The Indian startup ecosystem is going through a frenzied time, with VC investment deals spurting in the first four months of the current calendar year. As per VCCEdge, the research platform of VCCircle (a News Corp company), investors who typically do pre-Series A to later stage investments signed 83 transactions with an aggregate announced investment value of US$853 million in the first quarter of 2015 (till March) — a rise of more than 2.5X over Q1 2014. As per the report, the number of deals has also gone up during the period.
While most of the money from domestic as well as international investors is going into the consumer Internet space (food ordering, taxi booking, etc,), there is a sense of optimism among investors to place their bet on other related industries like on-demand logistics. All the VCs who e27 spoke to for this story agree that this excitement is boosted by the success of e-commerce majors like Flipkart, and this is going to continue for some more time.
“The increased investment in the Internet space is driven by a deeper sense of conviction that we now have the enabling elements that will allow for large-scale Internet companies to be built. At a most basic level sentiment has improved and a sense of optimism has set in that started with the new government. That has brought about a feeling that the changes that we have been waiting for are finally ready to happen,” says Sandeep Murthy, Founder of Mumbai-based Lightbox Ventures.
He is quick to add that the rate at which companies like Flipkart are growing is very interesting for investors. They are clearly building a case for the depth in consumer market in India and that is very exciting for investors, Murthy observes.
Abhishek Goyal, Founder of Tracxn (an online startup discovery platform for VC funds), cannot agree more. “Front leaders like Flipkart has done a phenomenal job in proving to a large number of consumers that Internet is a reliable and convenient medium to transact online and avail services. These consumers are now trying Internet (or mobile) for large variety of services and that is resulting in an exciting adoption for a lot of young startups.”
M&A activities to go up
As per the VCCEdge report, M&A activity in India in Q1 2015 was recorded at US$4.35 billion across 213 deals — an increase of 16 per cent in terms of deal volume, compared to the corresponding quarter last year.
According to Sudhir Sethi, Founder Chairman of IDG Ventures, the M&A activities are already happening in India and that will see further acceleration in the coming years, while Ravi Trivedi, Founder of Srijan Capital (an incubator-cum-angel fund) says the M&A activities in certain sectors should continue for both acqui-hires and for complimentary growth.
Subrata Mitra of Accel Partners, echoes Trivedi’s views. “M&A deals are about bigger companies — some are about value (for example, Flikpart’s buying of Myntra), while some about good team. I think the current spurt in the investment space will boost the M&A activities in India,” he says.
Lightbox’s Murthy observes that the M&A activity is spurred by the idea that 1+1 can equal something greater than 2. He adds that high levels of financing are not necessarily the main driver of this.
“That being said the India opportunity is all about scale. So as companies scale up in various market segments and start to prove out their respective opportunities, there will be a desire to consolidate and get to scale faster. So there will be consolidation in the market, but not just solely due to financing, but as a result of companies achieving and seeking scale,” Murthy adds.
The next big wave
Consumer Internet will continue to be the prime driver of activity in India, says Goyal. In his view, some of the largest companies will get created in food, local and home services, logistics, hyperlocal shopping, second hand and rental of goods, alternative lending and online learning.
However, Lightspeed’s Dev Khare and Matrix Partners’ Vikram Vaidyanathan say that fin-tech is the next vertical that is gonna see actions after consumer Internet. SMBs in India offer massive opportunities for fin-tech companies, say Vaidyanathan. Recently, Bangalore-based expense management solutions startup happay raised US$500,000 from AngelPrime.
Nitin Sharma, who recently joined the Lightbox’s core team from NEA in the US, also feels that fin-tech and online home services are poised for massive growth.
Murthy, however, has a different take on this as he sees potential in almost every sector. “While the adage says ‘software is eating the world’, we believe that ‘software is organising India’. As a result, we see opportunities in all sectors that are willing to look at how technology can be leveraged to create efficiencies. Every sector in India is open to change and disruption and that technology will play a pivotal role in that change,” he adds.
Albinder Dhindsa, Co-founder of Grofers, an on-demand logistics provider, feels that logistics and supply chain will continue to be a big theme in addition to services. Grofers recently netted US$35 million from Sequoia and Tiger Global.
“The smart and hungry Indian entrepreneurs are dreaming up new opportunities and spotting inefficiencies to go and address. There is a buoyant mood and capital available to back these aspirants,” says Nexus Venture Partners’ Sandeep Singhal.
Nexus, which typically invests in high-tech (enterprise software) companies, now started to invest in Internet companies (for example, Housing and TinyOwl), as it cannot afford to miss out on this buoyant industry.
What is still lacking here?
The quality of entrepreneurs has gone to a phenomenal level, prompting VCs to do more deals in a short time span. Goyal, who has invested in over a dozen startups in his personal capacity, says: “We have started to observe that there are multiple teams with interesting backgrounds in each of the markets. I would like if more entrepreneurs take their decision on which market to go after more seriously. You need good team to win in any market, but market and trends are very hard to work against.”
In Murthy’s opinion, understanding long-term sustainable differentiation is important: “While I am in support of using incentives to create awareness among customers, entrepreneurs need to be clear about what customer experience (driven by the product/service) will keep customers coming back – it can’t be a discount all the time.”
“As long as entrepreneurs are thinking about this, they can ensure that their customer acquisition spend is effectively utilised. One way to measure this is to look at a cohort and ensure that if an entrepreneur has incentivised a user to come in to try her product in the first month, has she been able to retain and cultivate that user over the subsequent months. If the average user is trending towards being a productive customer over time, then that is an indication that the model is differentiated and has the potential to be sustainable,” Murthy explains.