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Early stage funding drying up

By Suveen K Sinha in New Delhi
December 14, 2005 15:27 IST

There is a hole in the otherwise booming areas of venture capital and private equity funding. Early stage funding, which is meant for start-ups and is typically in the range of $500,000 to $5 million, has dried up.

In the first 11 months of this year, private equity and venture capital investments total $1.86 billion involving 139 deals. That is about double the number of deals in 2004, though in value terms last year clocked a sizeable $1.6 billion, according to TSJ Media, which tracks VC flows in the country.

However, this year only 6 per cent of the money ($111 million) has gone into early stage funding through 19 deals. That is the same as last year.

In terms of the number of deals, early stage was the only one to remain flat. The number of PIPE (private investment in public enterprises) deals almost trebled and growth and late stage funding nearly doubled.

An overwhelming 44 per cent of the funding ($803 million) went into PIPE deals through 57 deals.

The growth and late stages together accounted for 41 per cent of the value ($771 million). These stages too saw 57 deals. Sidbi VC and WestBridge Capital Partners remain the only active early stage investors.

The number of active funds increases as one moves up the life cycle of a company. Silicon Valley funds and strategic investors (Intel, Battery, NEA Bessemer, Softbank and Gabriel) are there in the growth stage.

The buyout and PIPE stages are littered with big names. Most of the big international PE funds (Warburg Pincus, Temasek, Actis, GAP, Citigroup, Newbridge, New Vernon, ChrysCapital) are there in this stage as well as big domestic funds like ICICI Ventures, IL&FS Investment, Kotak PE and UTI Ventures.

"There was a tough environment in the last few years after the technology which saw a lot of start-ups fold up. People found it safer and easier to do later stage funding," said Sandeep Singhal, managing director of WestBridge, which does both early stage and expansion stage funding.

Typically, early stage funding requires a long term view of a company and the sector it operates in.

"In early stage, companies take a long while to set up a franchise," says Singhal, adding that WestBridge saw its portfolio grow 70 per cent last year in revenue terms.

The industry buzz is that there are three-four early stage funds being raised, such as, by NewPath and JumpStartUp.
Suveen K Sinha in New Delhi
Source: source