SaffromContract: Employment portal StaffonContract.com, owned by Joule Consulting, has raised angel funding of Rs 50 lakh from Indiagames founder Vishal Gondal. The company intends to raise a $1.5 million (Rs 7.6 crore) Series A round soon. (Source: TechCircle).

Exotel: Bangalore-based cloud telephony startup Exotel has raised Rs 2.5 crore in Series A funding from Mumbai Angels and Blume Ventures. The two investors have picked up a 25 per cent stake in the company. (Source: Pluggd.in)

Ujjivan: The Michael & Susan Dell Foundation and Bellwether Microfinance Fund are in talks to sell their stakes in microfinance institution Ujjivan. The two investors own a combined 12 per cent stake in the company and want to sell at Rs 57 per share. Existing investor Lok Capital is one of the buyers in the fray. (Source: The Economic Times)

PoP: Noida-based Proof of Performance Data Services  has raised undisclosed round of funding from YourNest Angel Fund.(Source: TechCircle).

App Surfer: Droid Cloud (now rebranded as App Surfer), a platform through which apps could be accessed from anywhere and from any platform, has raised Rs 50 crore in angel funding from One97 Communications founder Vijay Shekhar Sharma. The platform has been developed by Pune-based RainingClouds Technologies. (Source: afaqs!).

The nine sectors that currently enjoy the exemption include nanotechnology, hardware and software development, seed research, biotechnology, R&D of new chemicals and medicines, production of bio-fuels, hotel construction and, development and operation of any infrastructure complex, dairy and poultry facility. Profits earned from investments made in any of these nine sectors are exempt from income tax. Following the finance minister’s budget proposal, this tax incentive will now be available to investments in all sectors.

Venture capital and private equity investors make profits by selling (or exiting) their stakes in portfolio companies, either through the public markets or via merger and acquisition transactions. The proposed tax exemption will only be applicable to investors who are registered with the Securities & Exchanges Board of India (SEBI) as domestic venture capital funds (the term includes private equity funds). Such investors, though, currently constitute a relatively small portion of the industry. Most venture capital and private equity funds that invest in India operate as foreign investors from tax-friendly, offshore locations such as Mauritius or the Cayman Islands.

The removal of the sector restrictions, when formally approved, will foster the creation of a more robust domestic venture capital and private equity industry. Local financial institutions will be encouraged to back domestic investment firms, thus enabling such as firms to reduce their dependence on foreign money. At present, nearly 90 per cent of venture capital and private equity firms that invest in India are backed by foreign money. This comes primarily from US-based pension trusts and endowments, global fund-of-funds and European and US-based family offices.

The problem with an over-dependence on foreign money is that when there is an economic slump in those respective overseas markets, fund-flows here tend to dry up. Entrepreneurs who started businesses in and around the year 2000 will recall the nuclear winter between 2001 and 2005 when venture capital and private equity funds disappeared from the Indian market. US-based investors, who froze fund-flows after the US market was hit by the dotcom bust, primarily funded Indian venture capitalists at the time.

The finance minister’s proposal could have not have been better timed, given that venture capital and private equity investments in India are currently on an upswing. Various industry research reports put investments in calendar year 2011 at anywhere between $7 billion and $10 billion. The last couple of years have been particularly positive for venture capital investors – who invest in startup companies – with investments last year reported at over $600 million. Notably, the past year has seen a slew of reasonably profitable exits by such investors, laying the ground for more investments in early stage companies.

Nexus Venture Partners makes exits look easy. In the last 18 months, the Mumbai-based venture capital investor has racked up six exits, out of which five have turned in more than decent profits. The only dampener has been online hotel rooms aggregator MagicRooms. Nexus managed to recover its original investment of Rs 7 crore ($1.5 million), when online travel agent Yatra acquired MagicRooms last August.

Still, five hits out of six, is not a bad record for a first-time venture capital firm, especially in the Indian market. At this juncture, the firm may be looking at an average IRR (internal rate of return) of 35 per cent on its first two funds, though this could not be confirmed. Nexus India Capital I and Nexus India Capital II, raised in 2007 and 2008 respectively, have a combined corpus of $320 million. About $210 million has been invested in 35-odd companies. The combined value of the profitable exit deals concluded by the firm so far stands at approximately $585 million (based on an aggregation of deal sizes reported in the media or in press releases).

