GROWING UP

Investors are chasing fewer but more valuable startup deals in India

The frenzy is ending.
The frenzy is ending.
Image: Reuters/Vivek Prakash
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The irrational exuberance that led to valuation bubbles in India’s startup ecosystem seems to have fizzled out once and for all.

Over the past couple of years, venture capital (VC) funds in India have chosen quality over quantity, a new report by consulting firm Bain & Company and the Indian Private Equity and Venture Capital Association (IVCA) suggests. Since 2016, the number of VC deals in the country has been tapering, even as the quantum of funding grows, the report said.

“The Indian VC industry is maturing and you are finding proof of funds going after fewer but better quality deals after building their initial portfolio,” Arpan Sheth, partner at Bain & Company and one of the authors of the report, said in the company’s press release.

This is good news for the world’s third-largest startup ecosystem, which in the last decade witnessed patches of hyper-funding followed by dry spells that forced many young companies to shut shop or lay off hundreds of employees. In just the two years between June 2014 and June 2016, almost 1,000 startups folded in India due to a lack of funding.

However, even as the number of funding deals comes down, there’s no dearth of capital itself in the system.

For the deal value grew five times in the past 10 years and touched $3.4 billion by 2017, the report stated.

Moreover, India’s startup ecosystem still evokes keen interest in new VCs. The number of VCs with investments in India rose from just 157 in 2013 to 270 this year.

Specifically, investment by corporate VCs—funds run by large companies—has increased four-fold over the past four to five years, and it is “expected to increase further in future given traction from funds set-up by mature startups such as Flipkart and Paytm as well as from top international corporate VCs such as Google Ventures,” according to the report.

Google made its first direct investment in India in Bengaluru-based personal concierge app Dunzo in 2017 and the second one in fashion e-commerce startup Fynd earlier this year.

Many of these bigs bets are now paying off.

Returning the favour

Overall, VCs in India have seen “reasonable success,” the report said, adding that between 5% and 15% portfolio companies of large funds went on to cumulatively raise more than $100 million worth of funding.

Exit momentum has also picked up in the past few years with over $4 billion worth of exits in 2017.

In 2018, the exit value skyrocketed to nearly $20 billion on the back of Flipkart’s $16.8 billion sale to Walmart, comprising 80% of the total exit value in the nine months ending September this year. Star Health Insurance was a distant second at $930 million.

 

And with increasing maturity of the ecosystem, exits are expected to increase in the future with nearly 80% of the startup founders expecting investor exits by 2024.