VCs Tilting Towards Single Fund Structure

California-headquartered venture capital firm Canaan Partners, which has remained focused on early-stage technology deals in India, is now open to early-to-mid stage deals in microfinance, clean technology and healthcare. Canaan’s current India portfolio comprises Bollywood portal Chakpak, classifieds firm Consim Info Pvt Ltd ( and mobile value added services firms Cellcast Interactive India Pvt Ltd and Mcarbon Tech Innovation Pvt. Ltd. VCCircle caught up with Canaan's Menlo Park-based general partner Deepak Kamra (in pic), who was ranked 70th in Forbes Midas List 2009, and its India office head Alok Mittal.

Kamra, who started Canaan’s India practice in 2001, has been with the VC firm since 1991. Canaan, which raised its eighth fund at $650 million last year, plans to invest 20% out of that in India. “A lot of that capital is still left,” Kamra says in a wide-ranging interview on venture investing sentiment in the Valley and the trend towards a single-fund structure. Excerpts:-

What is the sentiment in Silicon Valley in terms of venture investments?

Kamra: The technology industry has recovered faster than most industries at Wall Street. At Sand Hill Road (an area in Menlo Park, California, with a large concentration of VC firms), you can really see that change. With regard to financing, anything related to social media, gaming, applications on Facebook, there are signs of recovery. The mood is pretty good and sectors like internet, digital media and software are still pretty exciting. So if you are a winner, the money is very available.

But there are still too many companies, funded over the last 5-10 years, that are coming back to raise money. They are having troubles and that’s true with funds too. The good funds are having no trouble raising money but there are a lot of marginal funds which have given up. Probably this year and next year will be bad for fund-raising.

Is the exit environment improving?

Kamra: That’s what drives our business and you are seeing good exits every day or two. A number of our companies are talking to investment bankers about IPOs (Canaan’s US portfolio firms). We would like to see the Indian markets kick in for some of these venture-backed IPOs as there have been only a couple like Info Edge (India) Ltd and OnMobile Global Ltd. We invested in e4e and I am still on the board. The companies are still private and we are hoping to get some exits on those soon.

What is your take on early stage investing in India? Many of your peers are doing everything except early stage investing at this point of time.

Kamra: You saw people moving from early stage investing in the US when the downturn started as it is riskier and has a longer time horizon. The average time for exit from start to finish has gone up to 9 years in the US. That’s a long time and you can see why people are concerned about doing early stage.

But, we are continuing to focus on early to mid stage. It’s great if other people move into late stage investing which means less competition for us. Also, a lot of firms are moving to a single fund structure. That’s one of the trends that seem to be happening as opposed to multiple funds.

The other side is that the prices for late stage investments have gone up significantly and so the returns will see a drop. People have been bidding up the later stage investments in the US. I imagine that’s also going to happen in India as they are expecting a exit valuation which will be tough to deliver and thus justify the entry valuations.

This may not apply to everybody, but some firms are looking to raise new funds and they need to get some exits. And, these firms tend to do more later stage investments so they get some exits when it’s time to raise another fund. Limited partners like to see if the distribution checks coming through.

What do you make of this trend (single fund structure)?

Kamra: People have tried multiple funds like early and growth stage, sector or geography-focussed funds. They are finding a lot of overheads in terms of fund raising as they are forced to invest a certain amount either in a sector or stage or a country. In a single fund, there is a lot more flexibility in terms of going where the action is. And it also depends on what the LPs want. If they have a certain India allocation, then you will see VC firms opening India funds. But we haven’t seen a lot of that, at least not with the group of LPs we talk to. So, if the LPs don’t care that much, then it is usually about having a global fund and investing out of that.

Do you see any other advantage in this set-up?

Mittal: From an entrepreneur’s stand point, we are able to bring them our entire network and expertise regardless of where we make the investment. So we are seeing a lot of parallels between what is happening here and in the US, Israel or other parts of the world.

Consumer internet has held out a lot of promise in India but has not delivered as per expectations. What do you think of this space going ahead?

Kamra: Things are following the US market. If we look at the number of video views online or people using Facebook and Orkut, there is no reason why there shouldn’t be companies built around those models in India.

The advertising money is not big here so we need to think about business models. We think just the numbers will create some good opportunities. It will obviously have to be something unique and not just a US thing lifted over to India.

Mittal: The transaction capability that’s developing is interesting. If you look at online travel, it has been proven that you can scale transaction-based businesses on the internet. The same philosophy can be applied to multiple businesses.

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