A clutch of venture capital funds (VCFs), which have invested nearly $419 million in Indian Information Technology (IT) and business process outsourcing (BPO) firms till date, are now looking to diversify their investments into IT and IT-enabled services (ITeS) firms that generate revenues from the local markets.
The move follows a sharp decline in revenues of the Indian IT sector as a result of the rising rupee, sub-prime turmoil and a slowdown in the US economy.
The country's leading IT companies, which have seen a drop in earnings due to the near 12% appreciation of the rupee, have also to counter a possible drop in contracts from their US clients due to a slowdown in the world's largest economy.
As a change in strategy, VCFs are now looking to diversify into sectors such as consumer-based Internet and mobile-technology companies, where revenues come from the local market.
Venture capitalists are also looking for companies that are expanding geographically those that are targeting non-US markets.
Venture capitalists have pumped in more than $777million into India up to September 2007, according to the India Venture Capital report. About 54% of all venture deals in India were for IT companies, the report said.
Some of the largest venture capital deals this year include $20 million investment in BPO firm Adventity by Norwest Venture Partners, $14 million into Trianz, an IT consulting firm, by NYLIM India Fund, $7 million into Neilsoft by Trident Capital and $5.1 million into Hurix Systems by Helion Venture Partners.
Clearstone Partners' investment in BillDesk also clearly shows the new strategy by VCFs. BillDesk helps consumers to leverage the potential of the electronic medium to better organise and manage daily bill payments, while escaping the difficulties of traditional bill payment services.
Ajay Mittal, the director of UTI Venture Funds, said the rupee appreciation had impacted some of the companies where the fund had invested. He says, "The saving grace is that while income has been affected, it has been offset by some of the expenses, which are in dollars. UTI Ventures has investments in Semantic Space Technologies, Zylog Systems and ExcelSoft Technologies."
Some of the venture capitalists are even refraining from investing in hardcore IT companies.
Kanwal Jeet Singh, managing director, Helion Venture Partners, says: "We don't invest in services companies where the impact on margins is higher. Rather, we prefer product companies. There is a higher degree of commoditisation in the services sector."
The strengthening rupee has also led to a drop in the salary growth to 25% from 64% last year, resulting in high attrition rates and loss of quality manpower for these companies.
With the BFSI (banking, financial services and insurance) segment contributing to a large percentage of Indian IT exports, a slowdown in the US is expected to hit these exports adversely.
Alok Mittal, executive director, Canaan Partners, echoed the views of other venture investors. "Returns of venture firms will certainly get affected in the outsourcing space, because the valuations may not be as high for the similar level of business performance. Increasingly, we are looking to invest in higher-end processes, where there is more pricing leverage with the company."
