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Venture Capitalist banking on Indian market

Less than 50 startups raised their first round of funds in Q2 2020, while 52% of startups struggled to raise additional funding, as per reports.

SNS | New Delhi |

The Indian startup ecosystem is the third largest ecosystem in the world with almost 40000 startups. Entrepreneurs in the country have adapted quickly and effectively to COVID-19 in response to the rapidly evolving market dynamics, customer preferences, and operating conditions.

COVID 19 did cause a decline in the VC investments, especially from April to June 2020. The amount of funding and the total number of deals fell by 48% and 37%, respectively, in Q2 2020 over the corresponding period last year. Less than 50 startups raised their first round of funds in Q2 2020, while 52% of startups struggled to raise additional funding, as per reports.

However, now, the Indian economy, key indicators have turned positive. India’s startup and VC ecosystems continue to thrive. VCs have adopted a long-term view based on the country’s growth potential. They see the current slowdown as more cyclical than structural.

The 2019 story

In 2019, India Inc saw an investment of INR 1,211 billion (YoY growth: 60.5 per cent) in the form of private equity investments with the internet, computer software, utilities, financial services and transportation among the top gaining sectors. Additionally, India successfully materialized 616 deals with an average deal size of INR 1,967 billion.  For India’s venture capital industry, 2019 was a milestone year with $10 billion deployed into startups, a 55 per cent jump from 2018, according to Bain & Company.

2020 – Global VCs turning to Indian Markets

Leading VC firms are setting up India-centric funds. In July, Sequoia committed $1.35 billion to new India funds, including a $525 million venture fund and a $825 million growth fund. Recently, Lightspeed also announced the closing of the Lightspeed India Partners III Fund with $275 million of committed capital. There are various other similar funds that have come up. This is a strong indicator that India Inc is emerging to be one of the strongest investment markets for VCs globally.

There are very specific reasons behind India’s emergence as a global VC’s preferred destination. Enterprise innovation, cost-effectiveness, pool of qualified talent are major factors. The evolution that occurred in the US, has started to play out in India as well. Contributing to it are the added factors of geography and population. The number of mobile internet users will likely cross 1.5 billion by 2030 in India and SEA. Adding to it is the current political and trade tensions between the US and China. New India is also a staunch believer in forging global partnerships. All these factors are contributing to India’s emergence as a strong market.

A trend that is being spotted is that VCs are now investing in new companies more readily. SAAS, edtech, pharma, health, biotech, consumer internet are the sectors that have emerged as winners. The idea that a successful startup is born only in startup cities like Bengaluru, Hyderabad, etc, no longer holds water.

Other areas of opportunities, according to investors, which might be byproducts from the Covid-19 scenario, could be team collaboration tools that will help businesses cut their infrastructure and technology costs, helping MSMEs adopt online strategies to streamline their business operations and growth; and providing hyper-local information on app or website.

Many investors are banking on Indian startups because there is no concrete reason to stop investing as they invest with a horizon of seven-eight years (early-stage VCs).

The Silicon Valley Attention – The China Factor

Indian startups are getting a lot of attention from Silicon Valley. Since the start of 2020, the biggest names in US tech have invested around $17 billion in India. Silicon Valley has been largely shut out of China for years. The US distrust of China, new national security law imposed in Hong Kong which may push Silicon Valley further away. There seems to be a natural synergy between India and the US. Majority of the tech investment into India this year — including Facebook and Google has gone into Mukesh Ambani’s conglomerate. The Reliance conglomerate has forayed into almost all sectors- mobile network, e-commerce, digital payments, streaming services, video conference platform, and retail. At this juncture, it seems that the easiest way to enter the Indian economy is through the Jio gateway. Certainly, Silicon valley seems to know that and hence continues to support the Indian markets.

The OECD Outlook

Yields in the OECD companies continue to decline. Consequently, funds are expected to increase their resource allocation to emerging markets. The direct beneficiary of this shift would be India. As per Preqin, global PE/VC funds are sitting on the dry powder of almost US$2.5 trillion. With India forming a major part of the investment strategy for many global funds, we are likely to see a meaningful share of the incremental dry powder for emerging markets allocation being deployed in India.

The Japanese Interest

In the past few years, Indian private equity and venture capital markets have attracted Japanese investors. They are currently some of the biggest dealmakers in the Indian startup ecosystem. Japanese investors have brought in expertise, discipline, and patience along with the capital.

According to a report in 2019 by Inc42’s DataLabs, Japanese investors have funded as many as 105 Indian startups, spread across 157 deals between 2014 and the first half of 2019. The growing involvement of Japanese investors in the Indian startup ecosystem reasserts their interest to participate in the Indian markets.

VCs in this East Asian country have enough money to go around, but there aren’t enough good startups to invest in. Japanese investors need opportunities to deploy this capital. This is one of the major reasons that Japanese investors continue to support Indian startups. This year, Japan collaborated with India to launch a USD 187 million fund-of-funds for Indian tech startups during prime ministers Narendra Modi and Shinzo Abe’s meet at the G-20 summit in Osaka earlier in June. Independent Japanese VCs are exploring new emerging models in India across different sectors.

Japanese firms have set up operations in Southeast Asian countries including Singapore, Indonesia, and the Philippines. However, India is the only other market that is comparable to China, despite five to seven years difference between the two. This makes India, strategically, one of the strongest bets for Japanese investors.

While we have been considering the global investing scenario, we would like to stress upon the fact it is high time that homegrown VCs and investors step up. Going by the trend, there is a high need to keep Indian startups Atmanirbhar. With the increases confidence of global VCs in Indian startups, it will be interesting to see how this scenario plays out for domestic investors.

(By Alok Patnia, Managing Partner, ProfitBoard Ventures)