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In turbulent economy, VC funding gets easier

Globally, analysts can be shy about putting sell ratings on stocks because that can make it harder for their firms to win advisory business and can irritate the management of companies.

Anand Shimpi (Image courtesy: theverge.com)
Anand Shimpi (Image courtesy: theverge.com)

In uncertain times like today, when funds are hard to come by, an investment into a company is not only a huge help for the entrepreneur, but it also means a cheap valuation for the investor.

On Money Mantra, Mahendra Swarup, president, Indian Private Equity and Venture Capital Association, explains why many private equity firms are on a lookout for new deals. He says “it’s been nearly five years since investors heavily invested in new firms and are now looking for an exit. These investors are going to carry a lot of cash in hand to invest, if you have a convincing idea.”

Swarup adds that new ideas need not sound miraculous, but path-breaking ideas certainly help. "People are setting up chai shop chains because a hygienic cup of tea at a reasonable price is a need unfulfilled."

Beyond an idea, you need to have a team and prove scalability in future. The exit route will be decided in most cases even before you lock the investment.

So why is it that PE deals are getting smaller in size? VCCEdge, a quarterly report from VCCircle, tracks the deal size in the PE space.

The first quarterly report about such deals in India clearly indicates that deals are smaller than what they were before.  An investment of $1.9 billion across 139 deals is a good sum, but the average deal size shows an interesting story that proves Swarup’s advice right.

More and more venture capitalists want to invest in a small-size company with greater business potential. The median deal amount increased 50 per cent from $6 million in Q1 2011 to $9 million. The average deal value decreased 25 per cent from $24 million to $18 million during the same period.

Venture funding is not a cakewalk though for all. E-commerce has been a highly favored sector for PE investors but it’s no more a business secret of e-shopping websites on how they have ramped up scale to get more and more valuation, but it is going tough for them to get by.

Firms like Flipkart have no money to run for more than nine months and despite its super success the PE money may not come easy.

The social sector is another idea worth mentioning here. Pranav Nahar, managing director, Arctic Holdings, counts how the social sector seems an imminent choice for PE investors as the “bottom of the pyramid” remains untapped. The small buyer in villages, with a greater purchasing power, is waiting for every entrepreneur who can package it well for him.

Startups were always exciting and they don’t stop being that, but the idea of successful business is changing. How you prove it before a venture capitalist is what you need to prepare for.