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BENGALURU: Venture capitalists and technology entrepreneurs are usually the most implacable critics of government intervention in the economy. That hasn’t stopped them from being eager beneficiaries of the unprecedented fiscal spending that countries across the world led by the US have undertaken to prop up their economies during the pandemic.

This injection of cash has transformed what looked certain to be a funding winter for internet companies last year into a bumper period that investors say could continue through the end of 2021.

Features typically associated with a boom—big funding rounds, rapid increases in valuations, additions to the unicorn club, intense competition among investors for deals, suspect business models—are evident again after a brief pause at the start of the pandemic in India last March.

The unexpected funding surge is drawing comparisons with the dotcom boom-and-bust with investors admitting that valuations of most internet companies don’t look sustainable. In just three months so far this year, Indian startups have raised about $4 billion compared with $9.5 billion in all of 2020, according to data platform Tracxn.

"Never before has so much money been pumped into economies in such a short period of time," said Madhukar Sinha, founding partner, India Quotient, an early-stage venture fund. “Stock markets have done well, interest rates are near zero or negative and the venture space is one of the very few asset classes that can potentially offer attractive returns. And many LPs (limited partners, who invest in VCs) consider India an attractive market. I wouldn’t be surprised if this funding upcycle lasts for another two years or more."

Sinha said given the glut in capital, he expects deal making at unsustainable valuations to continue for now.

In this cycle, digital education startups have become the new investor favourites. Byju’s valuation has jumped to more than $14 billion from $8 billion in 15 months. Smaller rivals Unacademy and Vedantu have seen an even higher jump in their valuations.

Many other sectors like e-commerce, content and consumer brands are also attracting large amounts of capital. Even startups in spaces like consumer transportation, food delivery and financial services that have been damaged to some degree by the pandemic have largely avoided down rounds. Some like Swiggy and Zomato are seeing a rise in their valuation.

While startup funding has always worked in cycles, this one is different. Typically, there are alternating periods of upsurge and downturn when valuations rise and plateau or decline, respectively.

After the failed IPO of US shared working firm WeWork in September 2019, investors were anticipating a funding downturn after two years of boom—expectations that were only strengthened by the shock of covid-19 and the restrictions on Chinese investors, who had become the biggest backers of Indian startups. Instead, government spending and loose monetary policies in the US, where many LPs are based, along with the faster digitisation across sectors, prompted investors to keep pumping cash into internet firms here. And instead of a correction in valuations of the 2018-2019 cycle, they soared further.

"I look at 14 markets and while valuations are also looking rich in Indonesia and Brazil, India is by far the most frothy market," said Ganesh Rengaswamy, co-founding partner, Quona Capital, a VC fund that invests in India, southeast Asia and other areas. “Some new investor is always discovering the India market and that keeps increasing the liquidity in the market. There used to be some balance between performance and promise but now it’s gone to the level of pure imagination."

What could give a definitive verdict on whether investors have gone overboard are IPO outcomes. For the first time, a wave of Indian startups including Zomato, PolicyBazaar, Delhivery and Freshworks are preparing to list their shares within the next 18 months. If these IPOs are well received by public markets, investors will read a windfall that will be ploughed back into the startup ecosystem. If they flop, funding could take a hit.

"The IPOs will be a good barometer for the startup ecosystem, but in any case, the long-term looks very promising," said Bala Srinivasa, managing director, Arkam Ventures. “There is froth in the market, but the fundamentals are improving rapidly and valuations in India are much cheaper than US and China. Last year, rural India passed urban India in internet users, the cost of internet has declined and because of the pandemic the market is accelerating faster than we expected."

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