Outlook for VC Funding in India for 2008

The National Venture Capital Association (NVCA) has come out with their projections for the year 2008. Much of the predictions are in line with what is already known, that tech spending is going to significantly reduce in 2008, leading to reduced opportunities that will trickle down in as fewer exits and even fewer IPOs.

According to NVCA, a vast majority of their members estimate that the investments for 2008 will be to the tune of $27 billion, which is pretty close to the number that was for the year 2007. In 2007, according to studies, India had accounted for $4.2 billion of that figure and considering the state of the US economy, the logical conclusion would be that the investors would be looking at markets outside the US for better returns, thus leading to at least that number being matched or easily crossed in 2008.

In 2008 the slowdown is expected to hit IT spending by a wide margin:

“In January, we predicted IT spending growth of 6.1 percent for 2007. It now looks like growth will be 3.5 percent at year end.” – Jim Hale, Founding Partner, FTVentures

This is a sentiment that is widely seen on Wall Street with analysts scampering to fill their portfolio with safe stocks (companies that have a limited impact in terms of exposure to the US economy by having wider exposure to emerging markets and companies that do mission-critical installations and service contracts like Cisco or Oracle, who will have limited impact). Strangely, all of the analysts seem to consider semiconductors as a safe bet since there are major cost and capacity cuts planned for 2008 to shore up margins and increased demand to due to artificially constrained supply.

So, what does it mean for India? Well, not much. The segments that the VCs are looking to invest are the following: CleanTech, Media and entertainment, Biotech and Internet specific companies. Currently, other than carbon credits, there is not much worth investing in country yet that is in the domain of cleantech. Biotech is a bit of an enigma for me and honestly, other than a barebones knowledge that the segment is doing really well, I have no clue about how much is being taken onboard in terms of venture capital in the segment. there is though a fleeting mention somewhere that the segment attracted about $125 m funding in 2006. Maybe, this will be our rock star segment for 2008?

That leaves us with the obvious and usual suspects of media and entertainment and Internet specific companies. The latter is quite an interesting segment since it is exploding in India. At the same time, it is not a cheap segment to be in. Initial capital requirements are insanely high and the cost of securing decent carriage is even higher. And I can’t really see any existing players who are looking to do an IPO in 2008, though there is the rumor of Reuters exiting the Times Now venture (I know, I know, single sourced anonymous comment means nothing!), leaving a nice chunk of equity available for being picked up. Of course, there is the much bigger rumor of BCCL itself looking to offload some equity, even as it still won’t get itself listed.

Internet-specific companies. Oh well. Which and where, are two rather interesting questions in the segment. Most of the established players already have varying degrees of of exposure to venture capital and others are already public. Even if there is intent, like in the case of Infoedge, of raising capital, the question remains where are you going t put that money into? With even IAMAI scaling down its projections for growth and usage of internet in India, the chances of a surprise segment that will manifest itself in 2008 is going to be highly unlikely.

Other obvious ones like travel have already been done to death (with established number 1, 2 and 3 players), leaving us with the rather obvious option of consolidation via M&As. Other segments like matrimony and email have the same issues and even if were to talk in terms of the potential that is present in the market, we’d end up with the usual chicken-and-egg problem of penetration stifling reach all too easily.

All said and done, this is mostly guesswork, informed and uninformed, so what actually happens remains to be seen in 2008.