Venture capital funding in India for the first three quarters of 2007 registered a fivefold increase compared with the same period last year, according to a new study, confirming anecdotal evidence that a river of money is creating challenges in uncovering promising deals.
Venture capitalists poured more than $777 million into 57 deals through September 30, more than twice the record-setting $320 million for the full year of 2005 and almost five times the $158 million notched through the first three quarters of 2006, according to the study released Monday by Dow Jones VentureOne and Ernst & Young.
Sumir Chadha, managing director of Sequoia Capital India and co-founder and chairman of the US-India Venture Capital Association, said venture capitalists chasing the “hype” could lose their shirts.
“It’s not a great time to invest in India,” he said in an interview conducted before the release of the report. “There’s such a flood of capital. On average, the venture community will probably lose a lot of money in India.”
Though information technology notched 31 deals in the period, the most of any sector, the business/consumer/retail segment got the most money, reeling in $376 million in 21 rounds compared with $327 million. More than 60 percent of the investments came in early-stage deals.
Mark Jensen, partner and national director of venture capital services for Deloitte & Touche, said some investments in India and other developing countries are slowed by the lack of infrastructure and experienced executives to lead companies.
“In a lot of these emerging markets, investors on the ground are saying that you’ve got good ideas and talented people, but the rest of it is missing,” he said.
Many new venture capital firms grabbed footholds in India in 2006 and some inevitably will encounter “teething problems,” Mr. Chadha said.
Still, for those willing to take a long-term approach, he said India offers a fast-developing venture capital ecosystem, with strong academic institutions, one of the world’s largest pools of engineers, and a massive local market.
Marquee names in U.S. venture capital such as Draper Fisher Jurvetson, New Enterprise Associates, and Bessemer Venture Partners have put stakes in India in recent years.
Neill Brownstein has gone a step further.
Mr. Brownstein, who opened the California office of Bessemer in 1976 and worked at that firm for almost a quarter century, founded Footprint Ventures in Bangalore in April 2005.
Since then, he and his wife and venture partner Linda Brownstein have spent about half their days on the ground in India.
“We’re building a firm that’s really hands-on,” he said.
Citing an entrepreneurial culture, a pro-development government in New Delhi, the presence of tech powerhouses such as Intel, Cisco Systems, and Microsoft, and the pull on Western-seasoned Indian expatriates to return to their native country, Mr. Brownstein compares Bangalore to the early days of Silicon Valley.
As an early-stage investor, Mr. Brownstein said his firm finds less competition than some firms that focus on later-stage deals.
Mr. Brownstein expects a four-to-seven-year wait before reaching liquidity.
“We’re in it for the long term,” he said.