The last year in the startup ecosystem has seen both scale and funding activity in abundance. It’s been the perfect storm for Indian technology companies seeking capital, both in the B2C and B2B space.
Funding activity has increased by 30% in the first 6 months of 2019 compared to the first half of 2018.
We are seeing an even more bullish market than we did in 2014-2015 with the average Seed and Series A round sizes increasing by almost 100% and the valuations of these rounds doubling, sometimes tripling.
Large global private equity funds are back to writing cheques at a Series B, sometimes even a Series A. This is forcing even the larger venture capital firms with fund sizes north of $300MN to look at investing into business purely based on the space and the entrepreneurs background.
Startups, even the ones that are growing extraordinarily fast, raise money once a year. Popular companies that are in the investor's eye are now seeing two, sometimes even three rounds of financing in the same calendar year, each with a phenomenal uptick in valuations and little chance for real progress in the business or product validation.
What's leading to this financing boom ?
At a macro level, China’s consumer internet slowdown, the threat of a potential trade war with the US and India’s recent decisive election coupled with the preferential tax cuts for businesses in India are making it an even more attractive place to deploy capital. Global investors in the private markets have seen a lot of recent liquidity with the recent slew of IPO’s and are ready to deploy capital again.
In addition, 1/3rd of India’s 1.2 billion population is meaningfully online and data consumption has skyrocketed from 800MB a month to close to 8GB!
At a micro level, India has had several unicorns where vesting periods for ESOP’s have recently matured. Senior executives, who played an important part in these growth stories are now ready to do it again; this time at the helm themselves.
How is it different from 2015 ?
We are finally seeing validation in building for the India beyond the top 40-50mn of the pyramid (i.e. “Bharat”). Previous funding booms have focused on business models borrowed from the US or China, but the quick emergence and scale of businesses like Meesho, Udaan, BharatPe, and Khatabook to name a few, do not have comparable models in the American or Chinese markets.
Where do we stand ?
Cautious; around the excitement, the quick mark-ups and the momentum we are seeing in funding rounds today.
From our experience, it takes a certain type of entrepreneur to build businesses for Bharat (India beyond the first 50MN internet users) and these are first principle, bottom-up thinkers who have a deep sense of identification with Bharat and are building businesses based on these principles.
Many of the senior-level executives at unicorns who now leaving to become entrepreneurs may be able to raise larger sums of capital at high valuations at the inception of their businesses. More often than not, their experience is drawn from business models that have been borrowed from the US or China vs. those that are now playing to the advantage of “Bharat”. The high valuations of Seed rounds are a call option for larger funds but they encourage us to find value away from today’s “hot spaces”. The 2015 rush saw last mile-delivery and on-demand service businesses declared as hot spaces and today, we see the same excitement in consumer lending, SME-enablement and social commerce.
In these exciting times, we believe there remains value in finding entrepreneurs who have identified unique, counter-intuitive opportunities. Perhaps, these will form the hot spaces of tomorrow!
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