Om Malik of GigaOm writes that “The truth about Indian start-up scene is that there is more money than actual start-ups. We have talked about it before, and we will say it again. Venture Capitalists – both local and US-based are showering money on start-ups, some of them quite marginal.”

I’m not sure this is the correct conclusion.

The VCs that I talk to in India all seem to be investing at a pretty rapid pace, putting their $100-150M funds to work in 18-36 months. Yet, the deals that are getting done seem to me to be pretty decent. If you look at the portfolios of folks like Helion, Nexus, Sherpalo, and Matrix Capital India it doesn’t seem like they are doing stupid stuff, quite the contrary.

According to Ernst & Young, through the first 9 months of 2006 there was $178M of VC investment in India (about $240M on an annualized basis). For a country of 1.1 billion people and an economy growing 8-10% depending on the year, $178M hardly seems out of control. Even if it triples in 2007 to $720M it just doesn’t seem like that much (but that’s subjective).  Another way to look at this is that in 2006 the $13 trillion US economy had about $28B in VC investment (for every $ of GDP you had about two tenths of one cent of venture investment).  In India in 2006 you had a $804 billion economy with about $240M in VC investment (for every $ of GDP you had about three hundredths of one cent of venture investment).  Basically, the amount of venture capital being put to work in the US, adjusted for the size of the economy, is 7x that of India.  For India to have the “same” (economy adjusted) amount of VC dollars as the US there should have been $1.68B in venture investment (not $240M) in 2006.  Of course the US is a far more venture-ready environment than India, but a 7x differential seems pretty healthy.

On a slightly different note, I actually think the bar for Indian companies to be funded is higher than many in the US as most of the VC firms mentioned above are first time funds and are quite concerned about having too many failures in their portfolio. I’ve had several tell me that.

My conclusion is that it doesn’t appear that there is too much money. The other point is that if you look at the US the environment is pretty overheated there, with venture investment at record levels. There are 4 or 5 or 10 companies getting funded in every space.

Anyways, these are macro stats.  At the end of the day, if you focus on building a good business with a good team the fact that there is too much or too little money will be of little relevance.