By Deep Kalra
The winter that set in late 2015 on funding appears to have thawed as there is renewed funding galore in Indian startups. In the quarter ending March 2019, Indian startups recorded total funding of $3.42 billion. India’s startup ecosystem is going through a purple patch and the government stability and roadmap to boost economic environment is inspiring more entrepreneurial minds. While this growth in the Indian startup ecosystem is a good omen, the reality is that the top five most-funded startups — which make up a mere 3.06% of the total number of startups funded this quarter — contributed 43% to the total $3.42 billion raised in Q1. It’s why entrepreneurs leading startups need to go beyond overall exuberance and carefully plan their funding and flawlessly execute on their business plans to ensure they don’t end like the 94% that pulled down their shutters within the first year of operation.
The startup funding landscape has changed significantly over the past few years in India. While ten years ago the options available to startups were few, lately we’ve witnessed an important surge in Venture Capital / Private Equity available for startups at all stages. From seed to growth, from Series A to Series C. Deal-making has also broadened, across companies and sectors. There is a boom in late-stage funding with the deal activity in the first five months of 2019 overtaking the number of deals seen in the whole of 2016 & 2017.Investors are putting in money at higher prices because companies are growing at a fast pace even at a sizeable scale and with a reasonable chance at making a good return from their entry price.
The source of capital is also diversifying as new breed of MNCs plough in funds. Multiple new funds from countries like Japan, China, South Korea and Abu Dhabi are deploying their capital. And that’s not all, domestic capital too is now betting on startups. Large Indian conglomerates such as Reliance, Mahindra & Mahindra, and Hero Motorcorp are making investments in startups. While broadening the pool of funders for ventures, these businesses don’t have the typical restrictions of Venture Capitalists, who always have one eye on the exit.
Then there are sovereign wealth funds that are buying stakes in everything from airports to renewable energy in India today. With an eye on growing middle class, political stability and promise of structural reforms have made India a truly inviting place for foreign investors to deploy long term capital. Foreign institutional investor flows into Indian equities are $11 billion year-to-date, surpassing the total annual tally in each of the four previous years and setting 2019 on course for the highest annual inflows since 2012.
The founders that have built some wildly successful Indian startups are now the founding fuel for many a startups. They are giving back to the ecosystem not just as mentors to entrepreneurs but also by putting their money where their mouth is – by becoming some of the most active angel investors. The Chinese startup ecosystem is robust, vibrant, and massive not only because the Chinese Government protected their local companies, but also because of the way they structured their ecosystem. Big companies like Alibaba which once raised funding from the ecosystem now invest in a number of local startups. The money these big companies received from the ecosystem remains in the ecosystem.
The massive Flipkart-Walmart deal has underlined what good exits look like and will help ease any worries that investors may have had about the lack of exit path in Indian startups. Without going the conventional IPO route, investors are making an exit in subsequent funding rounds which is shaping an informal market for startups. Celebrating liquidity events will signal a coming of age of Indian startup ecosystem as it will put exits and returns, instead of large fundraise and paper mark-ups, firmly in focus.
In India, there have been more exits through M&A than IPO, both in terms of count and value. Be that as it may, an IPO is still a dream move for a lot of Indian startups that can place them into a higher orbit. For most, it’s a logical step in their eventful journey that can deliver liquidity to investors and employees while providing cash for investment into the business. A successful IPO requires not just a rock-solid balance sheet, but a clear business model and a tangible path to profitability. For some time now, the market regulator and stock exchanges have been working on making an IPO easier for startups. By listing in India, these companies will not only create value but will also keep it in the country – it’s why we need a liberal framework that reflects the thriving entrepreneurial scene in India.
(The writer is the Founder & CEO, MakeMyTrip.com.)