The first half of the year saw massive capital inflows as startups raised as much as $12.1 billion from venture capitalists and private equity firms, ET
reported on July 7. This was $1 billion more than they raised in all of 2020.
The exuberance of the past six months will continue on the back of the
upcoming IPOs of a clutch of consumer internet companies including Zomato, Policybazaar, Paytm, and Nykaa, founders and investors said on The Rundown, ETtech’s chat show.
“If some or more than half of these IPOs do well, I think the momentum will be sustained,” said Varun Dua, cofounder of Acko, which is in the midst of closing a $200 million round at a valuation north of $1 billion, ET reported in June. “Maybe some froth will come down. But on a broader, directional level, I think [the momentum] will continue.”
A startup that goes public offers the holy grail of exits to investors, and the flurry IPOs this year will boost investor confidence about the potential of big returns from the Indian startup ecosystem, experts said.
“Many people have complained in the past that Indian startups don’t give great exits,” said Siddharth Shah, cofounder of PharmEasy. “I think if these IPOs happen over a period of time, that confidence around exits will also significantly improve.”
Shah, whose company has been on a fundraising and acquisition spree, said that heightened confidence will only increase the availability of dry powder (cash in reserve) for Indian founders.
Apart from the upcoming IPOs and deepening tech adoption in the country, founders and investors told ET that the startup ecosystem is fundamentally more mature and companies are more profitable in 2021.
“I think that (profitability) always used to be one of the questions for the Indian startup ecosystem, which has been answered very, very decisively,” said Mukul Arora, partner at Elevation Capital, which has backed companies such as Paytm, Meesho, and Swiggy. “Hopefully, it will be proved over time that these are not gross merchandise value businesses — that they will start generating cash and achieve massive scale.”
Paytm shareholders approve primary raise of Rs 12,000 crore via IPO
Abhay Pandey, founder and managing director of investment fund A91 Partners, said people outside the venture capital ecosystem, who weren’t convinced about the Indian ecosystem before this year, are now eager for a slice. “It has completely transformed this year. Everybody wants to get to the pre IPO deal. High-net-worth individuals are jumping in and out, and mutual funds want to look at every company,” Pandey said. He added that seasoned professionals from large multinational companies are also more positive about entering the ecosystem as founders.
“Fundamentally, the perception that the Indian startup ecosystem led by technology is creating something really valuable has changed for the better,” Pandey said. The fund has backed insurtech startup Digit, and direct-to-consumer (D2C) brands such as Sugar Cosmetics and Paper Boat, among others.
Tiger, Tiger: What are funds doing differently
On the investor side, 2021 has stirred funds to raise their game. With New York-based venture fund Tiger Global
on the prowl with its $6.65 billion fund, India-focussed funds are looking beyond offering capital to founders to scoop up attractive startups early.
“If you’re going head-on with a fund like Tiger that is 4 times your size and can move at 4 times your speed, there’s no point competing,” said Hemant Mohapatra, partner, Lightspeed India. “ Instead of backing 20 founders with smaller checks, you concentrate your thesis areas, and you become a more focused investor.”
The cash inflows have increased competition on the investor side too. Venture capital advisory firm Chiratae Ventures
announced a 48-hour turnaround on seed fund requests and pitches for investments that are less than or equal to $500,000, an industry-first initiative for the Indian startup ecosystem.
What funds lack in capital, they are making up for by reducing the time to cut checks and narrowing their investment theses.
“We have to move much faster than we used to. One fund started doing investment committees on weekends, and now all of us are doing it on weekends. That is the reality of the market — we have to be much faster,” said Arora, of Elevation.
Good time to be a founder
Dua, of Acko, an online general insurance startup, says that startups now are more smartly built than they were in 2015, when they saw a similar rush of capital. “There’s never been a better time to be a startup founder in India,” said Shah of PharmEasy, as given the availability of capital, founders may have room to negotiate better deals for themselves.
“With the kind of competition there is now, we’ve been able to negotiate better deals and get much more control than we were able to maybe four or five years ago. I think that’s pretty critical. And I think it’s the difference between 2015 and 2021,” Shah added.