I am back after taking a couple months to run a very successful conference Innovating in a Flat World: www.tieconeast.com with over 1,400 people attending.
Stanford University and TiE have recently published a study on private equity in India http://aparc.stanford.edu/publications/accessing_earlystage_risk_capital_in_india/. Some of the highlights of the study:
- There is a dearth of seed and early stage investment capital in India with just 6.9% of capital going to that stage, as compared to 12.5% in China and 29% in the US.
- The authors recommend the Indian government allocate capital in conjunction with venture firms to early stage companies, modeled on Israel's Yozma program
- SEBI, the Indian regulatory authority, allow foreign accredited investors
An interesting observation from the study was that India gets more private equity than China, almost double in 2005. It appears China's industrial growth has been funded more by debt than equity financing. This is borne out anecdotally by the number of new private equity funds that are targetting India. The latest news is that Matrix Partners is setting up a fund in India. Likewise the average deal size in India is about $15M versus $4.5M in China. The number of deals in China are now greater than India. It seems that China uses equity financing at early stages and debt at later stages. India uses sweat equity and customer financing at early stages and equity financing at later stages. This also evident from trends in commercial loans--Chinese banks lend 130% of their deposits while Indian banks lend only 61%.
Indian VCs are reluctant to invest in early stages given the inexperience of entrepreneurs. Indian banks, dominated by state-owned banks are too conservative. Clearly there is a need for the government to reform banks and to encourage early stage investing like the US government did with the SBIC program.