Unravelling the venture capital boom
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After constantly being piped against China and always losing, it’s nice to be ahead of them for a change. Latest figures report that India has outpaced China in the number of deals struck by venture capital (VC) funds in the first quarter of 2015. We still lag behind in value, but raising over a billion dollars in three consecutive quarters is no small feat —it’s more than a 200 percent gain over the previous year.
As I write this, the sensex crashed 723 points on the back of sustained FII outflows, lackluster industrial production numbers, worries about a delayed monsoon, and an underperforming and straitjacketed government. This is not due to Incredible India. So how has this come about? Is it hype or is our newfound love for startups here to stay?
One big movement we have seen is the reach for scale. E-commerce firms are no longer the niche players catering to your disposable income. They want the share of your wallet that you spend on groceries (Bigbasket.com) and basic furniture (Urbanladder, Fabfurnish). That doesn’t mean niche players don’t exist but they need to ensure that the market is big enough and the value proposition, solid.
Much of the success of Silicon Valley has been attributed to its ecosystem, a culture that fosters innovation. It’s like a little village where those who create, those who manage, and those who fund the creative process live together in a community focused solely on innovation. While we are yet to find our own little haven, some characteristics of that ecosystem have undoubtedly crept in. What are these characteristics?
The permission to fail:
The first and most important one is the permission to fail. The natural state of the startup is to die yet death is not looked down upon and failure is not discouraged. Today a number of Indian startups have failed. E-commerce websites shut daily, opening up again in six months time using a new avatar, better and stronger using their prior experience to build a stronger firm.
Risk taking and focus on growth:
Most part of Indian business has always cared about the bottom line. Firms have repeatedly forgone growth in sales for better margins, but this changed when Flipkart realized the only way an E-commerce logistics company would ever get big was to pump money in and gain value-conscious customers and sales through deep discounting.
Valuations have a big role to play in this as well. Between 1997 and 2008, India was ripe for private equity growth capital and firms invested in companies on the basis of profitability multiples that would ensure an exit. VC firms care about scale and the next round and the inevitable IPO that will make millionaires. The multiples in vogue now are revenue multiples and making losses just means you’re willing to do what it takes to be the last one standing.
Earlier entrepreneurs were poor and the salaries they offered were poorer. Today’s news reported that Delhivery has just raised close to $85 million in a new round of funding led by venture capital firm Tiger Global Management Llc. They brought on board former FedEx Corp. executive SurajuDutta and Bain and Co.’s SandeepBarasia as managing directors. Working for a startup doesn’t mean foregoing your salary and owning a startup doesn’t mean you can pay peanuts; money buys talent. Consequently, MBA students from the best schools are making a beeline for e-commerce.
One in every nine students from the 2013-15 batch across 11 of India's top B-schools will join an e-commerce firm or startup after they graduate as compared to just one in 19 students in the 2012-14 batch. Salaries offered by startups have increased two fold in the last couple of years, with average salaries in startups ranging from 16-20 lacs.
Networking vs ‘contact’:
The era of pre-existing connections is coming to an end and rightly so. There is no old boy school network here; there’s just ‘I have an idea’ network. Have something interesting to say? Well, then you just have to find the right person who wants to hear it and, hopefully, pay you some money for it. Networks like Venture Nursery, Mumbai Angels and the India Angels Network foster conversation and have been created by venture capital firms, entrepreneurs, dealmakers and founders to meet a growing need. Today’s India, be it Mumbai or Bangalore, is teeming with VC firms from all over the world that are willing to bring in substantial capital. All you need a great idea and the capacity to execute!