India, surely but steadily, is gaining currency as the centre of startup innovation globally outside of the Silicon Valley. All the data points seem to be pointing towards that fact. Last year, when Masayoshi Son, chairman and CEO of Japan’s telecom giant SoftBank came to India, he announced his intentions to invest $10 billion (R60,000 crore) in the Indian IT and communications market. Earlier this year, Infosys, the home grown IT major, had announced that it has allocated $250 million to be invested in Indian tech startups. CB Insights, the New York-based venture capital research firm, has stated that India has outpaced China with 69 deals in Q1 of 2015, compared to China’s 66 deals in tech companies. And according to VC fund tracker Tracxn, the first four months of 2015 saw $2.36 billion pouring into Indian tech companies, compared with $4.78 billion in the whole of 2014.
The growing interest of investors in Indian tech-enabled companies is riding on the back of high consumption and spending ability of consumers, higher internet penetration and the size of the untapped market in tier-2 and tier-3 towns. “India is the last billion dollar market in the world going through changes in both consumption and technology adoption. There is a whole base of population that is moving from needs to wants, and technology is enabling them to access those products easier. That is the most exciting type of market for me. China has already seen pretty much of that phase,” said Sandeep Murthy, co-founder and partner at Lightbox Ventures, a venture capital firm.
Murthy said there is more willingness to explore and try new ideas among investors in India. According to him, the country will take five years to reach the stage where US and China had reached in 20 and 10 years respectively. “In US, online retail contributes 6% to its retail and in China its contribution is 7-8%,” he said.
The internet penetration, specifically mobile internet, has spurred the growth of e-commerce in India. According to a report by The Boston Consulting Group and IAMAI, approximately 40 million Indians are online every day. “Mobile penetration is increasing and people are using that connectivity to resolve a lot of infrastructural problems. Companies targeting consumers via mobile phones are seen as businesses of the future,” said Albinder Dhindsa, co-founder, Grofers. Grofers is a Delhi-based hyper-local logistics start-up, which has raised $47 million in total from Sequoia Capital and Tiger Global Management.
Alibaba’s investment of $575 million in mobile commerce platform Paytm was the biggest deal the March quarter. A lot of foreign funds have shown interest in the India growth story. Last year Sequoia Capital raised $530 million for its India-focused fund targeted at technology, consumer and healthcare sectors.
“In India, the consumer market has hit a tipping point. When we try to deploy at scale, India is the biggest market next to China. We have 100 million plus consumers with a single currency and single law ecosystem, while also low on technology adoption. This is driving the investor ecosystem. Investors who missed the boat in China are looking to capture the market in India,” said Ravi Gururaj, chairman, Nasscom Product Council.
A lot of this money is also riding on market sentiments, as is evident by the interest of HNIs and other IT companies creating funds to invest in start-ups. “During such time, a lot more people, typically who don’t understand the business and high net worth individuals also try to invest. That is the hot money in the market and that is what leads to a bubble,” said Dhindsa. Investors and experts are also saying that due to Series B and C becoming expensive, foreign funds have become bullish on early-stage investments. “Series A which was $1million a couple of years ago is now $5-6 million,” he agreed.
With more investors ready to put their money in e-commerce firms, valuations have also shot up. “The valuations are pretty much heated up in India now. But it’s all based on the kind of growth these companies are showing month-on-month. Even outside India, the valuations are high. For instance, Yohobian in China is valued at about 2x to 3x. The same company was running at 6x to 10x five years ago. Instacart in the US is valued at 15-20x today. So, in the early stage of business, the valuations are always high,” said, Hari Menon, CEO & co-founder, Bigbasket.
“Though raising money has become easier, we need to see its impact on the ecosystem. Everyone should not expect to get valued at the multiple of Flipkart or other such higher valued tech firms. If that is happening and investors are agreeing to it, we are in a bubble,” said Rama Bethmangalkar, principal, Ventureeast, a Chennai-based VC firm.