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Investors again willing to bet on early stage deals

Early last year, investors turned risk-averse and wanted to invest only in blue-chip companies

Mumbai/Bangalore: When Arvind Kumar, founder and CEO of the Chennai- based Attune Technologies Pvt. Ltd, approached venture capital (VC) firms for funds in the middle of last year, he was turned down many times.

He was spurned not because of the global downturn or a poor product or business plan. It was because the investment appetite of the firms he approached was too big for a start-up the size of Attune. “We met a couple of VCs and realized that their ticket sizes were large, so we stepped back,” he said.

Attune, founded in 2008 ,was looking for early stage funding. It is a healthcare information technology (IT)- and SAS (software-as-a-service)- based service provider targeting small and medium hospitals and diagnostic centres that can’t afford huge IT costs for electronic medical record (EMR) and enterprise resource planning (ERP) systems.

Creating a pipeline: Inventus managing director Kanwal Rekhi says early stage investment is risky but typically offers high returns. Ashesh Shah/Mint Attune wasn’t the only start- up to be turned down by VC funds that wanted to bet on bigger deals. Ajit Shelat, founder of Aviram Networks Inc., a Pune-based company providing products to secure LAN (local area network) space, was looking to raise money early last year. “My immediate priority was around $2-5 million (Rs9-22.8 crore), but then VCs were ready to write cheques of $10-16 million only,” said Shelat.

Both have received funding since. Attune received an undisclosed amount of funding from Mercatus Capital India in January. About the same time, Mumbai Angels invested in Aviram Networks, previously known as Nevis Networks (India) Pvt. Ltd. Shelat declined to disclose the amount he raised.

Early stage start-ups are again being able to attract investors and raise funds as the VC industry recovers from a slump last year when deal-making dropped by almost 50%—to 82 transactions worth $444 million, from 154 deals worth $841 million in 2008—in the aftermath of the global credit crunch.

“Compared to last year, activity in the early stage space is definitely up by almost 40-50%,” said Harshal J. Shah, CEO, Reliance Venture Asset Management Ltd.

Early last year, investors turned risk-averse and wanted to invest only in blue- chip companies. As the markets improved, they focused on mid-sized firms. Now, their risk appetite has improved, Shah added.

Other deals done by Mumbai Angels over the past six months include investment in Screampoint, which provides 5D digital city and digital building systems, and Insta Health Solutions, a healthcare solutions company. Mercatus, which is a Singapore-based VC firm, operates as an angel fund in India, making early stage as well as seed investments. To tap the potential of the healthcare sector, apart from investing in Attune, it invested last year in Pellucid Networks Pte Ltd, a tele-diagnostic service provider.

“Today, even a VC, who looks at only series B or series C round of funding, needs to look at investing in early stage companies to create a good deal pipeline,” said Rajesh Sukumaran, investment manager, Mercatus Capital India.

VC firms such as Inventus Capital Partners, which have remained devoted to their strategy of backing early stage start-ups, say deal flow continues unabated. Serial entrepreneur and Inventus managing director Kanwal Rekhi said that while early stage is the riskiest stage of investment, the returns are also typically high. “Investors have made as much as 20% returns in these investments,” he said. The firm in India is seeing a 20% increase in its deal flow.

Many foreign players are also eyeing the early stage space in India. These include the likes of the Netherlands-based DSM Venturing, the corporate venture arm of Dutch chemical company Royal DSM, and France-based Aloe Private Equity. DSM Venturing is betting on the potential of promising sectors in India as it looks to invest in companies with interests such as nutrition and pharmaceuticals. DSM Venturing is looking to make investments in the range of €0.5-2.5 million (Rs3.14-15.7 crore).

Aloe wants to invest in areas such as clean energy and waste recycling. “We are already working on three investment opportunities in India. Unfortunately, it would not be fair to discuss these deals openly but it would be fair to say that two of these investments are early stage, i.e., no technology risk and no revenues yet,” said Vivek Tandon, founder, Aloe Private Equity.

While Aloe intends to invest €5-40 million, its investment range would depend on a company’s requirements. “For a start-up, we can start with €3 million, but over the lifetime, we can put as much money (as is) required for the company to realize its potential. The idea is to create a solid, strong asset and not quick return,” said Vikram Nagargoje, investment manager, Aloe.

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