Home / Opinion / India’s VC industry needs to step out of SoftBank’s shadow

Exits in India’s venture capital market, according to data compiled by Chennai-based researcher Venture Intelligence, touched $2.7 billion last year, up an impressive 56% from the previous year. The exits rally, going by the data reported, has been propped up by a handful of big ticket deals. Three, in particular, are noteworthy. New York-based hedge fund Tiger Global Management has reportedly sold parts of its stakes in e-commerce company Flipkart and ride hailing company Ola and Delhi based venture capital firm SAIF Partners sold its stake in One97 Communications Pvt. Ltd, the company that owns online payments platform Paytm. The reported payout from just these three deals is $1.7 billion and all of that has come from a single buyer—Japan’s SoftBank Group Corp.

It is tempting to conclude, based on the available data, that India’s venture capital industry is in the pink of health. Fund managers have already started to talk up the exit numbers as evidence that early-stage investments in this market can be extremely lucrative. Incidentally, the data for the two deals involving Tiger Global, the second largest start-up investor in India after SoftBank, is based on unconfirmed media reports. From the point of view of limited partners, investors in venture capital funds, a more realistic view would be that venture capital as an asset class in India has for the most part failed to deliver. “There isn’t even a single success story that can claim to be a category leader or pioneer in any market globally," says an official at a Hong Kong based fund-of-funds that has backed several venture capital funds in India. “Limited partners, especially global investors who have invested billions in this market, need to take pause," he says. It’s a view that should be particularly pertinent for the emerging class of domestic limited partners, a majority of whom are first time investors in venture capital funds.

At the moment, setting aside the hype around the exits data, there is too much riding on a single and somewhat whimsical buyer. Last year, venture capital firms in India found an unlikely Messiah in Japanese telecom and internet conglomerate SoftBank. Armed with a nearly $100 billion investment corpus dubbed the Vision Fund, SoftBank pumped more than $4 billion into companies such as Paytm, Flipkart, Ola and budget stays aggregator OYO by December. A sizable portion of that money has reportedly gone into buying up stakes from legacy early-stage investors in those companies. Without SoftBank’s generosity, most of those early-stage investors would have very little to show in terms of meaningful exits from their portfolios, built over a decade or more.

The problem is that SoftBank is an anomaly. Outside of SoftBank, there are barely any takers for stakes in even the most prized start-up assets in this market. Many of those assets have mopped up billions of dollars over the past few years, remain far from profitability and continue to hold valuations that are untenable for most later-stage investors.

Further, even SoftBank’s current interest in India depends on its global strategy for the Vision Fund. Guided by SoftBank’s charismatic and ambitious founder and CEO Masayoshi Son, the Vision Fund has made fast work of buying up prime stakes in prized technology start-up assets across the world over the past year. In December, it bought a 15% stake in Uber Technologies Inc., the San Francisco-based ride hailing company that is locked in a fierce battle for market share in India with Bengalur-based Ola. Prior to the deal, SoftBank officials had indicated in interviews to the media that a merger between Ola and Uber could be a possibility. Its stakes in Flipkart and Paytm are part of an effort to put up a front against Seattle-based Amazon’s rapid advance in India. Flipkart, in particular, has struggled against Amazon. It’s no secret that an investment makes sense for Son only if SoftBank can dominate a particular market. If that possibility looks doubtful, it has no qualms about cutting the cord. Last year, for instance, it pulled the plug on funds to Delhi-based e-commerce company Snapdeal when it was unable to perform to expectation. SoftBank’s withdrawal was a death blow to the exit plans of Snapdeal’s early investors Nexus Venture Partners and Kalaari Capital.

Take out the SoftBank-backed exits and India’s venture capital industry doesn’t look in terribly great shape. The legacy portfolios of most leading venture capital firms in the market lack differentiation and therefore face a challenge on exits. “The portfolios are made up of clones and offer little or no upside for either a strategic or a financial investor. It’s a recipe for disaster," says an official with a US-based investments firm that has backed venture capital funds in India for nearly a decade. Further, too much capital has been concentrated in a few so-called showcase assets that are themselves now struggling to stay in the game. Sure, there have been a few exits along the way. Venture capital firms such as Saama Capital, SAIF Partners, even Nexus, have racked up respectable track records on exits. “But no big, stand-out winners. Nothing to show that India’s technology start-up market can produce global leaders," says the official at the US-based investment firm. Nearly every foreign limited partner that MintAsia spoke to for this column says that while the fundamentals for investing in India’s venture capital market remain strong, it may be time to step back for a bit and reassess their investment strategies. While recent years have seen the emergence of domestic limited partners, foreign limited partners still account for well over half of the capital that flows into venture capital funds in India.

It’s also true that a large part of the reason local venture capital firms have increasingly sought out local limited partners is the growing difficulty in getting foreign investors to write out cheques. In January last year, Bengaluru-based Stellaris Venture Partners raised commitments worth $50 million for its debut fund that has a final target corpus of $100 million. Its investors include software services giant Infosys Ltd’s Innovation Fund apart from as many as 50 HNIs (high networth individuals). It has also raised funds from overseas investors but domestic investors will be a sizable part of the final corpus. Pravega Ventures, a venture capital firm led by former SAIF Partners principals Mukul Singhal and Rohit Jain, is targeting domestic institutions, family offices and HNIs for its debut $30 million fund. Unicorn India Ventures, a Mumbai-based firm, raised 96% of its debut fund last year from domestic investors such as Small Industries Development Bank of India, Life Insurance Corp. of India, Canventure and HNIs. Former Helion Venture Partners founder Kanwaljit Singh’s Fireside Ventures expects to raise more than 75% of its debut $45 million fund from local investors. It has already raised commitments from local family offices such as Premji Invest and Sanjiv Goenka-RPG Group. Singh, however, says that 75% is by design because early-stage consumer brands, Fireside’s focus for investments, is a relatively new space that not many global limited partners understand very well yet. It isn’t just first-time funds that are tapping local limited partners. Legacy firms such as IDG Ventures India and Inventus Capital Partners, which is raising a India-specific fund, are also taking that route.

While it is encouraging that local limited partners such as Infosys’s Innovation Fund and family offices such as Premji Invest have started to take more than a passing interest in venture capital, it would probably serve them well to take their cues from the note of caution being sounded by overseas limited partners. “Any limited partner, foreign or local, should read the statutory warning—enter at your own risk," laughs the Hong Kong based limited partner mentioned earlier.

Snigdha Sengupta is a consulting writer with Mint. She contributes stories on venture capital and private equity.

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