VC deals surge amid downturn

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VC deals surge amid downturn
Bangalore: It seems India's aspiring entrepreneurs are made of sterner stuff than they are credited with. If the estimates of Indian Venture Capital Association (IVCA) are anything to go by, the risk-taking capacity of Indians witnessed a surge in the wake of the economic slowdown, which was triggered by the recession.

The average seed funding size has risen to $2.5-5 million from the pre-slowdown era's average of $1.5-2 million, according to the apex organization of the venture capital and private equity industry in India. Indications are that the amount will rise further by the middle of next year, reports Times of India.

Seed Capital is the money used to buy equity-based interest in a new or existing company. The amounts are usually small because the venture is still in the conceptual stage. "In the last one year, the number of business proposals for angel or early-stage funds has come down with the exit of non-serious entrepreneurs. Serious business plans will invariably require higher funding," said IVCA President Mahendra Swarup.

Industry estimates suggest that VC funding deals in India have touched $600 million in the January-September period, compared with the pre-slowdown average of $500 million for the period. This is despite the fact that the number of deals has come down to 150 this year till September, compared with the usual 250-260 a year.

For instance, IFCI Venture Capital Funds has already evaluated more than 150 proposals for seed funding this year. It has already closed nine deals and hopes to close four more this quarter. With the downturn in capital markets in 2008 and the first half of 2009, there was a shift in promoters leaning more towards PE deals than IPOs and QIPs, said BN Nayak, Managing Director, IFCI Venture Capital.

"Things may have changed in the past 6-8 months with public market valuations rising dramatically. But in the start-up stage, more often than not, promoters still prefer seed capital," he said. Most of the new business proposals are in sectors such as IT, ITeS, new media, FMCG contract manufacturing, packaged food, logistics, infrastructure, utilities and education.

"The VC industry is different from the U.S. one, where VCs back mostly technology product start-ups for super-normal returns. In India, there are numerous opportunities across industries to grow 100-200 percent year-on-year and provide 4-5 times returns on investments," said Nayak said.

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