US venture capitalists into India

U.S based venture capitalists (VCs) lining up a huge investment of about $4.4 billion (over Rs. 20,000 cr) for Indian entrepreneurs. It’s like raining dollars for country’s startups and early-stage companies.

According to a new study, over 44 US-based VCs have either raised or are in process of raising about $400 million for early stage investments in Indian companies over the next 4-5 years.

The latest trend is being seen by the industry experts as a resurgence of VC activities in the country following losses incurred by the venture capitalists and private equity investors during the bust that followed the dotcom boom in late 1990s.

The firms have already raised about $1.75 billion and an average of $100 million each would take the total funds to about $4.4 billion. This amount is equivalent to investment worth $22billion in the US or Europe on purchasing power parity basis, global research and analytics services firm said in a report.

While the renewed interest of VCs in the country could lead to a possible overheating of the market, it should not be taken as a “bubble� said the chairman of the firm.

On the back of the resurgence in fund-raising and investment activities, an overheating of the early-stage VC market in India is more likely to occur if VCs continue to focus on their traditionally favorite sectors like IT, BPO, telecom and Internet.

When markets overheat, they usually cause inflation and this may occur in India as well. So, if the VC market for early stage investment overheats then there would be more liquidity in the system and entrepreneurs based in India would have easier access to money and the valuations of their companies will rise.

The diversification process has already started with a number of firm branching out into new areas beyond the IT and related sectors. A very important feature of the resurgence in the VC activity in India since 2004 has been that the VCs are no longer focusing only on the IT and BPO sectors but outside these as well.

The latest surge in venture capitalists’ interest in early-stage companies could not be termed as a bubble like the one at the time of dotcom boom. The industry experts argue, as the investments are not limited to the once-favorite IT sector and target fundamentally stronger companies across various sectors.

This shift is partly due to the Indian economy no longer remaining limited to the IT sector and spreading more evenly to sectors like biotech, and pharmaceuticals, healthcare and medical tourism, auto components, travel and tourism retail, textiles, real estate and infrastructure, entertainment and media and gems and jewellery. IT and ITeS accounted for over 65 % of the deals in 2000and fell by about 23% in first half of 2006. But the share of deals in other sectors increased substantially.

The above figures reveal that the India as a leading economic power is well recognized by the said VCs and are very well prepared to invest their money spreading out to various sectors not just IT alone. This augurs well for Indian entrepreneurs and up coming industries.