Investors pour millions into startups despite regulatory hurdles

  • Investors commit large amounts with a long-term view to rake in outsized returns from their risky investment bets
  • Investors believe they can engage with the government to find an appropriate regulatory framework to operate in

M. Sriram
Updated25 Apr 2019, 08:59 AM IST
globally, startups such as Uber have constantly battled with regulators to find middle ground.
globally, startups such as Uber have constantly battled with regulators to find middle ground.(Ahmed Raza Khan/Mint)

Mumbai: While Indian startups across sectors are facing regulatory hurdles, including bans, investors are committing large amounts with a long-term view to rake in outsized returns from these risky bets.

The legal problems faced by short-video app TikTok and the Karnataka transport department’s decision not to allow bike taxi startup Rapido to operate for not complying with commercial licence laws, have put a spanner in the works for them.

The Madras high court on Wednesday lifted the ban on TikTok downloads, in a relief to startups and investors.

Online gaming startups and e-pharmacies are also on the radar of authorities. While the Delhi high court has banned e-pharmacies from selling medicines, the Telangana high court order prohibited startups offering ‘online games with money stakes’ to operate, as it is ‘said to constitute gambling’.

In spite of this, fantasy sports startup Dream11 raised a $60-million round from existing investor Steadview Capital, catapulting it to become India’s latest unicorn—valued at over $1 billion.

Similarly, e-pharmacies, including PharmEasy, Netmeds and 1mg are raising between $100 and 200 million.

International Finance Corp. announced a $70 million investment in 1mg in March. Mint reported on 25 March that Japan’s SoftBank Group Corp. is looking to invest $100 million in PharmEasy.

Even Rapido, which is in the eye of the storm, is closing a $40 million round from WestBridge Capital, according to a report in The Times of India. Two people aware of the matter also confirmed the development requesting anonymity.

“Investors know that an emerging market like India will have a certain amount of risk, with an evolving regulatory landscape, and that is the risk-reward argument, that leads to take these bets,” said Rohan Ghosh Roy, a partner at Trilegal, who advises on technology deals.

“They believe that they can engage with the government to find an appropriate regulatory framework to operate in.”

Investors, lawyers and bankers are of the view that with a 7-10 year horizon that most venture capital funds have, taking a long-term view makes sense. These regulatory hurdles are only short-term in nature, they added.

“Some investors want to take bets in these sectors which are growing and have assessed the risks attached to them. The laws are very dynamic in these sectors and subject to periodic shifts,” said Winnie Shekhar, a partner at IndusLaw.

“VCs with a history of operating in India are conversant with regulatory uncertainties. These investors have the ability to address issues and pivot even in a changing regulatory system,” she said.

Indian growth-stage startups are also not the first to face these hurdles. Even startups, such as Uber, currently filing for an IPO, have constantly battled with regulators across the globe in order to find middle ground.

They have generally looked to capture the market first, and to have an advantage when regulators come knocking.

“The core of our job as VCs is to back innovative startups that aim to change the status quo and transform a large market/space via technology. Regulations exist, but its extent applies differently,” said Sanjay Nath, managing partner, Blume Ventures. “Take mobility, for instance. Here the degree of regulation is higher. How will we impact long-term change, unless we back innovation while working around such challenges?” he added.

“Regulations have always struggled to keep up with the change of pace in any sector, globally, and this especially pronounced in the internet sector, where businesses tend to evolve much faster. India is no exception. Internet businesses around the world have not grown by voluntarily taking a conservative view of the law,” said Roy of Trilegal.

To be sure, these regulatory hurdles do cause some pain—valuations of startups have taken a hit, besides a smaller pool of investors are willing to invest.

But investors say that if you take a long-term view, these regulations will come and go, and they are careful to examine whether these are temporary and narrow in scope, or long-term and nationwide. This impacts the investing decisions.

“In the long term, you’re backing innovation that is creating lasting change. When we invest, we examine carefully whether a regulatory ruling/development is a temporary blip or something potentially long lasting. Uber globally is a great example; it battled taxi unions and other “bans” in almost every phase of its journey,” said Nath of Blume.

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First Published:25 Apr 2019, 08:59 AM IST
HomeCompaniesStart-upsInvestors pour millions into startups despite regulatory hurdles

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