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Canaan Partners India is an active venture capital investor in India, with a focus on technology space. Its portfolio includes BharatMatrimony (Matrimony.com), Equitas, iYogi, mCarbon, UnitedLex, CarTrade, and Happiest Minds. Canaan's Managing Director Alok Mittal speaks to Reghu Balakrishnan on the challenges and venture capital investment opportunities in tech companies. Edited excerpts:
How is the valuation in the consumer business segment at the moment?
If you look at the internet space, which is also a consumer space, the valuation is fairly reasonable because there is competition. Globally, valuation in the consumer business is stable.
How do you evaluate a company in the e-commerce /technology space?
Our investments will be for five-to-seven years. Hence we can't look at the market and decide which sector will be hot. We do not place a lot of emphasis on things like the rupee fall. What we do is from a macro level we tend to stay diversified. If you look at our India investments, all of them are in broad tech space, with about one-third invested in consumer internet and one-third in outsource services, which is dollar-driven.
What are the exact allocations?
About 70 per cent of our investments land up in series-A investments or first institutional round, 10-15 per cent are seed investments and 15 per cent of our investments are later-stage investments or series-C, that gives us a little bit of time window on exits. A later stage company might exit in three or four years and the early one might take seven, instead of five years.
What are the new areas you've explored for investments?
We are broadly looking at the same areas. We are currently looking at companies in the advertising space that are India-focused. We are looking at another company in the healthcare space. Healthcare spending is less volatile and less expensive. So that gives us a little bit of diversification there. We are looking at one other company in the financial sector that will be derived of the consumer and overall health of the economy. Traditionally, people have looked at investments in India as consumer versus infrastructure and I want to say 50 per cent of what we do is consumer-oriented where the business world derived from.
Do new areas such as cloud computing attract funding?
There is potential in cloud computing and we count that in our enterprise section. There are three or four opportunities in cloud infrastructure such as the software that is required to build the cloud. The technology is still being built and there are companies that are building that technology. In India, you don't find a lot of such companies, but you will find such companies in the US where we have invested in some of those. In cloud applications, we are seeing some companies in India where many of them are purely migration of what existed in the enterprise world to the cloud, which is less interesting. So, cloud is happening and those are the companies we are looking at. We also have a lot of exposure to cloud through Happiest Minds.
Is your current spending in India from the $600-million fund?
Yes. The current spending is from the $600-million fund. This is the ninth fund that we have raised globally. Since we started in India, this is our third fund. We realised as we did more and more investments in the tech space, US-India is a very strongly connected corridor.
There is value for us to have common fund and common partnership so that we can help our companies like Happiest Minds, which need customer introduction in US markets. Even if you look at consumer internet companies like Bharat Matrimony, it is like Match.com, which is essentially a dating company in the US. Now, we have investment in a company called Zeus, a social dating company. There is much cost flow of information, especially in technology, from the US to India and vice-versa. A lot of stuff is happening here for the first time, hence there is a lot of flow of cost from India to the US in the mobility space.
What have your investments and exits in India been so far?
We have invested in 14 companies so far and written off two to date. So, there are 12 active companies right now. The total investment so far in these companies will be around $130 million.
Isn't the total fund invested in India too small, compared with the global fund?
Yes, it is small when compared to our overall fund size, but we don't do 10 deals a year. We do two to three deals a year. We are very selective in what we invest, sometimes we invest in one deal a year or three deals a year, but we want to pace ourselves. Given that series A is our sweet spot, the initial ticket size is between $2 and $4 million, but over the life of the company, we invest $12-15 million. We will continue to invest once we get into a company and the business is doing fine.
Have the recent policy changes affected technology sectors?
The recent rupee devaluation with further spike in inflation will have an impact on the businesses. The only sector that will potentially help is export-oriented businesses. Maybe it's good for information technology services, as the profit margins will go up again due to fall in the rupee. Looking at the market conditions, the currency issues will continue and will remain a worry for investors. Retail tech business is looking good today, but I'm not sure if that will continue. Inflation is high and so are the interest rates. These things are not pretty.
