In 2006, Canaan Partners, a global venture capitalist (VC) firm headquartered in the US, entered India with an eye on the booming early stage technology investment space. Over the past eight years, it invested nearly $200 million in 13 companies, including BharatMatrimony (matrimonial website), CarTrade.com (auto portal), Naaptol (online shopping) and iYogi (remote technical support). The investments were made from its global funds with a straightforward goal: Identify internet-based startups in health information technology, e-commerce and financial services, to name a few.
But as of 2014—in a move that echoes at least six global VC firms in India—Canaan Partners will make no new investments and has already scaled down its operations in the country.
Two of its three India team members, former managing director Alok Mittal and vice president Nishant Verman, have quit the company. Mittal, who had co-founded JobsAhead before joining the VC firm when it launched its India operations, is going back to his entrepreneurial roots and is “considering a few tech startups in the field of education and health care”. Verman has joined online retailer Flipkart as director of corporate development.
There is talk that managing director Rahul Khanna, the third member of Canaan Partners’ India team, is also exploring other avenues. The trio will, however, continue to support the firm’s existing portfolio till exits are made. Investment managers usually do not wash their hands of the investments they’ve made, and tend to see them through even after they’ve quit a firm.
Up until early this year, Canaan was evaluating the possibility of raising an India-focussed fund. “Nothing of that is happening now. Rahul [Khanna] and I decided not to raise another fund. Canaan has decided not to invest; it is not motivated to build and reappoint a new team and wants to focus on its business in the US,” says Mittal. Forbes India’s emails to Marta Bulaich, vice president of marketing at Canaan Partners, went unanswered.
To date, Canaan in India has made only one partial exit—from health care firm e4e. Mittal insists that the decision to stop investments is not based on its inability to successfully exit from any of the 13 companies in its portfolio. “The focus will be on growing our existing companies; we cannot unilaterally decide to exit them,” he says. But early this year, the company had identified BharatMatrimony, iYogi and UnitedLex (legal process outsourcing) as mature companies, and was looking to cut the apron strings.
Canaan’s ‘semi-retirement’ comes at a time when business sentiment has improved in India. But the VC firm seems to be in no mood to ride on the positive wave. And it’s not the only one: The Indian arms of US-based global VC companies such as Draper Fisher Jurvetson (DFJ), Sherpalo Ventures, Kleiner Perkins Caufield & Byers, Greylock Partners and Clearstone have also been gradually scaling down investments in India over the past two-three years. Summit Partners, which opened an office in Mumbai in 2012, has yet to build a portfolio.
This lack of activity is a stark contrast to the heydays of 2005-06. It wouldn’t be wrong to describe those years as a golden period of investment with millions of dollars pouring in from international investors into an economy that was growing at more than seven percent. But after 2006, the economy went through double dips of downturn and stock markets stuttered—all exacerbated by the Indian government’s policy paralysis. As new businesses struggled, the once-euphoric VCs began bearing the brunt of their own optimism.
Many international VC firms seem to be following a ‘once bitten, twice shy’ India policy. The number of active funds (including those that have invested in at least one firm) in the last three years has dropped by about 18 percent, according to estimates made by VCCEdge, which tracks investment activity in the country. Analysts say it’s unlikely that the numbers will catch up before December 31, 2014.
Experts cite many reasons for this decline. For one, most international VC firms channel India investments out of a central pool of capital. A dollar invested in India will be no different from a dollar invested in the US. What’s more, an investment in any emerging economy is often expected to yield more, if not a similar, return than an investment in the US.
Quite a few VCs first invested in India nearly 8-9 years ago, but, for the most part, they have been unable to make exits. This goes against the grain because a typical fund has an investment horizon of 2-3 years. Investments in India have not returned profit for over three investment cycles. “That reality creates some amount of angst among the fund partners and also with LPs (limited partners), when, during the same time period, meaningful results have been realised in the US,” says Mohanjit Jolly, partner at DFJ, one of the VCs to have put a halt on its India investments.