Venture capital investments saw a decline of 39% in terms of number of deals and 58% in terms of deal value for the 9 months ending September 2016, and a similar trend was witnessed in the private equity funds which dropped by 37%, according to a report by VCCEdge. This fall has had an impact on the fund raising plans of Indian start-ups especially the e-commerce companies. T V Mohandas Pai, chairman, Aarin Capital and former board member of Infosys said this has led to VCs becoming more circumspect of their investments while e-commerce ventures focus on creating a sustainable business, in an interview with FE’s P P Thimmaya. Excerpts:
How do you see the investors’ sentiment in the Indian start-up eco-system?
The first six months of the year have seen a decline in irrational exuberance among the venture capital (VC) community. In the previous year we saw big cheques and large rise in valuation, particularly in the e-commerce and B2C space. This year we see that VC funds are more circumspect. The overall flow of money has come down. VCs have become more discerning and are asking the right questions. Many of these B2C companies have been spending as if there is no tomorrow. The B2C industry think they have to get GMV, customers first, but they forget that they are tech enabled businesses competing with the traditional business. They require loyalty from their customers but they are also challenged with high degree of returns and refunds. It is a chimera. Now they are realising that they are tech enabled business and must be cost efficient. They should also use technology as a differentiator and improve customer service. In the B2B segment, the funding is coming in but investors are asking questions like when are you going to become viable, what is the IP you are building, the focus is on sales, deep technology. It is a very competitive environment. People will have to tighten their belts. More companies will shut shop, if they do not have viable model.
Do you feel that the investors’ outlook has changed?
There is much more concern about the sustainability of business. There is much more resistance to high valuation and deeper focus on operational excellence. Last year, valuation went ahead of value creation, this year valuation has come down. It is a mix between value creation and valuation.
What has been the impact of B2C companies on the retail consumers?
The hype around B2C has fundamentally changed consumer behvaiour. More people are now going to the web to make purchases. They are making price comparison which has resulted in greater competition. This has brought in a lot of benefit for the country. In one sense, it is good to have the hype as it has created an environment for many more people to take up the entrepreneurial route. We have created more risk takers.
Has the slowdown in B2C investments impacted the B2B segment?
Absolutely. The B2B segment has become more competitive. There are talks of merger between big retail chains. These retail chains have not invested enough in technology. This becomes an area of opportunity for the B2B start-ups. Logistics is much more competitive. We are going to see reduction in overall cost in the delivery to consumers, which is very good. The focus has to be on improving productivity, reducing waste, increasing efficiency, and giving the consumer a better deal. The traditional retail were producer oriented not consumer oriented. E-commerce is more consumer oriented, the impact of e-commerce has been unbelievable on the Indian consumer.
Do you expect a rise in the number of Indian investor class funding start-ups?
It is happening, because last year around 5% of the capital invested was from India and the balance came from overseas. I hope this year it goes up to 10%. Indian capitalistic class is still a rentier class. They should learn to take risks otherwise India will become a digital colony once again. Right now the fight is between western and Chinese investors. More Chinese investments will come in unless Indian capitalistic class starts investing hugely. In China, 65% of the investments are from within the country and their government has put policies in place. If we want to save our future, I think more number of billionaires and people with money should seek investments. It is not that they will not make good returns, they will make good returns. There is lot of innovation and disruption happening. There is lot of growth.
So the entrepreneurial fervour still remains?
Entrepreneurial fervour is still there as lot of people are creating start-ups. They are struggling for capital, which is actually good news. Capital must not be something, which is poured down the throat. People must respect capital, it is very important.