Startups, India & exits?
Summery: India’s startup ecosystem is buzzing and most importantly we are getting much needed love, support from our government. This is good, but startup ecosystem will only scale if we have great acquisitions, from local existing players and it’s missing.
Our success story will match and everyone will have big bang return if we see enough exits. This will bring us in same bracket/category as Israel startup ecosystem. Do not get me wrong, but exit does not mean only selling, it can be going public or getting into stock sale with bigger players forging strategic alliance.
The Indian startup ecosystem is buzzing. Everyone is talking about it. Be it the chaiwala (tea stall owner) next door or a fresh engineering graduate to our government. The Government of India under Narendra Modi is doing great with the marketing and workarounds, in the hope of making India a startup nation. I have been told they are inviting small startups to pitch ideas so they can invest/fund in it.
Coming to the VC ecosystem, it seems everything is flourishing and things are on track. When I say things are on track, I mean founders aside, there is money in the market and VC’s are investing. According to INC42, Indian Tech Startup Funding Report H1 2017: $5.56 Bn have been Invested Across 452 Deals. It is a 3% jump; marginal but on a positive curve.
But there’s one thing; a lot us never mention, be it the media or armchair commentators [including me].
The funds have been deployed but what is the outcome?
How many Indian companies have gone public?
Economics of a VC fund [apologies, I am still learning]
- VC’s raise from LP’s and they need to return 3–4X over period of 8–12 years [depending on the love, relationship].
- LP’s aka limited partners can be a financial institution or a pension fund or some rich dude/dudette with money who is playing golf in his/her private island and chilling in life [I do know some people :)]
- In return for LP’s money, VC’s keep management fees [2–4%] yearly.
- In all positive scenario, to keep a VC’s vehicle floating he/she needs at-least one bumper exit from his portfolio.
- Which means over 90% of the startups a firm invest in, returns nothing [yup, it is like match making and going on date hoping for great return]
VC’s are in the business of making money [like us all :)]
So when a VC firm has to return 4X and make some money [carry fees, for team and managing partners] what will they do?
- Look for the best bet.
- Like a horse race, keep betting on top horses aka startup founders. Make investment in follow on rounds.
- Sometimes one VC firm gets cornered on CAP table by bigger fish aka VC firm with big fund size.
- Look for Exit ASAP with big returns.
- Get founders to raise next round quickly so on-paper valuation/invested money increases multifold.
- Getting acquired to another startup which is in same domain & joining hands makes strategic favors for everyone.
- Founders like to take best deal, they need better valuation with least dilution [no harm, we are in Capitalism] and sometimes ride on big EGO horse.
Let us come to EXITS
Q. How many startups got blockbuster exits in India?
A. Freecharge, Redbus, Taxi4Sure are few.
Q. But are/is this sufficient to get VC ecosystem flowing?
What should we do?
- First as a startup person you have to understand that not every idea is fundable.
- Don’t get mad at VC’s if they turn you down, they are just doing their job.
- Are you ready for a joyride with 5 years blockbuster exit?
Big old established shops :
With the emergence of newer technology, existing chop/body shops like Infosys, Wipro, TCS likes have to up the ante. Most of these companies have got shit loads of cash.
They should diversify and on top go acquire Indian startups. Why?
- Hiring is fucking painful especially in emerging technology.
- Body shops are good for providing support not innovation.
- Building in-house technical capability takes time. [Your competitor will go buy some Israeli startup, outpace you and acquire your customer ]
- Newer technologies like AI, Deep Learning, Drones, Cryptocurrency appear good on marketing material and take a lot of motivation. Which sadly internal employees lack, because most of them are busy with cycle of life [car loan, house loan, marriage, kids, loan repayment] or some [masters/MBA from US ]
In short you cannot build these newer technology as in-house expertise if you don’t have a band of motivated members.
What should VC’s do?
- More global exposure
- More commitment to founders and product
- Focussing on real growth matrix not vanity ones [like app download matrix or GVM, there are startups built to fake these numbers] :)
What about Government?
Government is doing great with all money and shining policy, but this is still far from sufficient.
- Due to newer technologies like Artificial Intelligence and other technology we are going to lose more jobs. source
- We are world’s youngest population, if we turn jobless we will go on the roads and run rampage.
- How about drafting policy where every stakeholder is in win win situation?
A. How easy it is to start a startup still? Like it fucking takes ages to run around for stamp duty.
B. Prevent need of paying bribes where ever humans are involved i.e professional tax one example.
C. What is the policy around seed investment and ESOP? What about tax implications?
D. How about giving tax discounts if a big firm acquires a startup? It will be a motivation and lead to more acquisitions.
E. Why can’t we be like Israelis, build in Israel and problem solved for the world. Indeed with acquisitions route via SF connections.
Am I a pessimist about India’s success story?
Hell NO, I would have been one of the H1B guy chilling in valley and giving arm chair commentary on the fucked state of India while sipping coffee or burgers using free WIFI.
I totally believe we have a great future ahead and we are here to solve our dear nation’s problems from healthcare, clean energy, solar power to solid waste recycle to name just a few. We have long way to go.
I keep hearing India has its own challenge and we have problems to solve; perfect, but will you match in making revenue and match with economy of growth? Your unit economies, customers? [I can name few who are sailing just because of deep discounts], I am not saying it’s impossible, but it requires luck, magic, persistence and lots of sacrifice and effort. Very few founders have got such patience or VC’s with faith and patience.
But we still have long way to go, each one of us has got to do Apna Kaam (our own job)and make the ecosystem a grand success.