Mumbai: India has emerged as the second most active venture capital (VC) market in Asia Pacific (excluding Japan) in 2002, with VC funds disbursing a total of $590.21 million into 76 domestic companies.

Only behind South Korea, India has improved its rank from third in 2001, according to the second annual survey of the VC industry conducted by Thomson Venture Economics and Prime Database on behalf of the Indian Venture Capital Association (IVCA).

According to the survey, investments in 2002 contracted by 37 per cent from the previous year, when $937.03 million was invested into 107 Indian companies. Similarly, only 45 VC firms made investments in 2002, compared to 57 a year earlier.

This happened as most VC firms despite having sizeable funds kept a tight rein on new investments, largely because of the paucity of strong deal opportunities and limited exit options for past investments. At the same time, most companies suffered a decline in valuations and promoters of several such companies became wary of giving a stake to VC funds.

Another positive development in 2002 was the success VCs had in obtaining significant new capital commitments from investors. Quoting from the survey, IVCA chairman Saurabh Srivastava says: "Despite the downturn in investment activity, the $241.8 million in capital commitments in 2002 was higher by 12 per cent than $216.5 million in 2001. The funds raised in 2002 enjoyed a significant increase in average committed per fund, rising to $48.36 million in 2002 compared to $21.65 million in 2001."

According to the survey, balanced stage funds received the largest share for new capital commitments in India, rising by a phenomenal 182 per cent from $82.5 million in 2001 to $232.4 million in 2002; in fact this accounted for 96 per cent of the total commitments.

Prithvi Haldea, managing director, Prime Database, which conducted this survey, observes that VC firms, which traditionally provide seed capital, incubation and start-up financing, began to show interest in the territory of private equity capital, which typically consists of investments in mezzanine, growth, expansion and the pre-initial public offering (IPO) stages.

In line with the global phenomenon and similar to 2001, Indian VCs continued to prefer investing in companies in the expansion stage. Such companies accounted for 57 per cent of all companies raising VC in 2002, which was almost similar to 56 per cent in 2001, indicating a continuing preference for funding ventures that had demonstrated success.

Based on these recent experiences, nearly all funds displayed hesitancy in investing in start-ups or in companies without a clear, scalable business model. Early stage / seed stage / start-up stage companies were pushed further in the background. In 2002, only 16 such companies received funding compared to 36 in the previous year, and these accounted for only 21 per cent of the total companies that received funding compared to 33 per cent in the previous year.

Significantly, VC funds continued to look at larger deal sizes - in 2002 the average was $7.11 million, though marginally lower than $7.81 million in 2001, but significantly higher than $3.85 million in 2000.

As per the survey, notwithstanding turbulent experiences in the recent past with the IT industry, 53 per cent of companies that raised VC in 2002 was in IT, down only marginally from 59 per cent in 2001. By amount, investment in the IT sector grew by 147 per cent to $311.66 million in 2002 from $126.12 million in 2001 and accounted for 53 per cent of the total investment compared to only 13 per cent in the preceding year. Funding of the Internet sector, despite it being out of favour, dropped only marginally from $68.47 million to $60.51 million in 2002.

The largest decline came in the communication sector; VC investments fell by 94 per cent to only $33.53 million in 2002 from $589.02 million in 2001, and the share of this sector of the total declined from 63 per cent to 6 per cent.

Haldea says the uncertain conditions in both the domestic as well as international capital markets had an adverse impact on the exit opportunities, especially through the IPO route for the Indian VC funds. However, on an overall basis, the year 2002 turned out to be much better than last year; the total number of exits rose significantly in to 41, from 20 each in last two years.