"When I come to India it is like breathing fresh air," said Mark Tluszcz, co-founder and MD of Mangrove Capital, which is best known for investments in Internet telephony firm Skype Based in Luxembourg, Mangrove Capital is right now raising $100 million ( 490 crore) for a fund, its first, to invest in early-stage Indian start-ups.
Investment in start-ups and early-stage companies totalled just $300 million in 2010. But last year, it expanded more than four-fold, making up $1.2 billion of the $9.3 billion in total risk capital. On the other hand, the proportion of growth capital investment in more mature companies fell to 61% from 83%. "A lack of sizeable opportunities and expensive valuations for mature businesses have led funds to co-promote start-ups," said Mayank Rastogi, partner (private equity) at Ernst & Young.
Blackstone, one of the world's foremost private equity firms, is hunting for smaller venture deals instead of large growth capital investments.
"These are opportunities which have come to us and need to be scaled and turned around quickly," said Blackstone India Chairman and Senior Managing Director Akhil Gupta.
Marquee investment firm Sequoia Capital has also upped its stake in the venture capital arena with three deals within the past one month alone.
These include a Rs 20-crore investment in Freecharge.in, an online recharge website, and Rs 35 crore for Knowlarity, a start-up that builds inexpensive voice and data communication products for small entrepreneurs.
Pedigreed Silicon Valley firm Accel has shelved plans to raise a $400-million growth fund to focus instead on venture capital, raising a $155-million fund.
There are now at least a dozen angel groups in addition to the well-known Mumbai Angels and Indian Angel Network that are investing high-risk seed money, sometimes as little as Rs 50 lakh, in very young companies.
Indian Angel Network made at least a dozen investments in 2011 while Mumbai Angels sealed 15 deals.
"The angel ecosystem is great for entrepreneurship. We are willing to invest less than $1 million in a young company and go up to $20 million depending on the opportunity," Sequoia Capital Managing Director Mohit Bhatnagar said.
While the boom in e-commerce accounted for a major chunk of deals in 2011, other sectors such as hospitality, retail and healthcare too were attractive to venture investors.
"We are looking for people who want to take control of their lives by becoming entrepreneurs. The more weird the idea, the better it is for us," Tluszcz of Mangrove Capital said. In November, Mangrove invested in group buying portal Deals and You and online shoe store Bestylish.
"The start-up ecosystem is vibrant today," says Sasha Mirchandani, co-founder of Mumbai Angels, who is cashing in on the opportunity by setting up his own fund, Kae Capital. "Our sweet spot for a first cheque will be around Rs 2-2.5 crore," he said.
Besides, valuations are not as big a challenge in venture funding as they are in growth capital. There are not as many investors, and hence competition is not as high. Moreover, the ability of first-time entrepreneurs to demand a premium is relatively lower, said E&Y's Rastogi.
Venture activity is also being boosted by the strong exits of smaller funds. Nexus Venture, which manages $320 million, has recorded at least five exits in the past year, including the sale of its stake in information technology infrastructure company NetMagic to Japan's NTT Communications and Red Hat's acquisition of cloud storage start-up Gluster.
According to a study by technology fund IDG Ventures, between 2004 and 2011, there were 152 exits by venture funds in India, with nearly three-fourths of these from technology companies. Nearly a third of these exits provided returns of $100 million or more, pointing to their high quality.
Technology investors earned more than five times the amount they invested in this period compared with an over three-fold return in non-technology investments. "Eventually, for the venture capital markets to be viable, there has to be visibility of returns in a reasonable timeframe," said Subrata Mitra, a partner at Accel, which has backed a slew of start-ups, including Flipkart. "The ecosystem is stronger, we have more entrepreneurs and consumers on the internet, and people with higher disposable incomes," he added.
IDG Ventures estimates that by 2015, venture capital alone will exceed the $9.3 billion in total risk capital that was invested in India last year.
The lion's share will be allocated for technology companies.
Apart from venture capitalists, a host of private equity firms are also shifting focus to early-stage funding. In September 2011, Goldman Sachs invested ReNew Wind Power while IDFC PE incubated renewable energy company Green Infra. "Private equity funds have identified some opportunities which are scaleable quickly," said Avinash Gupta of financial services advisory for Deloitte in India.
In contrast to venture capital, the private equity industry is going through a rough patch, with few funds able to demonstrate viable returns.
Dhanpal Jhaveri, managing partner of Everstone Capital, which has invested only 15% of its second $580-million fund, said he is having difficulty finding the right companies to invest in at the right price.
Sectors such as power, which are bogged down in a regulatory mess, deter rather than attract investors, he contended.
"We will see a lot of pain for the private equity industry," Jhaveri predicted.
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