandrashekar Kandaswamy, Managing Director, ePlanet Ventures.

While this is bad news for the current investors and founders of a firm, VCs' negotiations down the rounds for portfolio firms even in the eventuality of lowering the funder's investments are looked at as a distinct possibility. This means that the gestation period needed to close a deal will be longer as VCs will be raising the bar for investments.

VCs have now started emphasizing capital efficiency in addition to strong management teams and large market opportunities as the deciding factor for new investments. "The level of scrutiny and diligence, especially around business models and financial assumptions will be higher," says Mohanjit Jolly, Executive Director, DFJ India.

VCs will also invest far more in various sectors than before, which include healthcare, logistics, clean technology and second generation outsourced services in the forthcoming year. Interest in consumer-focused Internet and mobile services is a bit subdued this year, particularly for businesses that depend on advertising alone. The year gone by saw homegrown VCs raising their second funds in a sign of confidence shown by limited partners in India.

Although fresh capital has been raised, the pace of investing has been slow. Will 2009 ring in favorable conditions for start-ups and venture firms? Only time can tell.

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