India still hot for VC(2)

India continues to be an increasingly attractive prospect for venture capitalists. The first quarter saw an increase in investment, while the number of successful exits offers further cause for optimism.

India continued to cement its position as one of the world’s most entrepreneurial countries in the first quarter of 2007.

The world’s largest democracy, ranked by one study as the second most entrepreneurial country in the world, saw venture capital investment rise again during the first three months of the year. VC firms invested $130 million (€277 million) in 20 Indian deals, according to a study by research firm Venture Intelligence and the US-India Venture Capital Association.

The figure is a slight increase on the equivalent period in 2006, when $125 million was invested, and substantially higher than the $37 million figure for the first quarter of 2005, according to Arun Natarajan, chief executive of Venture Intelligence.

Sudhir Sethi, director of US-IVCA and managing director of IDG Ventures India, believes the amount of early-stage investment in India is a good indicator of the health of the market. “We are witnessing a significant number of early-stage investments taking place in the $1-3 million range which augurs very well for the VC ecosystem in the country,” he said.

More than half of the new investment was in the IT sector, with around $73 million invested in 14 deals. However, in addition to traditional venture capital target sectors like outsourcing and internet-based services, firms also invested in areas like enterprise software and even microfinance providers.

In the most recent study by the Global Entrepreneurship Monitor, a US/ UK-led research project that tracks entrepreneurial activity around the globe, India was second only to China as an environment for budding entrepreneurs. The report concluded that one in ten people in the country was engaged in some kind of entrepreneurial activity, with a much less noticeable gender split than in China.

The GEM report also noted that the environment for exits was also excellent, with a number of acquisitive large players. Last quarter this was also in evidence, with successful VC exits taking place through the sales of software testing firm RelQ, receivables BPO firm Global Vantedge and FM channel Music Broadcast to trade buyers.

Of course, the presence of these big players does have a downside – it makes it harder for small entrepreneurial businesses to get up and running in the first place. But for a venture firm, which will typically back a company which has already established some market share, the downside is relatively limited.

The public markets also proved to be a good exit environment for VC firms in the first quarter, with three highly successful flotations of VC-backed companies.

IT services company MindTree Consulting, which was founded in mid-1999 by a group of ex-Wipro alumni and backed by Walden International, raised $53 million from its February listing and has since seen its share price almost double. Business process outsourcing firm FirstSource and television news company Global Broadcast News also completed successful flotations during the quarter, providing lucrative exits for their venture capital backers.

It is not all good news for entrepreneurs in India. Participants continue to complain about the stifling level of bureaucracy that pervades much of Indian public life, while in some parts of the country there are still some problems with the infrastructure. Furthermore, GEM believes India’s politicians could be doing more to support enterprise through their policy-making.

But as the amount of venture capital money flowing into India continues to increase, it is clear that firms are still enthusiastic about the opportunities in the country. And that should mean more of the same for the coming year.