VC giant New Enterprise Associates to go slow on India investments

Photo: Mint

New Enterprise Associates (NEA), a giant in the global venture capital (VC) business, with more than $20 billion in management, will manage its investments in India from the US, go slow on its India investments for some time, and perhaps co-invest along with local venture firms as it revisits its India strategy.

NEA’s decision, which comes after a decade of strategy and personnel changes, is similar to that of Draper Fisher Jurvetson (DFJ) and Kleiner Perkins, two iconic Silicon Valley VC firms that exited India in the first part of this decade, underlining the difficulties that start-up investors have faced in an internet market that looks attractive on paper but is yet to live up to its billing.

It isn’t just VCs that have floundered. Online marketplace eBay—which entered India in 2004 with the acquisition of Bazee, the biggest start-up deal in India at that time—sold its India unit to Flipkart in April and invested $500 million in the Indian online retailer. eBay’s investment in Flipkart is seen more as a way of having a presence in India rather than a big strategic bet.

All the firms mentioned above were among the earliest entrants in the Indian start-up and internet business, which took off in 2006. That partly explains why they have given up their bullish view—the internet market started booming only four years ago. But it also highlights the fact that more often than not, investors have overestimated the potential of the internet and tech market here.

To be sure, NEA remains interested in investing in India.

“Moving forward, we believe that the most effective and efficient way for us to advance innovation and create value globally is through a combination of direct investments and co-investments in partnership with local independent teams,” Ravi Viswanathan, general partner at the firm’s Menlo Park offices, said in an email.

But while some executives at NEA US remain bullish on India over the long-term, they will wait for at least a year before making fresh investments, according to two people familiar with the matter who asked not to be identified. That is primarily on account of the somewhat disappointing performance of the existing portfolio of investments, the two people cited above said on condition of anonymity. Some well-known internet investments in its portfolio include Naaptol, FirstCry and MoneyTap. Other bets include Nova Fertility and Nepholife (acquired by Davita).

NEA’s investments in India were led by former ICICI Venture executive Bala Deshpande. Mint reported on 31 July that Deshpande was quitting the firm to launch her own investment firm, dubbed MegaDelta Capital Advisors. NEA may participate in some of MegaDelta’s investments as a co-investor. It is also expected to be one of the limited partners (investors in venture funds) in MegaDelta’s proposed $250-300 million fund. “We have adopted a similar approach in China, where NEA has helped establish two new funds over the last several years, one with a longtime NEA partner at the helm,” said Viswanathan.

This is NEA’s third attempt to find the right strategy for India. It entered the market in 2006 as an anchor investor in IndoUS Venture Partners, the $150 million debut fund founded by former Intel executive Vinod Dham and entrepreneur Vani Kola. The partnership didn’t survive and in 2012 Kola started a new fund called Kalaari Capital. NEA decided to go its own way and set up shop in Mumbai.

Viswanathan has increased his involvement in India since last year. “NEA has tried different things but it hasn’t worked out for them in India. So they finally decided last year that they didn’t need a team… Ravi (Viswanathan) has been looking after India but the firm thinks India will take at least one or two years to build the depth that they want before investing,” one of the people cited above said.

While it is true that the Indian market hasn’t yet delivered attractive returns for most VCs, it remains for many investors the last big unconquered internet and tech market in the world.

The dichotomy is clear—Indian start-ups are attracting large amounts of cash, particularly from Japan’s SoftBank Group Corp., and the two largest Chinese internet companies—Tencent Holdings and Alibaba Group Holding. Silicon Valley firms such as Sequoia Capital, Accel Partners and Norwest Venture Partners continue to invest aggressively. And while there’s an eBay that decided against having a direct presence in India, there’s an Amazon, its US rival that continues to pour billions of dollars in expanding its Indian business.

“LPs and investors are still largely positive on India. From a macro and global perspective, India remains one of the most attractive markets. The only ones in the US and China who aren’t positive are people who came here really early on and didn’t make it, or people who believe their domestic market is more attractive. But that set of investors is small, compared with those who are bullish,” said Ajay Lakhotia, partner at Fosun RZ Capital, an investment firm owned by China’s conglomerate Fosun Group.

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This article was first published on LiveMint.com.