Venture capitalists in India | Finance your digital health startup

Venture capitalists in India

Venture capital usually made in rapidly growing firms which require enormous funding or the start-ups who have a robust business strategy. Venture capitalists in India often invest in private start-up companies with a high-profit potential. The venture capital firms get the percentage ownership of the business in exchange for the investments they made. Others want to have the control over planning & payment of miscellaneous fees. Such firms expect a high rate of return because of the highly tentative nature of businesses they invest. [1] Besides, they often wish to obtain this performance over a relatively short (usually within 3 to 7 years). A large number of venture capitalists in India are seeing investing Indian technology startups.

We have seen investments in Indian start-ups on an upswing recently, topping close to US$9 Billion in FY2015-16 and accounting close to 1000 deals. In India, VCs in India are often interested in companies with low valuation and excellent chance to get higher annual profits. Venture capital era in India began with the acquisition of E-commerce store “Flipkart” by Tiger Global Management in 2010. [2] Along with top-ranked E-commerce sector; healthcare, edu-tech and travel industry also appealed investor’s attention.

 

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Amount of venture capital investment

2016 saw a sharp slowdown, justified by the mass mentality with which angels and investors jumped onto the movement of investing in every startup that popped up. In 2016, funding announcements saw a decline in value of 55 percent from the same period in 2015, some deals, however, has increased by 3%. On an average, four startup deals were announced every weekday throughout 2016.

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Overview of Venture capitalists in India

Most of the venture capital is from US, UK, and local firms. India-focused venture capital funds stood at a record US$ 3.1 billion, and disinterest from established capital funds since the peak of 2015 also has advanced.

Sequoia Capital, one of the top venture capitalists in India has around 130 businesses under its portfolio. They focus on healthcare financial, internet & mobile start-ups.  SIDBI Venture Capital Company focuses on small and medium-sized enterprises. SIDBI raised close to US$ 7 billion funds in 2014-2015.

SAIF Partners is mainly looking for seed, incubation & start-up investments. The largest fund raised by SAIF Partners was 3.5 billion in May 2016. Other major players include Accel, Blume, Nexus, IDG Ventures India, and Helion partners.

Geographies

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Delhi saw the highest number of deals with 32%, while Bengaluru received 30% of deals and Mumbai based start-us followed by 27%. Chennai, Pune & Hyderabad received followed-up with 3.8%, 1.7% and 1.4% deals respectively. Other cities that are unfolding as startup hubs and developing investor interest are Ahmedabad, Jaipur, Indore, Kolkata, and Vadodara.

Venture capital investment supports the growth of innovative entrepreneurship in India. Morgan Stanley predicts an investment of $120 billion in India by VC’s a new set of brave souls willing to bet their millions. If any business seeks finance to his project and industry through venture capital, he has the following sources available to him for providing funding.

  1. Venture capital funds supported by All India financial institutions through their subsidiaries. Example: Venture capital scheme of IDBI, ICICI.
  2. Venture capital funds backed by state-level financial institutions e.g. Gujarat Venture Finance Limited (GVFL).
  3. Venture capital funds supported by public sector banks or their branches e.g. Confine Venture Fund.
  4. Venture capital set up by private sector companies, for e.g. Indus Capital, Twentieth Century Finance (TCFC), Infrastructural Leasing and Financial Services Limited.

Developments & Trends

India has attracted highest amount of venture capital & PE investment in recent years. Increase in GDP ratio & liberalisation of the economy has significantly aided Indian venture capital industry. The steady increase is observed in the case of Domestic Venture capital funds, whereas sudden burst is seen in foreign venture capital funds, especially after 2009-10, due to the liberalization of regulations by SEBI.

Since India’s economy has been growing at 7-8 percent a year, investors reserved their interest in 2008-09 due to recession in the global economy and then picked up slowly in 2010 and then onwards.

Double tax avoidance arrangement of India with Singapore and Mauritius changed in recent years. Further, several regulatory reforms have been made in India, especially on foreign investments into Alternative Investment Funds (AIFs). For portfolio stockholders, choice of acquirers has more importance due to the revision of Finance Act of 2014 to set the position. Finance Act, 2017 has also introduced an amendment to Section 47 of the ITA to exempt gains capital gains tax.

The Indian government has taken some initiatives to improve the ease of doing business. For instance in recent budget Finance Minister has declared common applications for registration, opening Demat account & issuing Permanent Account Number.

GAAR introduced by Finance Act, 2012 has come into existence from 1st April 2017. [3] Venture capital investments positively correlated to gross domestic product and foreign direct investments inflows in India. Besides I.T & Manufacturing, healthcare & life science, BFSI, shipping and logistics, Telecom and Engineering and construction are getting priority for investments.

The structure of VC industry in India

VC firms formed as general partners who aid the managers of business & will serve as investment advisors. Depositors in venture capital funds are known as limited associates. They can be high net individuals & companies, state & private funds, insurances firms, university donations, insurance companies and funds of funds. [4]

  • Venture capital is usually a partnership firm.
  • Group funds in the form of commitment to a common objective.
  • They typically work for ten years with a clause of extension.
  • Average exposure 3 to 7 years.
  • Beyond 5 years VC’s looks for a change in the portfolio to cut exposure to Management &Marketing risk of a product.
  • Investors have a fixed adherence to the fund which is called down by VentureCapitalist over time as the fund makes the investment.
  • There involve substantial penalties to limited partners for not honouring a capital call.

Venture capital investments in India

The following table shows largest India-focused venture capitals (in terms of funds raised)

Firm Headquarters Funds raised (in $billion) Year
Sequoia Capital USA 7.3 2014-2015
Sequoia Capital USA 7.2 2008-2009
SIDBI Venture Capital India 7.1 2014-2015
SAIF Partners India 3.5 2016-2017
Accel Partners USA 3.25 2015-2016
Nexus Venture Partners India 3.04 2015-2016
Helion Venture Partners Mauritius 3.00 2015-2016
Matrix Partners USA 3.00 2015-2016
Greater Pacific Capital UK 3.00 2007-2008

 

Venture Capital is the hottest trend in India but many start-ups & founders who are confused about how the VC funding works. Most entrepreneurs are always looking for the banks or other sources of the funding.

VC process involves, budding entrepreneurs, financial wi