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Radical climate changes in investment have meant not only shrinking funding to purely internet startups but also an alteration in the segments that do get money, as well as tussles over company valuations, find  Sanjana Chappalli and Ashish Sinha

Illustration: Sudeep Chaudhuri

ON MAY 26, social networking site Facebook issued a press release acknowledging a $200 million investment from a Russia-based internet investment company, ending months of tussle over its company valuation. For months, Facebook had fought consistent devaluation attempts from potential investors. While the company allegedly claimed to be worth $15 billion, investors, looking for a stake in the company in lieu of a much-needed cash injection, had brought it down to as low as $2 billion.

Even though the stakes are in no way close to Facebook, Indian start-ups across industry segments too are facing similar valuation battles with investors. The companies need the money, even as venture capitalists (VCs) turn risk averse because of the global economic crisis.

The numbers are telling. In 2008, it was $740 million across 125 investments. In 2007, at the height of the Web 2.0 frenzy, it was $876 million across 144 investments. These figures, released by Dow Jones Venture Source (self-proclaimed as the premier data provider for the venture capital industry) as part of its periodical India Venture Capital Report, were definite markers of a buoyant investment economy. They reflected the confidence reposed by VC firms in Indian start-ups. The 2007 report, in fact, noted that investments in India had seen “a whopping 166 percent increase over the $349 million invested in 26 deals in 2006”— when most US based venture capital firms entered the Indian economy.

Only one quarter into 2009, it’s obvious that this year will see significant changes in the investment climate. Even though Q1 figures are yet to be released, it is obvious that investment figures are going to be a mere patch on the corresponding figures in 2008 and 2007. Against the context of the ongoing global economic slowdown, 2009 is seeing an investment squeeze for certain industry segments and an accelerated risk aversion for other segments amongst VC firms operating in India.

One indication of the investment squeeze is the number of refusals for formal interviews and discussions on funding. In several off the record discussions with TEHELKA, top executives were candid about investment drying up. “Great ideas on paper napkins and business plans on paper are no longer enough. There is no pure start-up money floating around anymore. Investors ask us if we have already signed on customers or if we have a working revenue generation model,” said a Hyderabad-based entrepreneur, who has been attempting to raise $1 million in seed funding for the last 10 months.


Companies that had successfully raised millions of dollars in seed funding as well as round one investment now talk of their investors delaying discussions centred on the next level of funding. “In this climate, milestones have moved further away. Even when we reach these, admittedly over an extended time period, the next round of cash injection seems to have vaporised — at least in our case,” said the financial officer of a company that develops applications for the mobile platform. “We have already had to engage in downsizing to make sure that we stay afloat. But without the next round of cash flow, we are looking at burnout in the next eight to 10 months,” he admitted.

This isn’t a case in isolation. Other top executives make similar forthright admissions in private, though understandably reluctant to go public with such information.

VC firms, also behind the smokescreen of anonymity, admit to an investment squeeze — but deny both the extent and the prevalence. Raising a second round of funding for the Indian market was always going to be a difficult proposition, they say.

And even where funding is available, there is a studied change in the segments attracting investments. Ask about the risk aversion that seems apparent and there is no denial from any quarter. Both mid-size and large VC firms admit to a series of funding disasters in 2006 as they flushed money into start-ups that were internet-based. The calculations were all wrong — internet penetration in India was not significant; neither were Indian users big spenders online, unlike their US counterparts. VCs who expected companies to have the cash tillers ringing by the end of the third or fourth year had framed their exit strategies within five years of funding.

In the current climate, company valuation tussles are clearly an area of dissonance between entrepreneurs and VCs. Interestingly, one VC that TEHELKA spoke with outlined the battlelines that are drawn between VC firms themselves over valuations. The firms that have already invested in companies are understandably keen to defend their decision and fight alongside company officials against devaluations from new and potential investors.

Yet another significant shift that can be seen is the movement away from internet focused start-ups to those that are able to achieve a mix of online and offline presence. Companies able to execute this mix within the healthcare, education, food and hospitality sectors are increasingly being given the thumbs up by VC firms. Look at the funding raised by Vaatsalya, a rural healthcare start-up, in early May. Though the amounts were not made public, company officials acknowledged raising money from Oasis and Seedfund VC firms. Bangalore-based Insta Health Solutions secured $1 million funding from Inventus Capital and Brand Calculus secured a $3.3 million investment from Helion Ventures.


BUT IF it’s too early to detect an investment trend in 2009, the deviation from the previous years is apparent: in 2007, the India Venture Capital Report stated that 48 percent of all financing deals in India were logged by companies in the “web heavy information services”.

If there is any good news for entrepreneurs in India, it must be the emerging presence of corporate captains as angel investors. While some have coalesced to form a loose confederation called the Indian Angel Network, others like Infosys Chief Mentor Narayan Murthy and Wipro Chairman and Managing Director Azim Premji have announced that they will extend support to young entrepreneurs. Infosys co-founder NS Raghavan has already marked his presence in the VC space with Nadathur Investments and Ojas Ventures.

And a host of corporate players, including Google and Bharti Airtel, have stepped into the fray. In September 2008, Bharti announced a $200 million innovation fund, though no public announcement of recipients has been made. As late as March 2009, Google too joined the net of VC firms with its $100 million Google Ventures. Rich Miner and Bill Maris, managing partners of Google Ventures said at the launch, “Economically, times are tough, but great ideas come when they will. If anything, we think the current downturn is an ideal time to invest in nascent companies that have the chance to be the ‘next big thing’, and we’ll be working hard to find them.”

Grand gesture notwithstanding, in the investment squeeze, it’s the entrepreneurs who have the hard task of convincing investors that their great idea is also the most bankable one.

This article was originally published in Tehelka, a leading independent news magazine in India, known for its investigative journalism. 

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