A closer look at each of those exits (an event where investors sell their stakes in a portfolio company) throws up some interesting details. To begin with, barring MagicRooms and Netmagic Solutions, all the deals involve technology companies that operated on the cross-border model (startups that either had dual operations in the US and India or a focus on both markets). None of the deals, except MagicRooms, had Nexus as the solo investor, though in several cases it was the lead investor.

Finally, and most importantly, mergers and acquisitions have been the preferred exit route. It begs the question: could Nexus have reaped higher returns if it had waited longer? Were there IPO candidates among the six companies it exited? The answer to both questions, says co-founder and managing partner Sandeep Singhal, is yes. However, the decision to exit those companies at the time was the right one, he adds.

To understand why, we walk you through the details of the exit run:

August 2010 | OLX

Entry: Alec Oxenford, co-founder of Buenos Aires-based online classifieds site OLX, knew Nexus co-founder Suvir Sujan from his earlier role as advisor to Baazee (the online auction site Sujan co-founded and sold to eBay). Nexus entered the company at the Series B stage, investing $5 million in 2009 from its first fund.

Exit: In mid-2010, South African media company Naspers started a due diligence of the company, with the purpose of making a strategic investment. Within 2-3 months, it decided that it would acquire a controlling stake in the company. Nexus was not initially keen on exiting the company. “We felt that it had the potential to IPO on Nasdaq,” says Singhal. However, it did not want to stay on as a minority shareholder either. Naspers bought out all of OLX’s shareholders, including Nexus, for a reported $20-40 million.

January 2011 | Dimdim

Entry: The Nexus investment in open source web conferencing startup Dimdim was the result of a cold call. In 2007, Sujan noticed that the company’s product was seeing reasonable downloads and decided to fly down to Hyderabad, where Dimdim’s development center was located, to talk to the founders. He caught CEO DD Ganguly just on his way out to the US to finalize on one of two investor term sheets he had received. “DD wanted to get an opinion from Danny Rimer at Index Ventures before he signed a deal. So we introduced them and that got DD interested in us,” says Singhal. Nexus eventually participated in a $2.4 million Series A round alongside Index and Draper Richards. The three investors later followed up with a$6 million Series B round. Both rounds came from Nexus’ first fund.

Exit: Sometime in early 2010, Dimdim entered into a strategic partnership with open source CRM software maker Salesforce. While working together, Salesforce expressed a desire to make a strategic investment in the company. Mid-way through negotiations, the San Francisco-based company decided that it actually wanted to buy Dimdim. Though Nexus felt at the time that Dimdim could have grown into a larger play on its own, it decided to concede to the founders’ wishes to sell out. Salesforce bought Dimdim for $31 million.

July 2011 | Cloud.com

Entry: Nexus co-founder Naren Gupta and partner Jishnu Bhattacharjee, who work out of the firm’s Silicon Valley offices, happened to meet Cloud.com founder Sheng Liang at a conference. At the time, the Nexus team was scouting a cloud-based software infrastructure management company that catered to Indian enterprises. Cloud.com had a focus on the Asia Pacific region and fitted in with Nexus’ investment thesis. It first invested an undisclosed amount in the company in 2009 in a Series A round alongside Redpoint Ventures. In May 2010, Nexus, Redpoint and Index Ventures invested another $11 million as part of the Series B round. Both rounds came from Nexus’ second fund.

Exit: When Citrix Systems made a unsolicitated offer for Cloud.com, Nexus’ Gupta felt it was too early and tried to dissuade the founders from selling. He felt that the company had the potential to IPO in two years and probably at a half a billion dollars valuation. Citrix acquired the company for a reported $200-250 million.

October 2011 | Gluster

Entry: Silicon Valley-based serial entrepreneur Anil Godhwani, who was an angel investor in Gluster, introduced the company to Nexus’ Naren Gupta. The cloud-based storage solutions startup was in the market for a Series A round of funding. Nexus led a $3 million round in 2008 and followed up with a $8.5 million Series B round alongside Index Ventures in 2010. Both rounds came from its second fund.

Exit: Open source enterprise solutions company Red Hat approached the Gluster team with a buyout offer. It was keen on adding a storage component to its existing platform, which already addressed the operating system and applications end of the business. Nexus and Gluster’s other investors, as per norm, decided to test out the deal with other potential buyers and found that the Red Hat offer was the highest. Red Hat acquired Gluster in a $136 million all-cash deal.

