Alok asked earlier about what change in behaviour we’re seeing among VCs. My own sense is that VCs in India are much more cautious than VCs in, say, the US. “No” is always a safe answer. Of course, the “venture” or “risk” part of “Venture Capital” is then drastically downplayed. Nowhere is this more true than in times like these. I have not attempted to gather much data on this impression yet specifically for the Indian market, but I would be surprised to be proved wrong.

Meanwhile, in the US, investments have fallen off a cliff. A post in TechCrunch details just how bad it has been so far this year:

And make no mistake—it’s a steep drop. Venture funding fell by 50% nationally from the first quarter in 2008 to the first quarter of 2009, totaling to $3.9 billion, according to Dow Jones Venture Source. That’s the lowest total since 1998. PricewaterhouseCoopers and the National Venture Capital Association had it falling farther to $3 billion.

Information technology investments fell 53% year-over-year to $1.7 billion—the lowest since 1997, and the lowest volume of deals since 1995. And clean tech? Well so much for that being the future of the U.S. economy: It fell by 74% to a paltry $117 million.

VC investments in Q1 2009

The author also believes that this isn’t just about the recession, and that the VC industry was overdue for a shakeup.

Returns, on the other hand, did go down. And they never really got back up, given the amount invested. But the industry is graded on a ten-year time horizon so that didn’t matter much. Once returns from 1999 and 2000 fall off that scale, it will. Returns will look at or below the S&P 500 for what is supposed to be a niche, high-risk/high-reward asset class. It takes forever to correct because fund cylces are so long, and the asset class is so illiquid. But it won’t go uncorrected, and the witching hour is getting close.

What does this have to do with money going out to startups? VCs are scared for the first time in a long time. There’s no obvious high growth sector of the tech economy, and their investors are hit in nearly every nook and cranny of their portfolios. They’re not sure how to do their jobs anymore when nothing can go public and acquisitions are few and far between.

I suspect, even though the VC industry is so young in India, that the reverberations will be felt here as well.

What is your feel? Any pointers to up to date data for India?

Udhay Shankar N

Udhay is a veteran of the technology and entrepreneurship scene, having helped found his first entrepreneurial venture straight out of college in 1991. Since then, he has been invoved in various pioneering ventures,
including (among other things) India's first web site company (in 1995), and India's first startup to get silicon valley venture capital funding (in 1999). He has helped build Yahoo!'s first social media network (before facebook existed) and was recently helping Intel build new products for the Indian consumer. In addition, he set up and ran the startup accelerator at the VC fund, Axilor Ventures, and spends a lot of time helping startups of various kinds further refine their product and strategy.

He is also the force behind the well-known discussion group silklist, since 1997, which makes it one of the longer-lived email lists on the net. Discussions on silklist have ended up inspiring articles, books, Ph.D theses, and sociological studies. Recently, he helped found the 'unconference' styled event, The Goa Project, which aims to bring interesting people of all types together to learn and collaborate..

More info about Udhay on Linkedin.