At a recent event in Mumbai, Vijay Shekhar Sharma, founder of one of India’s most successful startups Paytm said that India needs more ‘adventure capitalists’ rather than ‘vulture capitalists’, those who are willing to back the dream of an entrepreneur rather than going after the bottom line.
But at a time when a number of startups – Ask me, Tiny Owl, PepperTap, LocalBanya – have shut shop, or are ‘rebooting’, is it really wise for investors to be adventurous?
It has been over a decade since the fad of startups kicked into India. It started with e-commerce companies of the country getting noticed for their then disruptive business models. They attracted the big-ticket investors. As more innovative companies were founded, investors kept infusing capital.
Some turned into success stories, some failed. But while majority of them have become immensely popular, their balance sheets paint a different picture. With every industry seeing multiple companies emerging, mostly with ‘me too’ business models, companies have intensified the race to gain maximum market share. Be it huge discounts or large marketing campaigns, it is no secret that companies are burning a lot more cash than they are making. Losses are widening and profits far, far away.
So, how has this changed how Venture Capitalists (VC) and Private Equity (PE) investors view the startup sphere? A research report titled ‘The Fourth Wheel 2017’ by Grant Thornton states that startups continue to attract most PE and VC funding. In 2016, startups dominated deals in the PE and VC space, making up some $2.5 billion in value and 70% in terms of transaction volume.
However, while startups attract most investors, there is a sense of caution among investors. According the report, PE investors are exercising caution and haven’t been betting big. 2016 saw only 28 big-ticket investments as against 40 in 2015. And at a time when the valuations of ecommerce companies like Flipkart and Snapdeal are being written down, investment values in startups declined by over 50%.
When it comes to venture capitalists, while the number of deals more than doubled since 2014, the median deal size of VC deal came down to $1 million, from $2 million in 2014.
As per a report in VCCircle, 2017 will see a downward trend in terms of VC funding. Venture capital firms will be tightening their investment budgets in 2017. And with even the most promising firms being unable to deliver returns on the previously invested capital amounts, VCs in India will focus on exits this year rather than raising full-fledged funds.
Many VCs however feel that the time for adventure is over, investors are looking to make profits now. According to Bhaskar Majumdar, managing partner, Unicorn India Ventures, a VC needs to do a lot more than just infusing funds. “Sometimes companies come from a tech background and lack the knowledge of how to commercialize their products. Early stage investment is all about working closely with the startups,” says Majumdar.
The biggest problem in the startup ecosystem right now the blind race to capture market share as a result of which they forget to focus on a sustainable business model. VCs too are being prudent with investments. They are now looking at companies only if 3-4X returns are possible. Majumdar says that at VC firms like his infuse small amounts of capital, examine where the business is headed and only then put in another round.
But Majumdar says that India has crossed that hump. As venture capitalists get more stringent with investments, startups too are beginning to look at what the path to profitability is. “Nobody is just signing cheques anymore. Everyone is looking at profitability,” he adds.
Serial Entrepreneur and Angel Investor Yogesh Bansal has a slightly different view. According to him, investors have always been adventurous. “They understand that out of the 10 companies they invest in, at least seven will shut shop. But the value is in getting good returns from the three that succeed,” he says.
According to Bansal, entrepreneurs need to understand that VC firms also need to make money for their Limited Partners (LP). “Entrepreneurs are always running behind funding. One needs to work on the business model too. Entrepreneurs need to know that me-too products or businesses won’t work,” he says.
In terms of sectors as well, ecommerce is passé, Bansal says. Venture Capitalists, too, are looking for disruptive business models in the fields of Artificial Intelligence, technology. “See how Uber and Ola changed how we travel. That’s the kind of disruption that is required. Once your business model is good, you don’t have to chase investors. Investors will chase you,” he adds.