VC Funds Flock to India

An increasing number of VC firms are setting up funds specifically to invest in Indian startups

September 5, 2006

3 Min Read
VC Funds Flock to India

It seems the venture capital community can't resist the lure of India's red-hot technology sector, and an increasing number of firms are earmarking funds specifically to invest in Indian startups.

The Indian economy is seeing explosive growth across the board, and the traditional sectors for investment -- including telecom, IT, and, business process outsourcing -- are growing at a rate of five times GDP, making them a prime target for "tourist VCs" -- firms from outside the country looking for investment opportunities.

According to a report from research firm Evalueserve Inc. , 44 venture capital firms have already raised funds to invest in Indian startups, and another 21 are in the process of doing so -- and that's just in the U.S.

In August alone, at least five India-specific funds -- totaling more than $600 million -- were announced by VCs in the U.S., Switzerland, and Japan that will include telecom among their target sectors.

Clearstone Venture Partners , which has a $200 million fund, has opened an advisory office in Mumbai under the name Clearstone Venture Advisors. The firm plans to invest between $2 million and $5 million in early-stage companies.

Matrix Partners has set up a $150 million multi-stage fund, targeting "technology-powered sectors" like outsourcing, Internet, mobile services, and IP-based products. (See Matrix Closes $150M.)

Helion Venture Partners recently launched a $140 million multi-stage fund, and has already invested $2.2 million in JiGrahak Mobility Solutions, a startup developing mobile payments applications. (See Helion Launches Fund.)

BTS Investment Advisors , a Swiss private equity advisor, has established an $80 million "BTS India Private Equity Fund," that will invest between $1 million and $5 million in medium-size enterprises looking for capital expansion.

In Japan, SBI Capital Markets Ltd. has teamed up with Softbank Investments to launch a $100 million fund for India. Investments will range between $5 million and $10 million, targeting BPO services, online businesses, and "technology-enabled design and manufacturing" among other areas.

Rahul Khanna, director at Clearstone, says the Indian market is reaching a "critical mass" of startups that make it worthwhile for VCs to establish a presence there. A "culture of innovation" has emerged, he says, thanks in part to the emergence of a private sector in India and the wave of entrepreneurs returning home from Silicon Valley over the last few years.

Although Indian businesses were traditionally funded as backend operations for Western companies, investors are now seeing the potential of India's domestic market -- particularly on the mobile front.

With the mobile services sector booming, Khanna predicts that in India, where PC penetration remains low, "mobile can do what the PC has done in [commoditizing] the Internet in the West." A mobile subscriber base of over 110 million, growing at a rate of more than 1 million every week, provides a huge potential market for a range of services.

Clearstone is looking at several handset companies for investment. Khanna says that, rather than simply offering mobile service businesses, startups are beginning to go beyond content and branching out into multiple horizontal services such as payments and gaming, with mobile devices as the common platform.

According to Evalueserve, investments in India began picking up in 2004 with the recovery of the global technology markets. Venture capital and private equity investments in India rose from $1.65 billion in 2004 to $2.2 billion in 2005, and had already reached $3.48 billion by the end of June this year.

Alok Aggarwal, author of the report, writes: "We forecast that the total investment in 2006 is likely to be $6.3 billion, a number that is more than five times the amount invested in 2000."

— Nicole Willing, Reporter, Light Reading

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