'Valuations have turned attractive for VCs'

Q&A: Sudhir Sethi, Chairman and managing director, IDG Ventures

IDG Ventures India is a $150-million technology-focused early-stage venture capital (VC) fund which has opted for the co-investment route. Having invested in 10 companies over the last two years, IDG intends to invest another $60 million before tapping the market for raising fund next year. IDG Ventures Chairman and Managing Director Sudhir Sethi tells Shilpy Sinha that he wants to rope in domestic investors for the proposed second fund. Excerpts:

VCs have moved away from their specific area of specialisation and have invested in sectors providing good opportunity. Will you look at opportunities outside technology?
Our typical investments are to the tune of $1 million to $5 million. We typically tend to provide first institutional round (Series A) of funding. We invest in software products and services, engineering and manufacturing, energy and waste management, healthcare and medical devices, internet, mobile VAS, e-commerce and education. Within technology, there are a number of under-served sectors that I just mentioned. Hence, we do not see the need to invest outside our stated focused sectors. Our focus is technology companies in India which have the potential to be global leaders. Our portfolio companies such as 3D Solid Compression, Apalya, IViz, Manthan and Perfint fit the bill.

How do you view the change in valuations over the last one year?
Valuations are indeed extremely attractive for venture investors and have significantly reduced over the past two years. The scale of reduction is over 50 per cent. We do look for attractive valuations along with high value.

Have limited partners (LPs) revised their expectations on returns?
LPs’ expectations on returns are linked to the asset class. Venture funds and private equity have different range. But of late, LPs have started looking at much stricter investment discipline than what was a year back.

By when are you planning to raise your second fund?
We have invested 60 per cent of our current fund. We should be looking at our next fund in 2010. Our next fund will target technology in the venture space again.

Will you be looking at the domestic market?
At IDG Ventures India Fund, we have European and North America LP’s (limited partners). The Indian LP base is small, but the few players are significant. Sophisticated investors such as LIC, GIC, UTI and SBI are already active LPs in the market. We would seriously invite domestic investors in our next fund and will evaluate this possibility.

By when will you start exiting from your initial ventures?
Our portfolio companies are actively engaged in raising the next round of capital, typically a Series B of about $8 to $10 million. Exits should start in the next couple of years with typical exit routes being initial public offerings (IPOs), merger and acquisitions (M&As) and tranche sales.

What does the investment scenario look like in 2010?
In 2007, total investments by private equity and venture capital funds in India was $14 billion. This came down to $11 billion in 2008, and is likely to be $5-$6 billion in 2009. In 2010, we expect investments to be between $8 billion and $9 billion. We expect to see mergers and acquisition activity to improve significantly.

The Securities Exchange Board of India (Sebi) has simplified the listing norms for small and medium enterprises (SME). Does that make SMEs more attractive for venture funds?
It gives another exit option. VCs exit through mergers and acquisitions, fund trade sale and initial public offer.

For VCs, exits through M&A tends to be far higher.