Year in Review: India

The Mumbai terrorist attacks and the subsequent ongoing escalation of tensions between India and Pakistan will likely increase uncertainty for investors in the sub-continent in 2009.

But uncertainty is nothing new for VCs investing in India. They’ve had to contend with infrastructure issues, double-digit inflation, a real estate boom and bust and a stock slide of more than 50% last year.

Yet venture capitalists have kept their heads level and their rate of investment more or less constant from 2007, according to data from two sources.

VCs invested $678 million in 108 deals during the first three quarters of the year, according to data from research firm Venture Intelligence India. That’s a small increase from the $648 million invested across 97 deals during the same period in 2007.

Thomson Reuters (publisher of VCJ) corroborates this slight increase through the end of November. Its data, which include several larger, non-control private equity investments, show 220 companies receiving $2.96 billion. That’s up from the 187 companies that got $2.90 billion during the first 11 months of 2007.

“The VC segment in India seems to be picking up momentum,” says Arun Natarajan, chief executive of Venture Intelligence. “In 2009—while the climate for new fund-raising would be challenging—on the investment front we see VCs continuing their current pace of investments and expanding their focus on non-tech sectors like education, cleantech, financial services and other consumer spending-related sectors.”

India may be poised to leapfrog the U.S. in the production of “clean” electric energy thanks to the cleantech investments VCs are making there. Investors put $207 million into 14 cleantech deals during the first 11 months of 2008, according to data from Thomson Reuters (see table for details).

We see VCs continuing their current pace of investments and expanding their focus on non-tech sectors like education, cleantech, financial services and other consumer spending-related sectors.

Arun Natarajan

Natarajan expects VCs to increasingly team up to tackle such deals, which are often more capital intensive than pure-play information technology companies.

There should be plenty of money to put to work in the coming year for deals of all flavors. Sequoia Capital announced in September that it raised $725 million for its second India-focused growth fund, a scant two years after raising a $400 million growth fund targeting the country.

Just one month earlier, Accel Partners announced that it had rolled Indian seed investor Erasmic Venture Fund into a new fund. The newly minted India operation, called Accel India Venture Fund, hoped to raise $60 million by the end of the year.

Also in August, early stage investor Nexus India Capital closed $220 million for its second fund, just two years after closing its $100 million inaugural fund.

Meanwhile, balanced stage venture firm Helion Venture Partners closed $210 million for its second fund in March, also just two years after its inaugural fund.

And for every firm that’s reloading, there seems to be another that’s raising its first fund. Growth stage private equity and buyout firm Gaja Capital Partners is targeting $200 million for its first India fund and recently closed on $144 million toward that goal, according to Thomson Reuters.

The future of India-Pakistan relations or the safety of VCs traveling in India may remain a question mark during 2009, but expect investment levels to remain constant.