Like other first-time entrepreneurs, 40-year-old Ravi Joshi, founder of a young Bangalore-based IT products company, is upbeat about his prospects of cashing in on the changing mood of the investor community this year. Keystone Logic, his analytics and. business intelligence products firm that began operations under a year ago, hopes to raise close to a $1 million over the next year. The initial response from investors has been inspiring.
?From our interactions, we find that venture capital (VC) firms are looking for start-ups now, particularly in the IT products space; provided you can demonstrate the capability of your product and your team. The prospects look good and we are looking at raising anywhere between $0.5million and $1 million for scaling up in the next one year,? says Joshi.
While early stage VC funding saw a slump last year, industry experts say the last couple of months have seen activity in the sector picking up by almost 45-50%, with a lot of buzz expected, going forward.
TC Meenakshisundaram, founder and managing director of IDG Ventures India Advisors, confirms the trend. ?We expect about 160-180 start-ups to be funded in 2010, nearly double the figure of 85 in 2009. VC finding is expected to grow robustly to touch $1 billion in 2010,? he says.
According to Venture Intelligence, a research service focused on private equity and mergers & acquisitions, VC investment in companies at their formative stages during FY10 was valued at $237 million for 67 deals, while FY09 saw 108 deals with a total investment of $457 million.
Samir Kumar, managing director, Inventus Capital Partners, says that while some continued to invest during the downturn, many VCs had to focus on their portfolio companies that consumed much of their time, leaving little scope for concentrating on new deals.
?With the economy improving in general, we?ll see a lot more investors working on new investments this year. While numbers are hard to project, I would not be surprised if we see double the number of deals this year compared to 2009?, says Kumar.
Usual suspects such as education, consumer-oriented services and financial services such as e-payment gateways are still on the radar of investors. ?Other verticals like logistics, media & entertainment, aerospace and defence, clean-tech and alternative energy are also likely to attract attention from VCs this year,? says Harshal Shah, CEO, Reliance Venture Asset Management, the venture capital arm of Reliance ADAG.
Ananth Rao, founder & managing director of Focus Ventures, an early-stage investor, says that having made six investments over the last two years, in Internet portals, telecom software, hospitality and green building services firms, he is looking at technology firms and clean tech sectors this year.
From 2004 to 2009, nearly 1,800 companies received VC investments worth $3.3 billion, out of which $2.5 billion went to the technology segment. Industry experts say this figure is likely to treble in the next six years to $10 billion, of which the technology sector will continue to attract $7.5 billion or 75% of the corpus.
?Among the new IT start-ups, it is mostly product companies that are attracting attention,? says Arun Natarajan, CEO, Venture Intelligence.
Some funds such as Inventus, however, plan to stay focused on the technology space and expect to see a large number of attractive deals taking place in the sector this year. ?Software products, KPOs, mobile services, embedded software and Internet-based businesses are some of the areas we are likely to see activity in,? says Kumar.
With a mixed bag of lucrative sectors to consider, what are these investors looking for in start-ups? According to Meenakshisundaram, an investor would typically look for factors such as a great entrepreneurial team, a large global and domestic addressable market, markets that grow much faster than the underlying GDP growth of a country, disruptive technology backed by IP and the ability to scale fast.
?A great team is a necessary condition, without which businesses will not be funded by VC investors,? he says.
Ashish Gupta, managing director, Helion Ventures, says, ?There is also a need for the team to learn and adapt to the needs of the market, and they need to have sufficient cash to reach meaningful milestones.?
While start-ups are never short on enthusiasm and belief in their products, having little or no money to put where their mouth is often keeps them from seeing the light of day.
?In addition to your team composition and commitment, VCs take into account the pool of clients you have created and proof of your product?s marketability. And creating that customer base depends on how much money you can spend on marketing and sales, proving to be a bit of a catch-22 for start-ups,? says Joshi.
Joshi?s Keystone Logic, started with a seed fund of Rs 25 lakh, now has one client, which is a telecom service provider in the West Coast of US. His company is now trying to rope in two to three more clients in the next six months to demonstrate its product?s viability to potential investors.
On a happier note for start-ups, though, investors have been increasingly impressed with Indian entrepreneurship, finding its quality to be on an incline in the recent past. ?The amount of angel financing is meaningfully higher than before and in general, the quality of business plans we are seeing are also better,? says Gupta.