New Delhi: Dreamy-eyed Indian entrepreneurs hoping to talk their way into getting venture capital for their start-ups might as well look elsewhere for funding. It doesn't happen in India, not often anyway, investors and experts in the industry maintain.

 

Venture capitalists in India only prefer growth-stage companies -- firms already up and running that need money for expansion. Most start-up entrepreneurs, as a result, dive into their own pockets or banks, or draw funds from family and friends.

 

Seed capital for a new business has not come of age in India, they added.

 

"The concept of seed capital does not exist in India, there are a few funds which have come up of late, but it is minuscule compared to the need and potential," said Kalpana Jain, co-chairperson of Venture Capital Association of India.

 

"In the US or other developed markets, higher returns always come coupled with higher risks. And higher returns are prevalent mostly in a new venture which takes off," Jain, also senior director with global consultancy Deloitte Touche Tohmatsu, told IANS.

 

"In India on the contrary, many companies which are already operational give much higher returns. Then why risk money in a new venture?"

 

And the problem has also compounded by the current economic scenario, where financial institutions are more concerned with keeping their capital safe than risk their funds with a new venture.

 

"Venture capital firms invested $740 million India in 2008 compared to $876 million in the previous year," said the managing director and chief executive of Venture Intelligence, Arun Natarajan, adding hardly any funding went to start-up projects.

 

"The number of deals were also down to 125 in 2008 from 144 in 2007."

 

Jagannadham Thunuguntla, equity head at SMC Capitals, has an explanation. "The confidence among foreign funds, be it venture capital or private equity, hasn't been restored after what happened back home."

 

According to him, these funds will start returning to the equities markets first, and later look at other avenues.

 

Among start-ups, too, there is intense competition to get venture capital funding. And more often, there is one set of firms that comes up tops -- IT-based businesses or companies that use the web to reach out to customers, said veteran venture capitalists.

 

"A lot of venture capital firms look favourably at IT start-ups because once the concept takes off it is easier for such businesses to scale up," said Rahul Chandra, director at Helion Advisors, an India-focussed venture fund with $350 million under management.

 

"Also venture capitalists generally have a Silicon V "There is a reasonably long list of IT firms -- MindTree, Spectramind, Mphasis, Daksh, Naukri.com -- which have delivered good exits for venture capitalists," said Natarajan.

 

Perhaps, that's the reason why people like Manish Malhotra - who quit his position with a top bank to start a hospitality agency - are still floundering with their business.

 

"Venture capital is difficult to get. I come from the banking industry and know people. But even then it hasn't been easy at all to convince them that my plans will work," Malhotra said.

 

VCs need to rethink to invest in startups

 

Venture capitalists (VCs) are putting on a new look to invest in the early stage companies. They should fund the companies early and then sell to a secondary firm after a few years.

 

The venture capitalists or investors are banking on this approach because currently many investors buy stakes early and then add to those investments in later years. For instance, an early-stage company may invest $3 million to $5 million. Then in the entire span of the startup, the investors or VCs will put in another $3 million to $5 million to maintain their share of ownership along with the rights that come in. And, this model is considered sacrosanct for the past 30 years.

 

Companies like YouTube, purchased by Google for $1.65 billion in about less than two years after it was funded. Not only the longer waits hamper VCs to calculate the return on investments (ROI), but also the limited partners such as university endowments investing in the venture firms. It is also discouraging for individual venture capitalists. Some venture capitalists are leaving the profession and some VC firms are shrinking. So then the secondary VC firms come into picture in buying stakes in private companies from the VC firms.

 

These secondary VC firms account for three percent of the VC market. There is an increased influence of secondary firms in the market as they do mire deals. San Francisco-based Saints now has more A-list portfolio companies than most traditional VC firms.