Why India’s unicorns are turning venture capital investors

“Within 10 minutes of our first meeting, Nithin offered to invest in us," recalls the co-founder of Sensibull. But that was not to be. This was the pre-digital, pre-fintech era. Rigid rules imposed by the stock exchanges and the broking world were big bottlenecks for Sensibull. “Soon, we decided to wind up that company," says Hassan.

Cut to 2017. Hassan was happily working with an algo-trading firm. Out of the blue, Kamath reached out asking Hassan if he would like to revive his venture idea. A digital wave was sweeping across the country, particularly in the fintech space. And who would know it better than Zerodha and its founders who’ve been riding the wave?

Sensibull’s focus—retail option trading—was a nascent and unexplored area in India with virtually no players. “The capital market ecosystem in India is quite shallow. If you want to grow the ecosystem, we have to help build these niche platforms," says Kamath. Zerodha’s Rainmatter Fintech Technology Fund, which finances and incubates fintech startups, invested in Sensibull. The startup has been busy building a safe, accessible and profitable platform for options trading in India and boasts of over 300,000 unique users. “If Nithin wouldn’t have called that day, there would be no Sensibull. I wouldn’t have been here," says Hassan.

Kamath and Zerodha are part of a growing trend in India’s startup landscape. For a while now, successful Indian entrepreneurs have been investing in startups, but mostly in an individual capacity as an angel investor—tapping into both their financial and entrepreneurial capital. From Infosys co-founder Kris Gopalakrishnan in the 1990s to Sachin Bansal of Flipkart more recently, several entrepreneurs have invested in dozens of startups. Many have in fact set up family offices to invest and bring in some strategic thrust to their angel investing. But increasingly, more and more successful Indian tech startups—many of them unicorns such as Kamath’s Zerodha—are setting up a fund to invest as an organization. There is Flipkart Ventures that crystallizes Flipkart’s decade-long journey as an investor. The $100-million investment arm, set up in 2019, invests in early-stage startups. And then there is Dream Sports, parent of Dream11, which is setting up an investment fund that will finance and scale multiple sports-tech businesses. Earlier this year, Lenskart set up a $20 million Lenskart Vision Fund to invest in startups aligned with its business. Paytm has also set up the One97 Mobility Fund to provide early capital to mobile first businesses. And the list keeps growing.

“For the longest time, we have been talking about the need for large companies to work with startups (and support) growth. The trend is now slowly becoming a mainstream activity for most unicorns in India," says Atit Danak, principal and head, Zinnov CoNXT. According to a data analysis by Zinnov, Indian unicorns have invested in 90 plus startups in more than 110 deals over the last decade. 19 of the 50 unicorns in India have made at least one investment in an Indian startup. A majority of the investments have been made by Zerodha, Paytm and Zomato, which account for more than half of all equity investments by active unicorns. Interestingly, despite the pandemic, the investment pace of these unicorns has remained consistent. This year has already seen 14 investments in the first half from the likes of Zerodha.

Unicorn investors

It isn’t that the trend is absolutely new in India. Many multinational corporations (MNCs) like Intel Corp. and Cisco Systems, Inc. have funds that they use for investments in promising startups across the world, including India. But bear in mind that these are large established MNCs.

In India, Sanjeev Bhikchandani’s Info Edge (India) Ltd was one of the earliest pioneers in the space. Over the last 14 years, Info Edge has invested in over 40 such startups. “I didn’t invest much as an individual angel. In fact, to prevent potential conflict of interest with Info Edge, I don’t invest in unlisted tech companies personally at all," Bhikchandani says.

Now, many more like Zerodha, Lenskart, Paytm and Dream Sports are joining the club. Take Zerodha’s Rainmatter funds for instance. Last year, it set up a dedicated team to focus on fintech startups. The Bengaluru-based fund functions more like an incubator that provides well-equipped workspaces and a funding of $100,000 to $1 million to innovative startups in the space of capital markets. “With 6 million customers, we help these startups quickly validate their products and significantly reduce the runway," says Kamath.

Besides, being part of the Zerodha stable also helps these startups forge new connections in the industry and get relevant advice and mentorship to grow their product. “Red tape and compliance burden is very high in the stock broking industry. With us, startups can focus on building their product while we help them deal with regulatory and compliance issues," says Kamath.

Zerodha has invested in a range of startups including Streak (an end-to-end platform that creates, back-tests and deploys algos without coding), GoldenPi (India’s first online marketplace for fixed income instruments like bonds and debentures), Digio (bringing paperless documentation to business and consumers), Finception (aims to simplify all things finance for millennials from financial news to financial planning), Smallcase (a thematic investment platform that helps investors build a diversified low-cost portfolio) and Tradelab (builds cutting edge technology for capital market businesses). Through its fund, Zerodha’s attempt is to tap into adjacencies and focus on nurturing a vibrant ecosystem in the capital market with it at the centre.

Lenskart’s $20 million Vision Fund plans to invest up to $2 million each in startups that are synergistic to the eyewear, eye-care and omni-channel retail sectors. With 5,000 people, 750 plus stores and a daily processing rate of 20,000 for eyewear products, “startups that engage with us will have the potential to leverage all of this," says Lenskart co-founder Peyush Bansal.

