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  • Vinay Nair

The Year That Was for Venture Capital in India

Updated: Jan 27

As the year, and perhaps more poignantly, the decade draws to a close, the jury remains out on whether the #Indianeconomy will reclaim its position as the fastest growing major economy anytime soon.


In a year that saw most major indicators of economic health decline, and the automobile sector screech to a somber halt, the investment and #venturecapital scene held out with a flicker of hope. This market saw some moments of brilliant buoyancy peppered by a few downhill tumbles, and looks set to end the year on something of a high. While the apparent good fortunes that have struck this sector is rather heartening, a few of us can't help but worry about a few segments of the overall market.












Highs

For starters, some of the key statistics from this year's investments:

According to a report prepared by data service provider Prime Database, 2019 saw fund raising through equity markets jump by 28%.

According to Pranav Haldea, the managing director of Prime Database, the vitality of the primary markets this year was definitely boosted by the verve of the secondary markets, revealing an encouraging picture of the country's overall investment environment.


The Indian startups also made away with massive #funding this year, despite the monthly dips observed in the first half of the year and then once again in October.

As per the data listed by Tracxn's India Tech Annual Factsheet 2019 report, the Indian startup ecosystem had a great run at the pitching rooms, closely following in the heels of the American and Chinese startups.

With nearly two thousand new startups being incorporated, nearly half of them found investors to back their ventures, significantly rousing our hopes for prospects in the year ahead. 


As for the sectors that bagged most of the VC money, tech-based hotel aggregation and franchising companies like OYO, FabHotels and Treebo topped the charts. E-commerce platforms such as Delhivery and Ecom Express rivalled these hotel brands in wooing venture capitalists, and payments platform PayTM and B2B commerce company Udaan also found themselves inching towards the top.

The year saw startups raising $14.5 billion, a decent rise from the $10.5 billion they had raised the year before.

With the Indian startup scene now boasting of 24 "unicorn" startups valued at over $1 billion and over a 100 "soonicorns" (startups that seem poised to touch the $1 billion valuation soon), the year definitely seems to have been a modest success, even if not a resounding one.


Perhaps somewhat surprisingly, national capital Delhi produced the most startups this year, despite the political hullabaloo of an election year and sporadic tumults shaking up the city. Bengaluru and Mumbai expectedly did quite well in terms of churning out several successful startups as well.


Clearly, India's robust entrepreneurial talent, multinational accelerators and successful schemes such as Startup India have propelled reasonable growth in 2019, with the month of November being particularly dazzling, with companies raising as much $5 billion in that month alone. Despite the worrying economic climate that have shaken up the public consciousness from the middle of this year, venture capitalists and angels have not really shied away from investing in promising enterprises. In fact, this sector has been one of the few areas to have felt little impact of the dreaded economic slump that is closing in on us.  While one would have expected that the credit crunch and the finance ministry's half-hearted attempts to revive the supply side would not have done much for the investment scene, the reality has been less pitiful than apprehended. 











Lows

Although the numbers look quite decent in retrospect, especially when the seemingly impending economic crisis is accounted for; all did not go well throughout the year.

When the second quarter kicked off with the disheartening news that fresh investments had hit a 15-year low, it seemed that the government's last-minute attempt to resuscitate the slumping economy would bear little fruits.

October was particularly worrying, putting up a rather poor show, spurred by the slowdown of the realty market and concerns around an impending economic crisis.


Before November turned things around towards a modest end, it still seemed that our investments would take a sizeable hit because of the economic slowdown, and even the most optimistic ones among us feared for a much worse year-end. Thankfully however, the government's supply side measures did end up fuelling a few positives, and perhaps a little inexplicably, the market moved ahead regardless of the continued economic slump and all the rants and jokes about rising onion prices. 


However, as protests mount all over the country and socio-political tumults shake up India's major cities, the largely youth-powered startup scene might face a few bottlenecks in the short run. With major colleges (including IIT Bombay that is a major source of entrepreneurship and startups) being rocked by massive student-led protests, we must remain at least a little cautious about the sector's prospects in the months to come.

While these are short term concerns, a more disturbing long-term trend might emerge from the tendency of several VC firms to flush the startup scene with far too much money.

While Mayosashi Son's SoftBank Group is the most common culprit when it comes to aggressively funding and pushing up the valuation of brand new startups, other VC firms that top Indian investment charts (like Sequoia Capital and Accel) aren't all that harmless either. 

While it may seem like a great idea on paper to provide promising startups with a boatload of money, examples such as WeWork and Uber point to a more concerning direction.

Since all that VC money often comes with a lot of riders, and propels "unicorns" to set out on an aggressive quest for growth with no sustainability, it often leads businesses to skyrocket without a solid foundation to fall back on. Even though many such unicorns do manage to expand massively, most of them end up losing money with little regard for the financial haemorrhage, as long as their valuation continues to be bloated up disproportionately. Unfortunately, Indian unicorn Oyo has already begun to show worrying signs of falling prey to that trend, and we can only hope that this tech-based hotel brand and other budding startups learn their lesson from the WeWork IPO debacle fast enough to escape the clutches of SoftBank's lust for growth, and build businesses that are stronger at their core.


Another concerning trend that emerges from this year is the lack of exits in the Indian market. While the figures from this year's growth are not too worrisome by themselves, the distinct lack of exits might prove to be a major deterrent for the Indian startup ecosystem to go a notch up.

Even though the exit cycle has begun in India, it has not really picked up the kind of pace one would have expected, especially in the light of substantial investment figures being clocked up this year.

Without exits, capital cannot be freed up for fueling the next generation of great startups, and can potentially trigger a certain stagnation in the entire ecosystem. Silicon Valley, for example, sees over 50 major exits each year, and that is often considered to be a crucial element of its overall success. 


The Road Ahead

As it stands now, it seems that the venture capital scene has been faring rather well despite the slowdown that hit our economy earlier this year. Clearly, as the short term concerns fade and the government measures begin to show more substantial effects, the sector can only be expected to grow further.


While the lack of exit cycles definitely leave us with furrowed brows, the market does have some time to recover on this front. The only note of caution that I must end the year with is for the unicorns allured by the promise of big money. As Uber, WeWork, and now India's very own Oyo has shown, plenty of money in the bank does not always guarantee profitability.


As long as our promising startups remember this note of caution and strive for greater sustainability in their business models, the Indian startup scene and VC market will continue to grow symbiotically.

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