Booming first quarter stock markets and rising company valuations have had an interesting impact on venture capital fund (VCF) deals: though growth in the number of deals has dwindled, their value has soared.
The number of deals by VCFs in Q1 FY08 was a meagre 69?an increase of just 2.98% over the first quarter of last year. In comparison, growth in the number of deals in Q1 FY07 rose 67% over the same period in the previous financial year. But when it comes to the value of those deals, it?s a different story altogether. The first quarter of FY07 saw deals worth $1.8 billion, while this year, they amounted to $2.7 billion.
?Company valuations hit the roof in the first quarter of this financial year,? said Arun Natrajan, CEO & founder, Venture Intelligence. ?The problem was that valuations of even mid-sized firms were overheated. The secondary market was booming in the first quarter and small players in the venture capital arena found it difficult to clinch deals. Only big players could see deals through,? he said.
In the first quarter of this fiscal, the 30-share Sensex of the BSE rose 2,195.13 points, or 18%.
However, S Ramesh, COO, Kotak Investment Banking, says it?s not the number of deals but their size that is important. He said, ?Growth in the number of deals may have declined, but the average size of the deals have gone up significantly. The venture capital space is now occupied by larger players bagging bigger deals and so deal size is significantly higher.?
Natrajan says the trend has continued even into the second quarter. The US subprime mortgage crisis and the volatility of Indian stock markets in the last two months have also impacted the number of VCF deals in July and August. ?The US subprime issue has forced most players to sit on the sidelines. This has also affected the number of deals in the last two months,? he adds.