VC firms may garner over $4 billion from exits this year

For a little over a decade, venture capital (VC) investors, who back startups during the toughest of times, infused nearly $48 billion in young Indian companies. But during this period, exits, which helps venture capitalists (VCs) get decent returns on their investments, have been few and far between, broadly for three reasons.

One, lack of mergers and acquisitions (M&As). Two, fewer secondary sales. Three, regulations do not permit listing of loss-making companies.

This scenario is set to change. VC firms made around $2.8 billion from their exits across 56 deals in 2017, an increase of 56.2% from the $1.8 billion in 2016, according to deal tracker Venture Intelligence. This number is predicted to rise further with VC exits expected to breach the $4 billion mark in the two consecutive years after 2017.

For instance, in 2014 when Gautam Mago, the then managing director of Sequoia Capital, wrote the first cheque to Oyo, it was a small hotel aggregator offering 200 rooms. Today, Oyo Hotels and Homes is the world’s third largest chain of hotels, homes, managed living spaces and workspaces. While Mago quit Sequoia Capital in 2017 end, the firm infused about $27 million in Oyo across several rounds.

A few days ago, Sequoia Capital announced its plans to partially exit Oyo to rake in nearly $500 million in returns. Sequoia, which held a 10.24% stake in Oyo before the proposed deal, will still have over a 5.5% stake in the hospitality firm.

Oyo’s earliest VC investor Lightspeed Venture Partners, too, will make over 50-times returns on its $20 million investment in Oyo, taking home nearly $1 billion. While the transaction, wherein Oyo founder Ritesh Agarwal acquire stakes worth $2 billion, including a buyback of shares from Sequoia and Lightspeed, is still subject to regulatory clearances, such exits are what the venture capital industry had been waiting for. They had been hard to come by till about 18 months ago.

“For me, it’s much, much better than what it was five years ago. Many companies have achieved scale; companies are getting to scale at better economics than earlier. There are many reasons to be optimistic because businesses are bigger and better than before and going global, too,” Mago, a general partner at A91 Partners, said in an interview.

To be sure, it’s not just unicorns (or startups with valuation of $1 billion-plus) that are providing profitable exits.

A few months ago, Sixth Sense Ventures exited from Hindustan Foods Ltd with nine-times return on its investment of about ₹8 crore. Blume Ventures, which had first invested in online skills assessment startup Mettl in a seed round, exited the company with seven-times returns when it was acquired by Mercer, a global human resources consultancy. Private equity (PE) and VC investors typically seek internal rate of returns, or IRR, of 20-30%, that is, 3-5-times returns on the capital invested, depending on the stage of investment.

Experts said such exits represent the maturing of the early-stage investments in India, wherein investors are completing a full cycle—investment, scaling up and consolidation, before exiting their investments.