Investment by VC firms up five-fold

Venture capital firms invested more than $777 million in 57 deals for entrepreneurial companies in India during the first three quarters of 2007, according to the Quarterly India Venture Capital Report published for the first time today by Dow Jones VentureOne and Ernst & Young.

The investment grew nearly five times this year compared with $158 million in the year-ago period and more than twice the annual investment record of $320 million set in 2005.

The report covers venture capital investment specifically, which Dow Jones VentureOne defines as growth capital made available to entrepreneurial companies in exchange for ownership in the form of private securities.

These investments are often of a shorter term and do not include private equity investments such as leveraged buyouts or mezzanine and debt financing.

The report showed that 54 per cent of all venture deals in India were for companies in the information technology (IT) categories as 31 rounds were completed in the first nine months of the year, accounting for more than $327 million worth of investment.

"Though the majority of financing rounds in the first nine months of 2007 were struck in the IT industry, the business consumer and the retail industry attracted most of the venture capital of $376 million during this period," said Dilip Dusija, the leader of Ernst & Young's Venture Capital Advisory Group in India.

He added: "The median amount invested in a business consumer/retail round of financing reached $12 million, double the median round size in IT. This reflects a significant trend reversal compared to 2006, when both industries showed a similar median amount of approximately $9 million."

Within India's IT industry, the first nine months of 2007 saw more than $113 million invested in 17 deals in the information services sector, a four-fold increase over $27 million invested in this sector during the same period last year.

Information services include many of today's Web-based innovations such as mapping services, social networks and online advertising.

Venture capitalists committed $95 million in eight deals for communications and networks companies in India during the first three quarters of the year, with most deals and investments setting records.

The data also showed that service-oriented companies were also a popular draw for venture capitalists investing in India's business consumer and retail industry.

Overall, the industry accounted for 21 deals and $376 million worth of investment in the first nine months of 2007, but $329 million or 88 per cent of all investment in the industry went to 17 deals in the consumer business services sector.

"One reason service-oriented companies in India are so attractive to investors is because they often do not require a great deal of capitalisation to get off the ground," said Jessica Canning, the director of global research for Dow Jones VentureOne.

"This is reflected by the fact that 88 per cent of all venture capital investment in India in the first nine months went to companies that are already generating revenues."