July 27, 2018
India received a record US$24.4 billion in PE investments in 2017, 26% higher than the previous highest US$19.3 billion in 2015, and 59% increase over the US$15.4 billion in 2016
The fast-evolving technology and innovation sector has accounted for 56 per cent of the total PE and VC tech activity (by value) in the Indian and Southeast Asian markets since 2015
The Reserve Bank of India has allocated US$1.5 billion to set up a fund of funds, led by Small Industries Development Bank of India (SIDBI), which has committed 15% of the corpus
India has the second-largest startup ecosystem in the world, which is expected to grow at 10-12 per cent per year, with more than 1,000 new startups being born every year
The recently concluded US$16 billion Walmart-Flipkart has breathed new life in to the Indian start-up investment space. It has spurred a fresh round of funding by foreign as well as home grown investors – Venture Capital (VC) as well as Private Equity (PE) firms. The overall investment in the PE/VC space in India touched an all-time high in 2017, and this momentum is expected to continue in 2018. Experts in the space believe that India’s home-grown entrepreneurs and startups have competed well against global giants and are creating value for their investors, which is why more and more capital is flowing in.
The fast-evolving technology and innovation sector has accounted for 56 per cent of the total PE and VC tech activity (by value) in the Indian and Southeast Asian markets since 2015, according to the report by USA-based global risk management firm Kroll, and deal tracking firm Mergermarket (Acuris). Among the big Indian economic centres, New Delhi and Bengaluru have had the highest number of startup investment rounds greater than US$100 million since 2014. While Bengaluru recorded 21 and New Delhi reported 18, according to a report by USA-based venture capital and startup database CB Insights.
These “mega” rounds of investment are reflective of the opportunity that Indian startup space represents. Some of the big-ticket foreign investments in India included online marketplace Flipkart and Paytm, ride-hailing service Ola as well as online grocer Bigbasket and Swiggy’s. Big acceleration for Indian companies came from Japanese internet giant SoftBank Group that has invested over US$7 billion in the Indian ecosystem, including in Flipkart and Ola. Now, some of the largest funds in the world are raising or have raised billions of dollars for investing in India, spread across early-stage to growth-stage deals.
Meanwhile, Government of India is doing its towards building an entrepreneurial ecosystem, through the Startup India initiative. Launched in 2015, the programme focuses on and encourages start-ups as the cornerstone of the strategy for employment generation and development of the economy. The Reserve Bank of India has allocated US$1.5 billion to set up a fund of funds, managed by Small Industries Development Bank of India (SIDBI), which has committed 15 per cent of the corpus. Over 11,000 startups have been recognized across India, and 129 have been funded so far under the Startup India Initiative.
Financial uncertainties in global economy, rather than becoming a dampener, have actually further boosted the movement of investments to India’s vast, secure and rapidly-growing market. In the first half of 2018, about half-a-dozen first-time venture capital investors have made their debut into India, along with setting up India dedicated funds for investing in early to mid-stage startups. A heartening feature of this trend is that many of these funds have Indian corporates as their lead investors. Additionally, senior executives in the India offices of global funds, are splitting up and floating their own funds.
Apart from operational knowledge, these executives claim they can deploy funds better than a global operator. Participation from local corporates as well as funds from USA, Japan, China, Russia, among others, are being seen as a validation of growing investor confidence, based on realization that local startups can create value even if they have to compete globally. Meanwhile, PE firms are emerging as an important source of capital for internet and software firms in the late-stage market dominated almost entirely by SoftBank, Naspers Ltd and the Chinese internet giants Tencent Holdings and Alibaba Group.
Simultaneously, many hedge funds that were investing in mature startups in the funding boom of 2014-2015 are either no longer operating in India or have cut back sharply. Therefore the renewed interest of PEs in late stage startups is very important, to provide an alternative source of funding. However, PE firms have been selective investors, picking relatively safe bets in terms of startups that are reasonably mature and have reached No. 1 or 2 in their respective fields, or have the potential to do so.
India received a record US$24.4 billion in PE investments in 2017, 26 per cent higher than the previous highest US$19.3 billion in 2015, and 59 per cent increase over the US$15.4 billion in 2016, as per data compiled by Venture Intelligence. One of the last remaining hurdles, before the floodgates really open, is the exit or liquidity dimension. At the macro level, over US$100 billion has been invested in India in the alternative assets class and less than US$40 billion has been returned to the investors so far.
The investors/limited partners (LPs) abroad generally look at the measurable exits in India which are very few in number. In contrast, as per a CB Insights report, Beijing and Shanghai have seen over 50 large (over US$100-million) exits since 2012. However, the recent Flipkart-Walmart mega deal is a very positive sign from this perspective, where a strategic investor has given very attractive exits to Flipkart’s existing investors. Industry experts project that more such deals in the coming months will boost the investor confidence further to start of expand activity in the Indian startup investment space.
According to the Union Ministry of Commerce and Industry, India has the second largest startup ecosystem in the world, which is expected to grow at 10-12 per cent per year, with more than 1,000 new startups being born every year. In addition to Startup India initiative, the Indian Government’s push for digitisation (Digital India), investment (Make in India), skill development (Skill India), e-governance, among other initiatives, provides a vast opportunity landscape for start-ups to play a significant role in the growth of the Indian economy, as a source of employment, innovation and industrialisation.