Even as India's information technology and IT-enabled services (IT-ITes) industry has witnessed sluggish growth in 2012 with ongoing macro concerns in its biggest markets, the sector is still the favourite destination among venture capitalists (VC) to park their funds.
In the last twelve months, the sector accounted for 65% of the overall VC investments in the country with the emergence of new buzz words like big data, software as a service (Saas) and analytics.
The IT-ITes sector attracted 136 investments, the highest among sectors, worth $388.11 million in 2012, according to data from Venture Intelligence, an investment research firm.
Companies in the areas of online services, enterprise software, IT products and services and mobile value-added services (VAS) received almost 90% of the overall funding for the sector.
Among the top VC investments in the technology space during the period include AbsolutData Research and Analytics, a data analytics services firm attracting funding of $20 million from Fidelity Growth Partners India, followed by online fashion retailer Yebhi.com raising $18 million from Qualcomm Ventures, the VC arm of Qualcomm Inc, Nexus Venture Partners and Catamaran.
Cloud-based software provider Capillary Technologies managed to rope in $15.5 million from Sequoia Capital and Norwest Venture Partners, while Bangalore-based analytics solutions provider Manthan Systems raised $15 million from Norwest.
Venture Intelligence pointed out that the average deal size in the IT-ITes space was about $2.85 million.
The conventional IT services will attract only minimum VC funding as it has now become the domain of big companies as clients are signing outsourcing deals only with companies with size of $500 million in revenue. Good companies will continue to get funded. Saas -based, cloud and big data companies will attract maximum funding this year, said IDG Ventures India MD T C Meenakshisundaram. Last year the early-stage VC firm invested in 8 deals across the sector amounting to $26 million.
According to Venture Intelligence the number of deals in the IT-ITes sector climbed 8% year-on-year, while the value of investments declined by 32% in 2012.
Prashanth Prakash, partner, Accel Partners feels that the dip in value is a temporary phenomenon. Online platforms other than e-commerce will attract investments majorly in the products space who are selling to global small and medium enterprises. Domestic consumption-based online players will also attract renewed investment interest this year, he said.
According to industry estimates, Accel Partners, an early-stage VC fund has invested in 16 deals last year in the technology space valued at $75-100 million.
Arun Natarajan, founder CEO of Venture Intelligence said the decline in the value is more as some of the formerly VC-backed IT start-ups graduated to receive significant sized PE rounds during 2012. The list of such companies included e-commerce firm Flipkart that raised a $150 million round led by South Africa-based Naspers with participation from Iconiq Capital and existing investors Tiger Global and Accel Partners, local search firm JustDial that raised $60 million from Sequoia Capital India, online advertising firm Pubmatic raising $45 million from US-based August Capital and others.
Experts point out that as far as private equity (PE) investments are concerned both deals and the value has gone up in the IT-ITes sector. At a time when total PE investment in India has declined the IT-ITes sector has managed to grow from 100 deals in 2011 to 140 in 2012.
The value has also gone up almost 50% from $1408 million to $2031 million in 2012, which is more than 25% of the total PE investments in India, according to data from private equity investment tracker, Grant Thornton.
Though declining rupee would have ideally resulted in cheaper Indian targets for foreign acquirers, lack of expedited implementation of reforms, regulatory hurdles and slowing growth rate kept inbound deals at bay, said Raja Lahiri Partner, Transaction Advisory Services, Grant Thornton India on M&A round up and outlook for 2013.