Tough to see where windfall will come from for VCs
In 2016, Indian start-ups got a reality check with valuation markdowns, market share losses and a lack of big-ticket fund raises. But while the funding bubble burst, start-ups had a “soft landing”.
In 2017, investors turned more choosy, putting higher amounts of money into a few companies they believe are potential winners. So, while the amount of start-up funding in 2017 doubled, the volume of deals was lower. Start-ups raised roughly $10.7 billion in 2017, compared with $4.6 billion in all of 2016, according to data with Tracxn, a start-up tracker.
More than half of all start-up funding in 2017 went to just three companies, online retailer Flipkart, payments firm Paytm and cab-hailing app Ola.
The volume of start-up deals, a more reliable indicator of investment activity, fell to 973 last year, compared with nearly 1,300 in 2016, according to Tracxn. Early-stage funding of internet start-ups saw a sharp, unexpected slump—a worrying sign for next year.
The sluggish early-stage investment activity has led to concerns that venture capital (VC) firms will struggle to generate returns on the large amount of funds they raised in the past two-to-three years and that the big Internet companies are hoarding too much capital, leaving little for smaller start-ups.
As investors are still not done separating the weed from the chaff, expect the investment trends of 2017 to continue into this year.
On the actual business side, things did improve in 2017. After nearly 18 months, India’s e-commerce market finally picked up sharply in the second half of the year, driven by strong growth at Flipkart Ltd and Amazon India and new entrant Paytm E-Commerce. Online retail grew 23% to $17.8 billion in 2017, up from $14.5 billion in gross merchandise value (GMV) last year, according to RedSeer Management Consulting, a market research and consulting firm.
The expansion of online retail is likely to accelerate next year, with the market projected to increase by as much as 60% to $28-30 billion in gross merchandise value (GMV), according to RedSeer estimates. GMV is an e-commerce metric that refers to the value of goods sold on a site but does not account for discounts or even sales returns.
The broader consumer internet market also improved sharply because of the expansion of digital payments, increasing smartphone penetration and the availability of fast and low-cost mobile internet services led by Reliance Jio Infocomm Ltd. The volume of wireless broadband data consumed by Indians has risen sharply, from less than 200 million gigabytes (GB) a month in June 2016, to around 1.3 billion GB a month in March 2017, according to the Internet Trends 2017 report by Silicon Valley VC firm Kleiner Perkins Caufield Byers (KPCB).
For the three big Indian internet companies—Flipkart, Ola and Paytm—2017 turned out to be an excellent year. Flipkart proved that it is back to its best under CEO Kalyan Krishnamurthy and after raising $3 billion in fresh capital and snagging SoftBank as an investor, the company is a favourite to keep arch-rival Amazon at bay at least for the foreseeable future.
Ola raised $1 billion in its latest funding round and the company is well-placed to hold its leadership position against Uber Technologies Inc., which is trying to recover from a damaging leadership, image and corporate culture crisis at its US headquarters that claimed the job of its founder and CEO Travis Kalanick. Payments firm Paytm consolidated its position as the biggest payments firm in India and created a new entity for its e-commerce business. The company is likely to face stiff competition from rivals in the payments space and it is struggling to match the service standards of Flipkart and Amazon in e-commerce. But with SoftBank Group Corp. and Alibaba Holding Ltd as its backers, the company has abundant cash to keep pumping into the two businesses. Paytm also expanded its payments bank business and is expected to accelerate its push to become a diversified financial services company this year.
Some other internet companies that had a good year were food ordering firm Swiggy and its rival, Zomato, grocery delivery firm BigBasket, hotels brand Oyo, and lending start-ups and software providers led by Freshdesk and Druva.
The list of losers in 2017 was even more striking. Online retailer Snapdeal cut thousands of jobs and has seen its sales nosedive after it struggled to raise fresh capital. A bitter boardroom battle between its investors and founders ended with the company refusing to sell itself to Flipkart. Snapdeal had raised roughly $2 billion and its key investors include SoftBank, Kalaari Capital and Nexus Venture.
Some VC firms have already started facing tough questions from their investors about the chronic lack of exits in India’s start-up business even though in 2017, VC firms generated exits worth around $2.8 billion across 56 deals, an increase of 56.2% from the $1.8 billion last year, according to deal tracker Venture Intelligence.
But the data isn’t straightforward.
Unlike typical venture exits, which comprise acquisitions or public listings, the single biggest driver behind the jump in exits in India was SoftBank, which, through secondary transactions, accounted for most of the exits secured by VCs.
At some point soon, however, VCs will have to find other ways to get exits. And it’s tough to see where the windfall will come from.