VC investment momentum to continue in 2018
The venture capital industry in India has taken off only in the last six to seven years, but the year 2017 in particular started with a lot of expectation and hope. This hope was built on the fact that a drop in the sentiment of investors in the year 2016 would have led to correction in valuations that the entrepreneurs were expecting. However, the year 2017 proved that it was not just about valuations, it was much more than that. Let me try and enumerate the main issues that determined the key outcomes in the year 2017.
Let’s first understand the ecosystem of investors who invest in venture capital funds in India. There are four types of venture capital funds operating in India:
(1) International funds that have raised their entire capital outside of India in dollars. Example: Accel and Sequoia
(2) Indian funds that have raised their funds primarily outside of India. Example: Blume Ventures
(3) International funds that have raised large amounts from Indian investors. Example: IDG Ventures
(4) Indian Funds that have raised their funds primarily from Indian investors. Example: IvyCap Ventures.
Each of these categories of funds behave differently, given different expectations of their limited partners (LPs) who invest in venture capital funds.
The rupee dollar exchange rate at the start of the year 2017 was Rs67.9 and is expected to close the year at around Rs64. LPs who invested in dollars in the previous years are happier because they are seeing appreciation of their returns just because of the exchange rate. However, if the dollar continues to slide against rupee, investors may get cautious. Some of the funds that invested at a dollar value of Rs40 and had to exit at a dollar value of Rs65 lost a lot of value just because of the exchange rate.
The global fundraising environment for venture capital funds has only gotten tougher in the year 2017. Funds that have the 2006 to 2010 vintage were expected to return substantial capital in the year 2017. Given the fact that fresh investments only reduced in India, the exits were few and far between. At the macro level, over $100 billion has been invested in India in the alternative assets class and less than $40 billion has been returned to the investors so far, even though $2.77 billion was returned to investors in 2017, up by 56% over the previous year. Unless investors see the money coming back to them, they will not get the confidence to put more money into India. One may argue that the overall investment in the PE/VC space in India has touched an all-time high in a single year at around $22 billion in the first 10 months of the year. However, majority of these investments happened through eight large deals. In comparison, China saw a much higher level of deal activity with 2,155 deals in PE/VC space amounting to $218 billion investments just in 11 months of 2017. This was up almost 8% from the previous year.
At the same, one needs to realize that India has started understanding venture capital only recently. It was only in 2013 that Sebi defined three different classes of alternative investment classes of AIF1, 2 and 3. Prior to that, it was all VCF (venture capital funds), irrespective of the size or stage or focus of the funds. It was only in 2015 that the Narendra Modi government launched the Start-up India/Stand-up India initiative, identifying start-ups to be the mainstream focus for employment generation and development of the economy. It was in the last three years that the Rs10,000 crore fund-of-funds corpus of the government started getting pushed towards venture capital investments.
The year 2018 is expected to continue the momentum of venture capital investing in India.
There was various tax benefit initiatives that are still sitting with the government for its approval. The Indian venture capital industry is expecting the government to ease tax policies in order to bring speed of investments in the start-up ecosystem. The industry is also expecting further allocation of funds and promotion of investments through pension schemes.
I am hopeful that the year 2018 will bring new energy into the venture capital ecosystem and encourage more investors to make fresh investments and therefore allow more entrepreneurs to further their dreams.
Vikram Gupta, founder and managing partner, IvyCap Ventures.
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