Venture Capitalists

There are some warning signals too by some industry leaders. Sumir Chadha, managing director of Sequoia Capital India and co-founder and chairman of the US-India Venture Capital Association, said venture capitalists chasing the "hype" could lose their shirts. "It's not a great time to invest in India," he said in an interview conducted before the release of the report. "There's such a flood of capital. On average, the venture community will probably lose a lot of money in India."

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Though information technology notched 31 deals in the period, the most of any sector, the business/consumer/retail segment got the most money, reeling in $376 million in 21 rounds compared with $327 million. More than 60 percent of the investments came in early-stage deals.

Mark Jensen, partner and national director of venture capital services for Deloitte & Touche, said some investments in India and other developing countries are slowed by the lack of infrastructure and experienced executives to lead companies. "In a lot of these emerging markets, investors on the ground are saying that you've got good ideas and talented people, but the rest of it is missing," he said.

But even these critics agree that for those willing to take a long-term approach, India offers a fast-developing venture capital ecosystem, with strong academic institutions, one of the world's largest pools of engineers, and a massive local market. Marquee names in U.S. venture capital such as Draper Fisher Jurvetson, New Enterprise Associates, and Bessemer Venture Partners have put stakes in India in recent years.

Neill Brownstein has gone a step further. Mr. Brownstein, who opened the California office of Bessemer in 1976 and worked at that firm for almost a quarter century, founded Footprint Ventures in Bangalore in April 2005. Since then, he and his wife and venture partner Linda Brownstein have spent about half their days on the ground in India. "We're building a firm that's really hands-on," he said.

Citing an entrepreneurial culture, a pro-development government in New Delhi, the presence of tech powerhouses such as Intel, Cisco Systems, and Microsoft, and the pull on Western-seasoned Indian expatriates to return to their native country, Mr. Brownstein compares Bangalore to the early days of Silicon Valley. As an early-stage investor, Mr. Brownstein said his firm finds less competition than some firms that focus on later-stage deals. Mr. Brownstein expects a four-to-seven-year wait before reaching liquidity. "We're in it for the long term," he said.