VC funds log out of IT firms

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Mumbai: Venture capital funds (VCFs), which have invested nearly $419 million in Indian information technology (IT) and business process outsourcing (BPO) firms, are now looking to broaden their investments into IT and IT-enabled services (ITeS) firms that generate revenue from local market, reported The Business Standard.

The rupee appreciation follows a sharp decline in revenues of the Indian IT sector, sub-prime turmoil and a slowdown in the U.S. economy.

The leading Indian IT companies, which have seen a drop in earnings due to this, have also to counter a possible drop in contracts from their U.S. clients due to a slowdown in the world's largest economy. During this year the rupee appreciation has gone upto about 12 percent compared to the U.S dollars.

VCFs are now looking to diversify into sectors such as consumer-based internet and mobile-technology companies, where revenues come from the local market. Venture capitalists are also looking for companies that are expanding geographically that are targeting non-U.S. markets.

According to a report by India Venture Capital, India received more than $777million as VC funds till the September 2007. About 54 percent of all venture deals in India were for IT companies, the report added.

Some of the largest venture capital deals this year include $20 million investment in BPO firm Adventity by Norwest Venture Partners, $14 million into Trianz, an IT consulting firm, by NYLIM India Fund, $7 million into Neilsoft by Trident Capital and $5.1 million into Hurix Systems by Helion Venture Partners.

"The rupee appreciation had impacted some of the companies where the fund had invested," said Ajay Mittal, Director,UTI Venture Funds. Some of the venture capitalists are even refraining from investing in hardcore IT companies.

"We don't invest in services companies where the impact on margins is higher. Rather, we prefer product companies. There is a higher degree of commoditisation in the services sector," told Kanwal Jeet Singh, MD, Helion Venture Partners, to the Business Standard.

The strengthening rupee has also led to a drop in the salary growth to 25 percent from 64 percent last year.

With the BFSI (banking, financial services and insurance) segment contributing to a large percentage of Indian IT exports, a slowdown in the U.S. is expected to hit these exports adversely.

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