January 2012 | Netmagic Solutions

Entry: Netmagic became part of the Nexus portfolio, when the venture capital firm acquired the defunct eVentures India’s residual portfolio of four companies in 2007. Nexus co-founder Sandeep Singhal was earlier part of the eVentures India founding team. Netmagic had originally raised $4 million from eVentures and Global Technology Ventures, back in 2000. In 2008, Nexus and Fidelity International came in with a $18 million second round of funding. This was followed by a $15.7 million third round of funding in 2010, which was led by Nexus. Both rounds came from Nexus’ first fund.

Exit: Much before NTT Communications entered the picture, Netmagic had received an acquisition bid from an undisclosed buyer based in the Asia Pacific region. Post-acquisition, the buyer planned to take the combined entity public. Again, as per norm, Nexus and other investors decided to test the market for other buyers. “This is the only deal for which we actually engaged an investment banker,” says Singhal. The result was three higher bids, one of which came from Tokyo-based NTT. “The first bidder dropped off,” says Singhal. NTT was eventually found to be the best fit and it acquired a 74 per cent stake in the company for an undisclosed amount. Unconfirmed media reports put the size of the deal at $128 million.

In a couple of months, or more likely earlier, Nexus is expected to announce its third fund. The corpus is speculated at $250 million. The six-year old firm’s maiden exit run will play a big role in determining how and where the upcoming fund will be deployed.

Images Courtesy: Nexus Venture Partners & Companies

Lead Photo Caption: (From left) Suvir Sujan, Anup Gupta, Sandeep Singhal and Naren Gupta

The Bangalore-based Catamaran currently owns a 1.3 per cent stake in SKS. It had originally bought a 1.5 per cent stake in January 2010 for an investment of Rs 28 crore. SKS had issued the shares to Catamaran at Rs 300 per share, just a few months ahead of its initial public offering in August 2010. The company’s stock listed at Rs 1,036 (against an offer price of Rs 985) and it went on to raise over Rs 1,600 crore from the public markets.

This is not the first time in recent months that speculation about Catamaran’s imminent exit from SKS has hit the headlines. In September, The Financial Express, again quoting sources, reported that the venture capital firm was mulling a stake sellout. The root of the speculation, then and now, appears to be the soon-to-expire lock-in period for Catamaran’s holding in the microfinance institution. Contractually, Catamaran’s shares were locked in for 24 months from the time of the investment. The lock-in period officially expires in January, though the venture capital firm could have exited even earlier — as per its shareholder agreement with SKS, the lock-in would become invalid if the weekly average closing price of the SKS stock fell below Rs 400, which it did this May.

For SKS, the speculated stake sale by Catamaran comes at the end of what has been a particularly troubled year. The company’s stock has declined drastically from its spectacular listing price to around Rs 100 now. Founder and chairman Vikram Akula recently resigned from the company, ostensibly to pursue a fresh entrepreneurial venture in the area of mobile banking. The company is also in the red, posting losses of Rs 384.54 crore for the quarter ended September.

The Catamaran exit, if it happens, will further dent the company’s already battered credibility with both retail and institutional investors. It could also set off an exodus of SKS’ remaining venture capital backers, which includes WestBridge Capital Partners, Sequoia Capital India, Silicon Valley serial entrepreneur and investor Vinod Khosla and Sandstone Capital — though the company has recently said that its existing investors have shown interest in participating in an upcoming QIP (qualified institutional placement).

Paris-based Sequans is the first French company to list on the NYSE since 2002. It raised $177 million in gross proceeds on listing and is traded under the symbol NYSE: SQNS. Reliance Venture had invested in the company in 2007 alongside a posse of investors including Alcatel Lucent, Motorola and CDC Enterprises. “We are open to discussing financial information after observing a limited quiet period for 25 days after the IPO,” said Harshal Shah, CEO of Reliance Venture, in a press release.

In late March the firm exited Hyderabad-based climate control apparel startup Dhama Apparel Innovations, earning an IRR exceeding 100 per cent on the sale of its 45 per cent stake. It is currently in talks with several portfolio companies on further exits. Some of the firm’s recent investments include AllGreen Energy, Gradatim IT Ventures, Tessolve Services and Reverse Logistics. One of its earliest startup investments is online travel portal Yatra, in which it was a founding investor.

