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Venture capital firms shy away from backing new start-ups in India

Source | LiveMint : By Snigdha Sengupta

Mumbai: It is no secret that for the past several months, more than a few venture capital portfolios in India have been up for sale en masse and at steep discounts.

The problem is that there aren’t many buyers out there for those portfolios. Most of the portfolios on sale represent the so-called copycat investing that has marked the greater part of the past decade of early-stage investing in India and aren’t worth much today in the midst of what is now clearly a prolonged downturn.

“We (the venture capital industry) are getting branded globally for not being able to show much (in returns) for the money that’s gone in so far. There are a lot of portfolios on sale but such sales are not easy to price. Buyers are naturally wary that people are trying to get rid of the lemons through these secondary portfolio sales,” says a fund manager at the Mumbai offices of a global venture capital firm who spoke on condition of anonymity.

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Since 2007, when venture capital as an asset class returned in earnest to the Indian market, venture capital firms have invested more than $10 billion in local start-ups, mostly in the technology and Internet sectors, according to data compiled by Chennai-based researcher Venture Intelligence.

So far, such investors have struck exit deals worth $8.5 billion. After providing for fund manager fees, which is calculated at 2% on the fund principal on a recurring annual basis, and accounting for principal investments, the profits left for distribution wouldn’t be a very significant sum.

All of that is just the early-stage capital that’s been sunk into the market. Add to that the later-stage or growth capital that has followed the early-stage money, and the overall investment would easily ride up to at least $20 billion.

Much of the later-stage money, which has come mostly from global hedge funds and strategic investors, also remains unrealized, further compounding problems for the early-stage market.

For the past 18 months, since the venture capital market slipped into a downturn, early-stage investors have been more focused on conserving cash and less eager to back new start-ups.

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