SAINTS and Angels — The Great Indian Venture Capital Story!

Credit: Olesa Arts

Venture Capital is coming of age in India with a second successive year of $10Bn+ in investments. There is much talk of Unicorns and multi $100 million funding rounds with the occasional flourish of even a $1 Bn+ round. Everyone is in on the action — entrepreneurs, investors, politicians, government, media, and even the ordinary citizen.

However, there are a few whispers of discontent. A feeling that perhaps all is not as real as it is made out to be. Some of it tinged by envy of those who missed out, some from the not-so-hot sectors who feel left out and some from the general it-cant-be-so-easy gang. More importantly, even within the eco system, there is a feeling of inequity, a lot of concern around the difficulty of raising money, a feeling that only the big are getting bigger and no one cares about the small.

So which of these narratives is true? Are the headline numbers real? Or are the concerns valid? We at WaterBridge Ventures decided to get into the debate starting from first principles. We have looked at data for the last 8 years both in aggregate and in relevant slices to bring to you the reality of the Indian venture capital ecosystem.

Here we go. With apologies to Charles Dickens…

We split the market into six segments:

1. Seed — defined as all deals less than $1 Mn (7 Cr)

2. Pre Series A — all deals between $1 and 3 Mn (7–21 Cr)

3. Series A — all deals between $3 and 6 Mn ( 21–42 Cr)

4. Series B — all deals between $6 and 15 Mn (42–105 Cr)

5. Series C — all deals between $15 and 100 Mn (105–700 Cr)

6. Mega Deals — all deals greater than $100 M (700 Cr)

For each, we looked at the number and value of deals for the last 8 years breaking the analysis into two parts 2011–15 and 2016–18 to reflect the last peak which was 2015 and to see the progress from there onwards.

We then decided to zoom out and look at the data in a simple form — less than $6Mn deals and those greater than $6Mn. The data is clear that there is indeed a boom in the larger deals while the smaller deals are struggling. What could be driving this dichotomy? Is it a lack of fundamentals? Angel tax? Exits?

The fundamentals as we show could not be stronger so what else could be going on. Perhaps, there are some “technical” (industry specific) factors at work to consider why investors are not opening their cheque books for smaller deals. After all, the Unicorns of tomorrow have to be funded today?

We have identified three specific points which could be at play.

1. The traditional Venture Capital funds have been fairly active in raising funds. However, their fund sizes have all grown significantly from the $100Mn and below to $300Mn+. This is partly due to the interest in India as explained by the sharply improving fundamentals as well as due to the better economics of running larger funds. Increased fund sizes lead to a naturally enhanced interest in larger deals as it is difficult to deploy these funds in smaller (sub $6Mn) deals. Angels and family offices which might have been able to fill in this gap have stayed away due to regulatory issues like Angel Tax, lack of capital and extended horizons needed to get their capital back.
2. The second point which is the rapid influx of SAINTS and other large global players into India. They view India as the largest “open” market in the world (China has several restrictions on global players and has mostly home grown champions) and one that they don’t want to “miss” out on. This has led to a rush to invest in category leaders. Here, Softbank needs a mention of its own. Its otherworldly $100Bn (yes, Billion!) Vision Fund has created its own set of unique dynamics. Combing unprecedented capital with speed of decision making, they have created FOMO like never before. This has led to other global players rushing to fund companies before Softbank shows up or in some cases alongside them. Founders who are concerned about handing over control to Softbank are also spending long hours crisscrossing the globe to find other heavyweights to balance them. These bigger players understandably only look at larger deals as investing a few million in early-stage startups won’t move the needle for them.
3. The elephant in the VC room has been the lack of exits from the first wave of investments made in the mid-2000s. With the benefit of hindsight, it is clear that fundamentals were not in place then (incomes, internet users, devices) but this has led to investors waiting for over a decade to get exits even from well-performing companies. While has been a very cheery year on this front with Flipkart’s $16Bn exit, this has done more for aggregates than for long-suffering investors given the very few VC funds that were investors there. More promising is the trend of secondary sales which have been over $2Bn in the last two years wherein funds which have invested early sell to later stage investors. This lack of exits has had a dampening effect on early-stage deals as investors feel that it will take them a long time to get their money back.

What next?

The current aversion to early-stage deals seems like a classic case of navigating using the rearview mirror rather than anticipating what is coming ahead. We see that the improving fundamentals, growing digital infrastructure and most importantly, rapidly changing consumer behavior will lead to a renaissance of early-stage investing.

Consumers in India are growing used to their phones delivering a variety of products and services and this expectation is only growing. As millennials come into the consuming class, for the first time, the balance will shift towards those who have never experienced life without the internet. Their expectations and behavior are sharply different from their greying parents who in turn are getting more and more addicted to their phones!

The rise of new technologies like AI, AR/VR, IoT, and Blockchain will further accelerate this change. Looked at it simplistically, many of these technologies allow for levels of customization at an individual level never imagined before. These will alloy hyper-targeting and lead to almost magical consumer experiences where products and services will show up before you even ordered them!

At WaterBridge, this early stage opportunity forms a key part of our thesis to invest in technology disruption across sectors. This is clearly the segment of the market where more capital and players are needed. We are joined by a host of new (and old) funds who too see this opportunity. Interestingly, some of the larger funds have also joined the fray with special programs for early-stage ventures. We believe that all this activity will lead to a healthier early stage ecosystem which in turn will benefit all the players.