India’s startup story this year: From baby steps to giant leaps

This was a year the Indian startup ecosystem got out of its adolescence and entered maturity. When you are maturing, you often tend to look at the older boys—for inspiration and in awe.

The “older boys” changed this year because Silicon Valley, which has long been the undisputed king of venture capital, is now sharing its throne with Asia.

Sample this: A new unicorn company is born in China every three days. Most are in the internet industry, claiming close to 50% of the global unicorns’ value, according to CB Insights data. To be fair, China is a highly regulated market, too.

Almost every major conversation back home among venture capitalists hinges on, or quickly gets into, China. Investors are trying to learn more of its playbook. They are overawed by the sheer scale of China’s internet companies, by their path to profitability. And, in their hearts, investors wish India gets there soon.

Such expectation is not without a reason, for 2018 raised their hopes. This year, global retail major Walmart acquired 77% of Flipkart for $16 billion, pricing India’s most valuable consumer internet startup at $21 billion.

The deal gave Flipkart’s backers, in particular, and the venture capital industry, in general, a great India story to sell to limited partners or global institutional investors.

One significant after-effect is that now there is no dearth of late-stage capital for category leaders.

More capital is coming into tech style venture investments—upwards of $100 million. The era of supergiant rounds is now the new normal.

This is attributable, in part, to billions of dollars flowing into new venture capital funds—the largest of which are raised by the oldest, most entrenched firms—and competition from relative newcomers such as SoftBank. There is crowding of capital now at late stage with not much available for early-stage and mid-stage ventures.

Private equity is now increasingly getting seduced by venture capital and FOMO, the fear of missing out, on such investments is playing out.

“Globally, venture capital is outpacing private equity as investors look to take larger bets in disruptive technologies, which is also happening in India,” says a fund manager, requesting anonymity.

The real testimony would be when annuity-seeking funds, such as large pension funds or sovereign wealth funds, look to invest in fast-growing internet companies.

“We haven’t been able to do such deals doesn’t mean conversations have not happened,” said Suyi Kim, Asia head for CPPIB (Canadian Pension Plan Investment Board), which has $300 billion in assets under management. She mentioned that they are investors in companies like Alibaba and would like to do such deals in India, too. These are significant assertions.

The Flipkart-Walmart deal served as the biggest catalyst in the Indian startup phenomenon. It provided a fillip to the venture industry, which needed an exit like this for its own validation, and also laid the foundation for India’s own version of the Great American Dream.

An event like this also comes with lessons, which brings us to the next trend—processes are bigger than people, especially when organisations reach scale, and startups will need to be mindful of this.

In this context, the board of Oyo Rooms did a laudable job by getting on board Aditya Ghosh as the chief executive officer at a time when the startup is preparing for its next big step.

If you have to expand globally, you also need to follow the global playbook. In 1998, Google co-founders Larry Page and Sergey Brin promised their investors that they would hire an experienced chief executive officer to manage the company once it began to take off.

In 2001, Eric Schmidt became Google’s CEO, keeping the job for a decade of incredible growth and mind-boggling impact.

As more startups pursue global ambitions and scale, the founding CEOs need to embrace such transitions. Investors will have a quicker “trigger finger” to get a new CEO than the founder wants.

India now has close to two dozen unicorns. It needs a deep enough rupee-denominated, home-grown venture capital market, which can further accelerate its leap. In a sign of a maturing trend, India’s angel investor community of first-generation tech entrepreneurs, who cashed out with early startups, are making micro-bets on high-potential winners and can feed the rise of an “Indian Silicon Valley”. In a short span of 10 years, China’s tech economy has gone from “Made in China” to “Copied in China” to “Invented in China”.

Today, the biggest trend to watch is “Copied from China” or US companies copying Chinese innovation—something Indian startups should now do.

Shrija Agrawal is Mint’s associate editor. Due Diligence will run every week and cover issues in India’s venture capital, private equity and deals space.