The Indian Venture Capital Ecosystem - Myths and Realities

1. 1 The Great Indian Venture Capital Story - A Tale of Two Cities! @WBridgeVentures Sarbvir Singh @pen5ta Pulkit Mehrotra @pulkitmehrotra
2. 2 VC INVESTMENTS CROSSED $10 BN FOR THE SECOND YEAR IN A ROW SAINTS© SEEMED TO LEAD MOST DEALS YET SURVEYS AND ANECDOTAL EVIDENCE SHOW LACK OF CAPITAL! © Softbank, Alibaba, Didi, Naspers, Wal Mart, Tencents…
3. 3 It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness...
4. 4 $1.4B $1B $1.6B $5.1B $8.2B $4.2B $10.4B $10.9B 2011 2012 2013 2014 2015 2016 2017 2018 Source : Tracxn Total VC Investments Remain At Elevated Levels
5. 5Source : Tracxn But, Total VC Investments In # Of Deals Are Down 219 294 380 521 1120 1196 1013 839 0 200 400 600 800 1,000 1,200 1,400 2011 2012 2013 2014 2015 2016 2017 2018
6. 6 50%+ Of Total $ Invested in Last Two Years Has Come From The SAINTS © Softbank, Alibaba, Didi, Naspers, Wal Mart, Tencents…
7. Water Water Everywhere But Not A Drop To Drink!
8. 8 Let’s take a closer look at what’s actually happening… @upfrontvc - https://www.slideshare.net/msuster/is-vc-still-a-thing-final/
9. 9Source : Tracxn Seed Investments (<$1M) Have Declined Quite Sharply 103 176 239 303 654 $24M $43M $57M $79M $172M 2011 2012 2013 2014 2015 786 611 381 $216M $178M $131M 2016 2017 2018 Number of Deals Investment Amount
10. 10Source : Tracxn Pre Series A Investments ($1-3M) Are Also Down 34 46 48 102 190 $56M $72M $79M $165M $311M -30 20 70 120 170 220 270 320 0 50 100 150 200 250 2011 2012 2013 2014 2015 202 177 172 $314M $281M $286M 2016 2017 2018 Number of Deals Investment Amount
11. 11Source : Tracxn Series A Investments ($3-6M) Are Down in $, Flat in # 28 31 37 35 95 $122M $130M $165M $148M $401M -30 20 70 120 170 220 270 320 370 420 -10 10 30 50 70 90 110 130 150 2011 2012 2013 2014 2015 78 93 93 $320M $387M $375M 0 50 100 150 200 250 300 350 400 450 -10 10 30 50 70 90 110 130 150 2016 2017 2018 Number of Deals Investment Amount
12. 12Source : Tracxn Series B Investments ($6-15M) Are Up Modestly 30 24 35 29 80 $276M $216M $323M $263M $740M 0 100 200 300 400 500 600 700 800 -10 10 30 50 70 90 110 130 150 2011 2012 2013 2014 2015 62 59 86 $544M $517M $836M 2016 2017 2018 Number of Deals Investment Amount
13. 13 Series C & D Investments ($15-100M) Are Growing 23 15 12 38 94 $583M $431M $580M $1,248M $2,788M 0 500 1000 1500 2000 2500 3000 -10 10 30 50 70 90 110 130 150 2011 2012 2013 2014 2015 58 50 106 $1,640M $2,302M $2,794M 0 500 1000 1500 2000 2500 3000 -10 10 30 50 70 90 110 130 150 2016 2017 2018 Source : Tracxn Number of Deals Investment Amount
14. 14 Mega Deals (>$100M) Are The Ones Really Driving Growth 2 1 2 9 14 $308M $150M $360M $3200M $3744M 0 1000 2000 3000 4000 5000 6000 7000 0 5 10 15 20 25 30 2011 2012 2013 2014 2015 7 10 23 $1131M $6722M $6453M 0 1000 2000 3000 4000 5000 6000 7000 0 5 10 15 20 25 30 2016 2017 2018 Source : Tracxn Number of Deals Investment Amount
15. 15Source : Tracxn Seed to Series A Deals Are Down Larger Deals Are Holding Up The Sky $884M $849M $847M $791M 600 650 700 750 800 850 900 2015 2016 2017 2018 < $6M $7.3B $3.3B $9.5B $10B 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 2015 2016 2017 2018 >$6M
16. 16 Early Stage Deals Are Down Sharply Are Fundamentals The Issue?
17. 17 Consuming Class is Growing Strongly Affluent Class Middle Class Emerging Middle Class Lower Class > $37,000 $7,500 - $37,000 $3,300 - $7,500 <$3,300 Annual Income Source : PwC Analysis, Not to Scale 2022 1.4bn 2017 1.3bn 360 550 380 20 290 500 540 40
18. 18 165m 252m 302m 343m 422m 494m 13% 20% 24% 27% 32% 38% 2013 2014 2015 2016 2017 2018 World’s Second Largest Internet Base Source : RedSeer, Axis Capital
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
21. 21 0.8 mbps 2009 2014 2018 9mbps2mbps Quality of Internet Access Up Sharply 5% 21% 36% Internet Speed Smartphone Penetration Source : Medianama, Statista
22. 22 4mn 2mn 2009 70mn 110mn 15mn 8mn 2014 250mn 225mn 30mn 75mn 20mn 20mn 2018 Social Networks Have Achieved Scale Monthly Active Users ( India ) Source : Economic Time, Factor daily, Statista
23. 23 Mobile Payments Are Growing Rapidly 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 RTGS Cheque NEFT IMPS NACH Credit Card POS Debit Card POS m-wallet Mobile Banking UPI 3bn 4.5bn 3.9bn 4.1bn 1.6bn 2.8bn 1.5bn 2.2bn 1.2bn # of Transactions - $82bn UPI and $13bn m-wallet transaction in 2018 - p2p mobile payments growing quickly post UPI Source : RBI, NPCI
24. 24 Fundamentals Have Never Been Stronger So What Could Be Going On?
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
28. 28
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

Notes de l'éditeur

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.

The Indian Venture Capital Ecosystem - Myths and Realities

Vous êtes en train de lire un aperçu.

Consultez-les par la suite

The Indian Venture Capital Ecosystem - Myths and Realities

Plus De Contenu Connexe

Diaporamas pour vous (15)

Similaire à The Indian Venture Capital Ecosystem - Myths and Realities (20)

Plus récents (20)

The Indian Venture Capital Ecosystem - Myths and Realities

Notes de l'éditeur