“The first lesson of economics is scarcity; there is never enough of anything to satisfy all those who want it” – Thomas Sowell
The challenge in writing about the topic, “Is there enough funding available for digital startups in India”, is that the question is rhetorical. If you ask an Entrepreneur, the answer will depend on who you ask and what their experience has been with raising capital. If you ask any Venture Investor in India, my guess is that the answer will be a unanimous “Yes!”. They will likely flip the question around and ask, “Are there enough fundable startups in India?”. We’ll leave that topic for another day. For now, lets look at a few aspects of the early stage startup eco-system in India and leave the conclusion for later.
How old is the India startup eco-system?
Lets begin with some history. India has always been an entrepreneurial nation with several small businesses being setup every year. These were typically funded the old fashioned way – by bootstrapping or through an initial investment by dipping into the family’s savings. The focus of these businesses was to grow – BUT only as long as the growth came with profitability. Over the past 10-15 years, India, like other high growth markets, has seen the emergence of a new asset class – Risk Capital or Venture Capital. More mature VC markets, like the US, see over 25 to 30 times the annual VC dollars invested in India. China, too sees 3 to 5 times the amount of VC dollars invested annually relative to India. So yes, the Indian startup (and hence Venture Capital) eco-system is still in its nascent stages – the good news is it only gets better from here!
Startups beget funding, not the other way round
Several folks I speak with, believe that an increase in venture capital availability will help spur a startup revolution in India, like the Silicon Valley. While this has some grain of truth and the two are mutually reinforcing, the fact is that Venture Capital exists because of Startups – not the other way around. An increase in startup activity, and diversion of the best talent available in the country to startups v/s larger organizations, will result in more Venture funding. Capital chases quality entrepreneurs looking to build high-growth companies. Period.
Now lets look at some data. As seen in the chart, since 2007, Venture Capital investments in India have been hovering around $1 Billion mark. In 2011, during the peak of the e-commerce bubble, India saw $1.2 Billion dollars invested across 157 VC deals. In 2012, the number of deals reduced marginally to 147 and the total investment reduced to $1 Billion. Thus far, in the first half of 2013, $400 Million has been invested across 141 deals (source: Venture Intelligence). If we extend that to the rest of 2013, we can expect increased Venture Capital deal activity. This signals a shift towards a larger number of deals, albeit with smaller check sizes.
Startup Volume & emergence of Angel/Seed investors
Over the past couple of years, India has seen a remarkable rise in the number of web + mobile startups. While there is no easy way to figure out the exact number, our own internal estimates at Matrix suggest that around 1000 to 1500 web+ mobile companies were started in 2012. That number in 2013 is likely to be over 2000! In response, there has been an equally phenomenal rise in the number of individual angel investors, angel groups, incubators and accelerators.
These entities play a pivotal role – not only do they provide the much needed seed capital, they also help the entrepreneur navigate the initial challenges of setting up a team and act as a sounding board for debating various ideas and business models. As per some reports, India now has between 50-100 active angel investors, 30+ angel groups, 35+ incubators & accelerators and 40+ VC funds.
Raising later rounds of financing is harder
A recent analysis published by Alok Mittal, suggests that 27% of the startups that received seed financing were able to successfully raise an angel round. Of these, just about 20% were able to close their Series A round of financing. This means that less than 6 out of 100 startups that raised seed financing were able to reach Series A stage. Of course, Series B, Series C and further rounds of financing are even harder to come by – simply because these companies are unable grow fast enough to continually justify their valuations. As someone once told me, it’s easier to raise on promise than on performance J Jokes aside, this is in part due to the point I make below.
Limited Exit activity
One of the more well-discussed issues affecting the Indian startup eco-system has been a drought of meaningful exits. We’ve had just 5 Internet IPOs and less than 10 “meaningful” M&A transactions in the last 15 years. While India is seen as a huge talent pool for bright engineers, large global technology companies (i.e. buyers who have cash to acquire) simply haven’t come shopping to India – yet.
At the same time, taking a company IPO in India is not easy – investors want to see at least 100 to 150 Crores in annual revenue with minimum of 10-15% PAT margins and a reasonably high growth rate expected in the years following the IPO. Some companies such as MakeMyTrip and Rediff have listed on NASDAQ but the challenge of adequate analyst coverage remains. The few Indian IPOs also mean that there aren’t enough Indian buyers available for an M&A. Lastly, in the US, acqui-hire (acquisition + hire) is also an exit option available – larger technology companies who are constantly on the lookout for brilliant startup tech talent, will often acquire a smaller company to gain access to an outstanding team. As it stands today, Indian tech companies don’t see enough value in such transactions and choose to build internally whenever faced with a build v/s buy decision.
In conclusion, I’d like to say that while there is sufficient funding available (and increasing rapidly), the eco-system has a long way to mature and investors need to see more exits to increase their risk-appetite. Successful exits will spur a new generation of entrepreneurs, attract more talent to startups, bring more buyers to the table and in turn ensure more Venture Capital dollars flow into the system. It is a virtuous cycle and it needs its time to play out. At Matrix Partners, we’re confident that Indian Internet will see 10 Billion Dollar companies being created in this decade and several more that cross the $100 Million mark. So just focus on building an outstanding team, select a space that allows you to create a big company and innovate on the business model – rest assured, the funding will follow.
There has never been a better time to startup in India!
[About the Author – Tarun Davda is an intrapreneur turned VC with Matrix Partners India. He has had the unique opportunity to build and lead two successful Internet businesses in India – BigRock.com and StepOut.com. With over 12 years of experience in the trenches, he is eager to partner with promising Internet entrepreneurs and use his experience to help them nurture, grow and flourish their business. You can read more about him here or follow him on twitter.]