The Challenge of Returns for a VC in India
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Compared to the rupee funds launched the risk capital industry in the mid-1990 s in India, today, over 95% of investments are from foreign capital in the sector. VC’s and Angels form a crucial and growing part of this sector but are still looking for successful exits that are proving elusive in a rapidly transforming start-up ecosystem.
The core motivation for any investor, be it PE or VC-based is to get decent returns from their amalgamated portfolio. But pumping in dollars into the startup ecosystem in India doesn’t necessarily guarantee that returns will come by in the same ratio. Let us assess some key factors that make it difficult for VCs to gain expecetd returns on their investments.
Investment and Expectancy
The simple expectancy of most investors who have sought foreign capital is to cash in sizeable returns when they exit the business. But due to shallow markets, and the developmental stage of the ecosystem, returns as per global standards is difficult to come by.
“Investors who invest in dollars in India expect to mint returns in dollars, which doesn’t happen. Moreover, the market is not deep yet to offer such return as the US in terms of exists,” said Bharti Jacob, Managing Partner, SeedFund at a press event.
Valuation and Value
Valuation and Value are not the same thing. Just because a startup receives a huge sum, it doesn’t accrue to them being the largest valued firm in the ecosystem in future. Unlike the public companies, where share price and company valuation is the result of aggregated shared expectations by a deep and broad set of players, valuation of startups is a narrow view of a handful of investors who benchmark it to determine their own gains.
In such a situation where valuation is ultimately a vanity metric it is almost impossible to judge where the final equity value of a VC will stand when exiting the business. The recent Snapdeal sale saga is a clear reflection of how a startup’s true worth is almost impossible to determine, with just a handful of players calling the shots and changing the scenario overnight.
More Exits Needed
The ultimate goal of a VC who invests in the early or mid-cycle of a business is to gain their timely return and exit the venture. Unfortunately not too many have been able to do that, largely because of low return on their investments. But investors believe, the market is still growing indicating that as time passes by the xit scene will get better, and returns will be value driven.
“As the market deepens companies will scale and we will have better results, while some bit of secondary markets need to exist,” said Rajat Agarwal of Matrix partners.
Short-Term Gain Mentality
Most VCs in India as of now are still obsessed with short-term hauls as opposed ot US where big returns have only come to investors that have stuck through years with their ventures.
"An investment cycle typically needs to last for a minimum of five years, and it some scenarios 10 years," said Vikram Gupta of IvyCap Ventures. "Indian VCs cannont expect return like their counterparts in the US if they don't stick aorund for the long-haul and give the company time to scale and grow," he added.