Photo: Priyanka Parashar/Mint
Photo: Priyanka Parashar/Mint

Three reasons for cheer in the venture capital market

There's still plenty to cheer despite valuation markdowns, shutdowns and investment write-offs

Valuation markdowns, down rounds, business model pivots, shutdowns and investment write-offs have become the staple this summer for India’s venture capital market. However, there’s still plenty to cheer about.

First, let’s take stock of some of the bad news from just the past few weeks. In late April, Sequoia Capital-backed PepperTap shut down its on-demand grocery business and is now transitioning to logistics services. Sequoia too finds itself in a spot of bother. The country’s largest venture capital firm, and among Silicon Valley’s top quartile firms, is under the scrutiny of the Enforcement Directorate for alleged irregularities concerning its investment in Chennai-based Vasan Healthcare.

In a separate development, Draper Fisher Jurvetson (DFJ), another storied Silicon Valley venture capital firm, has sold most of its India investments portfolio to Hong Kong-based private equity secondaries specialist NewQuest Capital Partners, reports The Economic Times. Neither DFJ nor NewQuest have confirmed the report. However, if such a deal has closed, it brings the firm’s troubled sojourn in India to an end and enables the 16-odd companies in its portfolio to move ahead.

Another long-troubled entity, property search platform Housing, may also be close to deliverance. The Hindu Business Line reported that New Delhi-based Jasper Infotech, which owns e-commerce marketplace Snapdeal, may soon acquire the SoftBank-backed company for anywhere between $50 million and $100 million.

Meanwhile, Snapdeal rival Flipkart saw the value of its shares marked down again this week. Two North American mutual funds with minor stakes in the company, Fidelity Rutland Square Trust II and Valic Co 1, marked down the value of their shares by 39.6% and 29.4%, respectively, as of February 2016, compared to August 2015.

Beyond unicorn valuations and their markdowns, and despite an ongoing funding slowdown, things are actually turning for the better in the venture capital market.

One, even in dull market conditions, exits are looking up. Venture capitalists here have been knocked often enough for not being able to deliver liquidity to their investors or limited partners. The industry’s track record on exits has been particularly dismal on the IPO (initial public offering) front. Over the past 8-12 months, however, some of that has been set right. By rough estimates, more than a dozen companies backed by venture capital and private equity investors have taken their shares public and done reasonably well on the bourses post-listing.

The most recent and notable example is the public market debut of Equitas Holdings. The Chennai-based MFI (microfinance institution) mopped up 2,176 crore from retail and institutional investors, drawing demand for more than 17 times the number of shares on sale. Importantly, it served up exits for as many as 10 venture capital investors, reported Business Standard. Among them, impact fund Aavishkaar Goodwell made more than 13 times its money on a $1.5 million investment made in March 2008, said the report citing data compiled by Venture Intelligence.

What’s most interesting about the Equitas IPO and others over the past 8-12 months is that they involve companies that are far removed from the so-called hot sectors favoured by venture capitalists. Late last year, New Delhi-based diagnostics services chain Dr Lal PathLabs’s public offering, which was subscribed more than 33 times, delivered partial exits for its two private equity investors WestBridge Capital Partners and TA Associates. The success of the Dr Lal PathLabs IPO along with those of Narayana Hrudayalaya and Thyrocare Technologies have helped renew venture capital and private equity interest in the specialist healthcare sector, which has lately struggled to attract the interest of such investors. Most of these companies don’t command unicorn valuations and some of them have taken nearly a decade, more in some cases, to scale and go public. But, unlike their unicorn peers, what they do have are scalable and profitable business models.

Two, as is now well documented, most venture capitalists are cleaning house. Cash-intensive business models are being phased out in favour of cash-efficient ones. Funds are being reallocated to portfolio companies that appear more viable than others. As a result, follow-on funding rounds, especially involving mature startups, are beginning to happen at more realistic valuations. By rough industry estimates, entry valuations at later-stage companies are down by at least 25% and are expected to inch lower.

To that extent, the recent valuation markdowns at Flipkart could be a third reason for cheer in the market. Several venture capitalists admit in private that unicorns such as Flipkart and Snapdeal are no longer benchmarks for valuations within and without their portfolios. Neeraj Bhargava, founder of private equity firm Zodius, even quipped on microblogging platform Twitter this week, “High valuations are theoretical too." He was responding to Sachin Bansal’s earlier comment on markdowns.

If this sense of reality persists through the current season of investing, it will mean more money in the system than not.

Snigdha Sengupta is the founder of StartupCentral, a digital news and analytics platform focused on venture capital. She also periodically contributes stories on venture capital and private equity to Mint.

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