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Home / Opinion / Tough times ahead for India’s start-ups

The haircuts have begun. Though not as brutal and ruthless as those that marked the close of the first dotcom bust way back in 2001, they are sending shivers down the spines of many recently hatched companies. Venture capitalists which have bankrolled over 2,000 of India’s rambunctious start-ups over the past 10 years are getting more demanding with their investments.

That comes as a double whammy for Indian start-ups, which are also facing the heat from other types of investors. Last week, US-based mutual fund T. Rowe Price, which had invested about $100 million in Flipkart in December 2014, marked down its shares in the Indian e-commerce company by 15%. For the nine-year-old firm, India’s answer to Amazon, and a lodestar for the burgeoning start-up ecosystem in the country, this was its second major setback after February 2016, when another investor, Morgan Stanley, marked down its shares by 27%.

Flipkart’s shrinking valuation marks a time of distress for India’s second generation of dotcoms. The latest data from CB Insights, which maintains databases on venture capital (VC) and angel investments, and KPMG International suggests that the amount of money VC firms are investing in start-up companies in Asia has declined for two consecutive quarters, making it the first time since 2012 that there has been a six-month stretch of falling dollars flowing from VC firms. Effectively, only $6.5 billion was plowed into VC-backed start-ups in Asia during the first quarter of this year, down from $14.3 billion two quarters earlier.

Nor is Asia or India an exception. In the US too, VC investments are on a decline. At the same time as T. Rowe slashed the value of its stakes in Flipkart, it did the same in Uber and a clutch of other start-ups, The Wall Street Journal reported.

Significantly, in the US, not a single tech company has gone public so far this year. In India, of course, that option simply doesn’t exist. None of the much-flaunted Indian unicorns (firms with billion-dollar valuations) is IPO-ready unless major changes are made to rules, and that would be perilous. While there have been exits, thus booking profits for VCs, the transactions have involved ironically one loss-making start-up selling to another slightly better-funded but equally money-losing buyer. Thus, IDG Ventures India, Kalaari Capital and Accel Partners, early investors in online fashion firm Myntra, booked profits when it was acquired by Flipkart in a $330 million deal. Similarly, online recharge service provider FreeCharge was acquired by Snapdeal in a $400 million deal. Today, Snapdeal is facing the heat, with investors reluctant to pour in fresh funds at expected valuations.

The absence of viable exit options is one of the factors giving VC firms the jitters, as is the inability of most start-ups to evolve a clear path to eventual profits. Nor have most Indian start-ups been able to create a clear and unique differentiation for themselves. This last also means barriers to entry are low and pricing continues to be the main weapon of war.

But if the start-ups are to blame for choosing softer options like discounts and deals instead of creating products and services with lasting value, VCs must cop part of the blame for sticking to the safer option of investing in the same set of firms with derived and me-too business formulae.

India’s unicorn club comprises start-ups like ShopClues, Flipkart, Ola, Snapdeal, Paytm, MuSigma, InMobi, Zomato and Quikr. What’s strange to note is that the same set of VC firms feature in most of these—Tiger Global, Sequoia Capital, Nexus Venture Capital, SAIF Partners, Norwest Venture Partners, Kalaari Cpital and Matrix Partners.

With the big VCs playing safe, there is no effort to discover start-ups which are creating new technology codes or finding solutions to major problems—water shortage, for instance. Instead, the effort seems to be to find Indian clones of global success stories.

In India, according to available numbers, the top three VC-funded industries between 2006 and 2015 were ‘internet software and services’, ‘software and internet’ and ‘catalogue retail’. By contrast, according to TechInAsia, an online platform for Asia’s tech community, Israel’s best funded start-ups dominate in areas like cybersecurity, health and big data. The contrast provides a hint into the mindset of India’s VC community.

Along with angel investors, private equity players, mergers and acquisitions specialists, VCs are a critical part of the start-up ecosystem. If VCs in India don’t target, nurture and grow innovation, the downward slide started by food-tech companies like TinyOwl, Zomato and Foodpanda could turn into a larger rout of me-too start-ups going the same way.

Is India’s start-up boom a bubble that has begun to burst? Tell us at views@livemint.com

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