Paytm too has been investing in startups for a while now. The company, which is currently preparing for its initial public offering (IPO), is in a silent period and has declined to share comments. But its strategy is to tap into adjacencies and support startups to help build complementary technologies.

In 2019, it had set aside ₹500 crore to invest in early-stage startups for the purpose. While each deal varies in its construct depending on the entrepreneur’s comfort, typically, Paytm prefers to take large strategic stakes (of 50% or above) and lets these startups leverage its platform to reach customers. Also, Paytm is open to going beyond being a strategic investor and subsuming the startup—like it did for Nearbuy—under its umbrella.

Dream Sports has invested in FanCode, a sports content and commerce platform. This aligns well with the parent’s ambitions to become a one-stop solution for sports. Its chief corporate development officer Dev Bajaj says the intent is to build long-term expansion opportunities for Dream Sports and contribute to the overall growth of the sports ecosystem.

Though no longer a startup and part of retail giant Walmart, Flipkart too has set up a $100 million fund called Flipkart Ventures. Over the last decade, the home-grown e-tailer has taken minority stakes in over 12 startups, including Blackbuck, Ninjacart and Shadowfax. And now, its fund will formally take forward its investment strategy. “The aim is to invest in innovative startups that are disrupting the digital ecosystem," says Ravi Iyer, senior vice president and head, corporate development, Flipkart. The fund, managed by a dedicated team of experienced investment professionals, will do early-stage investments with a cheque size of $1-3 million for the first round which can go up to $5 million. “We will also be open to investing in follow-on rounds to support the growth of our portfolio companies," he says.

Orbit shift

Why is this happening? One hint for what’s driving this trend comes from China. Tech giants in China such as Alibaba Group Holding Ltd and Tencent Holdings Ltd have aggressively invested in startups. “They usually see the consumer usage and data before others, so they know what services and apps are getting traction," says Jeffrey Towson, head of research at Asia Tech Strategy and a professor at the China Europe International Business School. “They can invest from a position of strength due to their reputation, capital and market power. And after (the) investment, they can direct traffic and other assets to support the invested company," he added.

Unsurprisingly, most startups say yes to an investment by one of the tech majors. “ByteDance was a notable exception to this, preferring to stay independent," Towson says. All of these tech giants have large merger and acquisition (M&A) teams with seasoned bankers and they invest in hundreds of firms every year. “They represent about half of all the venture capital money in China. There is nothing like that in Silicon Valley," he says. This could be because of the different construct of the corporate landscape in the two geographies. Unlike the US, business conglomerates are far more common in Asian countries, including China, Japan and India.

In India, even though Bhikchandani first began investing via Info Edge, it was not so much with a strategic intent or a desire to tap into business adjacencies. It was more to do with capturing the growth upside by investing in startups. When asked about the difference between investing as an angel investor and investing through the balance sheet of the company, Bhikchandani responded by saying, “It helps align the entrepreneur’s interests with those of the company and its shareholders. If Zomato had been the Info Edge promoter’s personal investment, all the returns would have accrued to the promoters personally."

However, more and more unicorns in India are now looking beyond financial returns as they set up their funds and invest in startups, says Arun Natarajan, founder, Venture Intelligence: “You can see a strong strategic intent behind this trend. The kind of support and scale that a Zerodha can provide to startups in the space goes far beyond just financial."

Sumant Mandal, co-founder of US-based March Capital, agrees. “It signals growing maturity and evolution of the ecosystem,"

Catch them young

There are ample tell-tale signs that Indian startups are preparing for an orbit shift. India’s unicorn factory is gathering pace. There are over 50 unicorns in India today with 16 joining the club in 2021 alone. By 2025, Zinnov forecasts over 100 unicorns in India. Exits, a constant investor peeve in India, are increasingly looking good.

Led by Zomato, startups are lining up for listing with close to a dozen IPOs slotted in the next 12 months. In tandem, startups and entrepreneurs are moving up the ambition ladder and looking beyond valuation and exit game to build firms for the long term. From Byju’s to Ola, home-grown startups are making audacious M&A bets while tapping into adjacencies that will help them grab a bigger slice of the market.

However, there are two issues with the M&A deals. Firstly, it is an expensive affair with high valuations. Secondly, “it could be hard for these unicorn startups to compete with the likes of Tatas and Ambanis," says Danak of Zinnov.

Catching them young and investing in startups at an early stage through funds offers these unicorns a good entry point. Of course, the valuations are much lower. However, it helps them enter the fray from a position of strength. With a large user base and a deeper understanding of the digital landscape, the unicorns can spot emerging trends far ahead of others. Their young discerning founders think about risks very differently than the large traditional corporates whose risk appetite is constrained. Also, culturally unicorns can relate to these startups and their entrepreneurial energy a lot better.

But as the trend gains momentum, investee startups might want to be cautious. As they sign up investment deals, they should examine the clauses and fully understand what they are getting into. “By getting a unicorn on board, they shouldn’t be shutting out someone else in (the) future," says Sanjay Nath, co-founder, Blume Ventures. They should make sure that the deals aren’t structured in a way that they feel constrained in future, he added.