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Venture capital firms have been active in India since 2006. Yet, even after pouring more than $19 billion into Indian start-ups over more than a decade, most venture capitalists (VCs) have struggled to get attractive returns on their investments. Now, VCs will have to increase their focus on coming up with more specific plans for exiting their portfolio companies, said Abhishek Goyal, co-founder at Tracxn, which provides data on start-ups and VCs globally.

In an interview, Goyal, who was the first investor in Flipkart through his earlier avatar as an associate with venture capital firm Accel Partners, said that investors continue to be attracted by the potential of India’s nascent start-up ecosystem. He spoke about the possibility of exits, the next sunrise sectors and the outlook of new investors towards India.

Edited excerpts from the interview:

It’s been a decade or so of VC investing in India. Yet, there are no success stories of VCs having returned multiples of their funds. What is the latest when exits will have to be shown?

The liquidity has come slower than expected. It’s because of a lack of focus on exits among funds, lack of organized channels for secondary and corresponding ecosystem, and infancy of the ecosystem. In the next decade, we will see a lot of improvement on all of them.

Two other things should also help. One, a better India-US and India-East Asia corridor. Then, special efficient regulations for M&As (mergers and acquisitions) among start-ups especially around stock swaps or stock deals.

What’s the unicorns’ best chance of showing exits: M&As or initial public offerings (IPOs)?

A fair portion of start-ups which are competing aggressively for market share will see M&A opportunities. Eventually burn will cross the point of RoI (return on investment)—either shareholder pressure or business sense drives M&As. I would also expect few transactions within these companies as well.

Companies which are clear market leaders will see improved economics and gear for IPO, think Zomato, Practo. Secondary transactions are also going to play a meaningful role...

We will also likely witness domestic M&As done by the information technology services industry and cash-rich public companies.

Also read | The endgame for venture investing in India

Has wave investing worked out for most VCs?

I would broadly agree with wave thinking. Primarily because when the market is ripe, there are going to be a lot of entrepreneurs who will identify that as an opportunity. Investors with the right selection acumen will have higher chances of selecting the team and getting selected by the entrepreneurs.

There is also a large set of success stories of investments which weren’t waves when the funds invested but became waves few years later. For instance, the global SaaS (software as a service) wave and the Accel funding of Freshdesk (in 2011). These are cases where funds will potentially make a non-linear return. This is also what helps funds turn into irreplaceable brands in their ecosystem.

Investors say they’ve learnt from mistakes made in 2014-2015. But part of the thinking behind funding some sectors such as fintech is that these worked out in the US and China. That was the same mentality in 2014-2015.

We are also seeing investments in India-specific models— where companies are solving specific needs of the Indian market—for example, rupee (gold loans) and cases in SMB (small and medium business) SaaS.

When investors meet entrepreneurs, isn’t the first question still: so, what’s your equivalent in the US and China?

This will continue to get asked in some form. In US, for example, people do ask, is there any parallel of similar trend in other industries or any other need of the consumer. This is a great way to understand the amount of disruption a trend can bring. In fact a lot of crowd equity funding platforms do talk about explaining concepts in analogies or mega trends. Largely, I don’t expect this to change in another decade. The form may change depending upon if the innovation is leading the pack globally or following it.

SaaS is a big theme this year. What’s the exit strategy in this sector? Who are the potential acquirers of Indian SaaS companies?

If you are selling a SaaS product to domestic customers, then there are fair chances that a global player in a similar market will buy you for additional customers, especially if you are among the top three players in the geography. Since the domestic market is not very deep and average ticket size is small, eventually the M&A price will be attractive for founders, but not for funds. If you are serving emerging economies outside India, then revenue potential is higher. Eventually, someone will buy you for additional customers.

If you are building for the global market and can threaten the big global tech firms in their own geographies—that will generate most attractive M&A opportunity. This can be in their core markets or new material initiatives that the buyer is planning.

Another set of M&A opportunity will arise from domestic IT services industry, if you are able to sell any product above $200K/year price point to Fortune 500 companies globally. It is then easy for them to acquire/invest and put their distribution/relationship to work, and scale it quickly.

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