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 – government, media and general citizens. 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 inequality, 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 eco system.
Here we go. With apologies to Charles Dickens…
19. 19
Active Internet Users Are Up Sharply & Are
Expected To Double From Here On
2012 2017 2022
Digital Champions
Digital Live
Digital Explorers
Digital Beginners
< 1mn
5 – 10 mn
10 – 15 mn
50mn+
10 – 20 mn
50 – 60 mn
80mn+
200mn+
50 – 60 mn
100 – 130 mn
130 – 150 mn
500mn+
Source : PwC Analysis
20. 20
Most Affordable Internet Globally
Average Cost
Lowest Cost
0 0.3 0.6 0.9 1.2 1.5
3 6 9 12 150
India
India
Brazil UK China US
China USBrazilUK
$3.5 $6.7 $12.37$9.89$0.26
( Rs. 18.5)
$0.02 $0.26 $0.87 $1.5
Cost of 1GB of data
Source : cable.co.uk
25. 25
Fund Sizes Have Increased Resulting In
Changed Focus To Larger Deals
2007 2014 2018 2008 2011 2016 2010 2015 20172015 20182007 2012 2015 2006 2011 2018 2007 2012 2015 2013 2016
$100M
1
26. 26
SAINTS And Global Players Are On The Lookout For Bigger
Opportunities
2
India Is The Only OPEN Large Market For
Global Investors
Their Focus Is On Less Risky Late Stage
Deals
27. 27
Long First Cycle Exit Horizons Made Early Stage Less
Attractive
3
2008 - 2017
Exits ex Flipkart; till 2017
29. 29
What Does The Future Hold?
1. Rising Incomes with Digital Infrastructure & Rails In Place – Devices, Access, Social, Payments
2. Pace of Change Will Accelerate As Emerging Technologies Mature - AI/ML/AR/VR/IoT/Blockchain
3. Early Stage Deals (Seed to Series A) will see a Renaissance as Technology Disrupts More Sectors and Becomes
An Integral Part Of Consumers & Businesses
4. New Set of Funds & Programs Emerging To Fill The Early Stage Gap & Are Rapidly Deploying More Capital
5. Later Stage Deals (Series B+) Will Continue To Grow But At A Pace More Aligned With Early Stage Deals
30. 30
It is a far, far better thing that I do,
than I have ever done; it is a far, far
better future that I go to than I have
ever known.
@WBridgeVentures
Sarbvir Singh
@pen5ta
Pulkit Mehrotra
@pulkitmehrotra
Hinweis der Redaktion
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 – government, media and general citizens. 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 inequality, 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 eco system.
Here we go. With apologies to Charles Dickens…
Venture investments remain on the upswing and are at almost 10x the 2011-13 levels. The erstwhile peak in 2015 has been decisively crossed and 2018 was the second successive year of $10Bn+ in investments.
A disturbing factor has been the decline in total number of transactions for the third successive year. This also gives credence to the feeling that only the big are getting bigger. The average deal size is up 3x at $10Mn+ from its $3.5 Mn trough in 2016.
This is further reflected in the domination of the SAINTS as they invested over 50% of all Dollars invested in the last two years. India is unique in the sense that it is the last big open market so is attracting the global biggies from all geographies – USA, China, Europe and Japan.
There has been much written about the lack of early stage funding. Angels are up in arms. The dreaded ‘Angel Tax’ and lack of exits has driven a lot of them away from the market. There also appears to be a lack of capital in early stage deals with a lot of commentary around the fact that investors are only interested in making larger investments in more mature companies. There is a feeling that the big are getting bigger and entering ever increasing businesses at the cost of the smaller players.
Having set the stage. Let’s now dig into the details. We have split the market into six segments.
Seed – defined as all deals less than $1 Mn (7 Cr)
Pre Series A – all deals between $1 and 3 Mn (7-21 Cr)
Series A – all deals between $3 and 6 Mn ( 21-42 Cr)
Series B – all deals between $6 and 15 Mn (42-105 Cr)
Series C – all deals between $15 and 100 Mn (105-700 Cr)
Mega Deals – all deals greater than $100 M (700 Cr)
For each, we will look 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.
At this point, we would like to acknowledge the inspiration we have taken from a similar analysis carried out by Upfront VC for the US market.
1. Seed Deals <$1Mn – have declined precipitously as discussed earlier. While the “Angel Tax” issue has received a lot of press, we do believe that a lack of exits for the first wave of investments made in the 2014-16 time frame are also responsible for the decline. Interestingly, the decline has been more severe in number of deals than in value with the average deal value actually going up from $275K in 2016 to $350K in 2018. This reflects the changing nature of the participants with individuals giving way to more deep pocketed super angels, family offices and increasingly institutional capital in the form of smaller funds.
Pre Series A deals have declined gently both in number and value. This segment has seen increasing activity from smaller funds and domestic family offices. Super Angels have also been somewhat active in this segment.
Series A investments have been flattish in both $ and # terms.
Counter to the narrative that there is a lack of capital in this space, Series B deals are actually up modestly in number and value. These have seen increasing participation from strategics and global funds.
Series C & D deals saw a sharp decline in 2016 and 2017 as several funds active in 2015 (Tiger Global, Steadview, Falcon Edge) took a breather. However, 2018 saw a sharp revival with both transactions and value surpassing the 2015 levels. Several new participants came into this segment including some activity from the SAINTS.
Mega deals is where the action has beet the hottest and ones that understandably hog all the headlines. These have seen astonishing growth in both magnitude and number. These have been led by the likes of Flipkart, PayTM, Byjus, Oyo, Swiggy and Zomato raising over $6Bn over the last two years. SAINTS have led the deals but so have a variety of non traditional players (for the VC space) like General Atlantic and CPPIB. There has also been a broadening out of focus beyond ecommerce to education, fintech, foodtech, SAAS and hotels/lodging. These deals have sparked concerns over another ”bubble” emerging in Indian Venture Capital like in 2015. The supporters argue that this time it is different as company and industry fundamentals are better but to some the quick rise to Unicorn status and large funding rounds seem worrying. Time will tell!
We 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? We decided to dig deeper into these points.
We start our exploration of the fundamentals by looking at the consuming class. Eventually, all businesses need a healthy consuming class to succeed. The news is definitely cheery. While the affluent remain a small minority, the numbers are growing. The “Middle Class” is large and is forecast to grow even larger.
The internet users at almost 500Mn (second largest in the world behind China) has been growing steadily with penetration fast approaching 40%.
This is not merely a numbers exercise but even those who are using the internet actively are growing fast and are forecast to grow even more rapidly in the next five years.
This is being driven by ever decreasing costs of internet access largely driven by Reliance Jio. India is now the cheapest place to access internet globally both on an average and marginal cost basis.
The cheapness hasn’t come at the cost of quality! Average speeds are are approaching 10mpbs and almost 40% of Indians now have a smartphone.
All these are reflected in the number of Indians on messaging platforms and social networks where in many cases, Indians are the single largest population. There is also the emergence of India specific networks like ShareChat which solve an uniquely Indian urge – to share on WhatsApp! These populations are interesting as they represent an efficient way of reaching the fast growing Indian internet user base.
Digital payments are also growing fast led by UPI, mobile wallets and widespread adoption of mobile banking. The old chestnut that Indians won’t pay electronically seems behind us.
The fundamentals as we have seen 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 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 other worldly $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 earl stage startups wont 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 2000’s. 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.
The current aversion to early stage deals seems like a classic case of navigating using the rear view 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 is 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 behind technology disruption across sectors. 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 eco system which in turn will benefit all the players.