What others are saying about the deal

• Reliance Venture exits 4G chipmaker Sequans (Economic Times)

Some highlights from the report:

• Software received the highest funding at $1.1 billion
• Biotech came in third raising $784 million
• Cleantech saw a 26 per cent growth in investments over the December 201o quarter at $1 billion
• Series A investments increased 12 per cent over the December quarter raising $987 million across 221 deals

NVCA also earlier released the first quarter numbers for venture capital fundraising and exits. A total of 36 funds raised $7 billion which represents a 74 per cent growth over the first quarter of 2010. This included 25 follow-on funds and 11 new ones. The big three fund raisers were the $1.6 billion Bessemer Venture Partners VIII fund, the $1.3 billion Sequoia Capital 2010 LP and the $1.2 billion JP Morgan Digital Growth Fund LP. This marks the return of billion dollar funds after a slow fundraising phase in the last couple of years.

On the exits front, 14 venture capital-backed IPOs valued at $1.4 billion entered the market in the first quarter. 109 venture capital-backed M&A deals were reported of which 45 had an aggregate deal value of $5.9 billion. The NVCA thinks that a 20-30 per cent increase in US venture capital-backed firms going public this year is a reasonable goal.

The first quarter performance reports can be downloaded from the NVCA website.

Image Courtesy: Danilo Rizzuti/Free Digital Photos.net

In April 2000, Intel Capital had acquired a total stake of 3.66 per cent in Persistent for an investment of $1 million. It sold 1.37 per cent early last year shortly after the company went public. Apart from Intel Capital, the other venture capital investors on board at Persistent include Norwest Venture Partners and Gabriel Venture Partners who own 13.5 per cent and 4.8 per cent respectively. Hewlett-Packard is also an investor in the company.

Founded by former Hewlett-Packard executive Anand Deshpande in 1990, Persistent provides outsourced software product development services to overseas customers. The company currently employs over 5000 people and has a portfolio of over 290 customers.

What others are saying about the deal

• Intel Capital exits Persistent Systems, returns pegged at 6X (VCCircle)

Image Courtesy: Persistent Systems

• The National Venture Capital Association (NVCA) reports that venture capital exits in the US market have shown “mild improvement”. Initial public offerings (IPO), the preferred exit route for venture capital investors, have made a small comeback. Five venture-backed companies hit the capital markets to raise $720.7 million in the April to June 2009 quarter. This is a significant improvement over the full year 2008, which saw only six IPOs worth $470.2 million. More details in the NVCA release here.
• Preqin reports $76 billion in global private equity (includes venture capital) fundraising during the April to June 2009 quarter. This is a 28% growth over the $60 billion raised in the January to March 2009 quarter. However, compared to the $213 billion raised in the April to June 2008 quarter, it is still a steep climb up to normal levels. Full details in the Preqin release here.
• PitchBook reports global private equity investments (does not include venture capital) at $11.11 billion in the April to June 2009 quarter, down 18.5% from $13.64 billion in the January to March 2009 quarter. The research firm concludes that investors are still waiting for the investment environment to improve. It estimates that investors are sitting on $400 billion in available funds. Details in the PitchBook release here.

Fundraising in the US venture capital market has been slow, sometimes non-existent, for some time now and it isn’t getting better just yet. The Q1 2009 numbers released by the National Venture Capital Association (NVCA) report that 40 venture capital funds raised $4.3 billion, down almost 40% from 7.1 billion raised by 71 funds in Q1 2009 – see details in the release here. Only three out of the 40 that raised capital are new funds. There is however one small positive. Fundraising in Q1 2009 has been slightly higher than Q4 2008. Still, it is going to be hard for startups to come by money for a while longer, both in the US and in India, which depends quite heavily on the US venture capital industry for fund inflows.

Not surprisingly, it is not looking good on the exits front either. Q1 2009 saw M&A-led (merger and acquisition) exits worth $654.3 million against $4.54 billion in Q1 2008, reports an April 1 NVCA release. There were no IPO-led exits. Another worrying aspect is that exit deals that earned venture capitalists a 4x return (four times the original investment), which the NVCA terms a top return, accounted for just 23% of total exits in Q1 2009 against 46% in Q1 2008.