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"Several VC Funded Companies Will Have 'Material Cash Exits" If we were to understand this journey of VC in India as if it were a "start-up" it would be interesting to analyze reasons.

By Niren Shah

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When I started my journey in the Indian venture capital (VC) space in 2007, both venture capitalists and their Limited Partners (LPs), who fund VCs, could see that India was going to be a large VC market and that as a natural progression we would start seeing strong exits within a period of 10 years.

Almost a decade later, while the progress towards creating large companies has been strong, the real challenge is demonstrated when one compares "material cash exits" from India against similar ecosystems in the US or China. By "material", I mean exits exceeding $100 million and by "cash exits" I mean where the IPO or sale of the company results in cash or shares which can be easily converted to cash to be returned to the LPs.

So far, such material cash exits have been few and far between. If we were to understand this journey of VC in India as if it were a "start-up" it would be interesting to analyze reasons for that and why there could be a dramatic change in few years.


Just like every nascent market takes time to evolve, this happened in the Indian VC ecosystem too where several investments made in 2006-08 era were arguably too early. Further, VC investments often ride on a megatrend and it wasn't until 2010-11 that the Internet started really taking off in India. If we predict exits by 2021 (10 years after the Internet megatrend really took shape), I think we will all be pleasantly surprised!


If we think of the entire Indian VC ecosystem as one team in the 2006-2008 period, one would find that everyone was new to this ecosystem. While entrepreneurs were trying to understand what VC was all about, venture capitalists like me were trying to figure out which entrepreneurs to bet on. Today, with experience the VC industry has gained over the years, deals today are being carefully evaluated for their exit potential.


Several venture capitalists also initially tried to fund the India start-ups in line with what was getting funded globally. Certain areas such as local social networking which were funded early on, did not work out since they were not able to generate local differentiation from a Facebook. The experience has been similar for certain niche online-to-offline models which are currently nascent for the size of the Indian market. We have now seen a strong change in orientation towards models which have local application.


Prior to 2015, VC stakeholders were content with the increasing valuations of the overall VC portfolio. With the slowdown, start-up performance is now being measured by margins and profitability. By the same logic, the metrics of measuring VC performance is also trending towards the more fundamental metric of "cash returned". Hence, the VC community made exits a top priority this year that has begun to show results.


It's also apparent that size does matter and hence, certain spaces in India such as the Internet are only now beginning to become meaningful in numerical terms when compared to US or China market. A simple example of the staggering "Singles' Day" sales of $13 Billion on Alibaba this year shows the scale of other markets. The lack of a significant size has a natural impact on exits via IPOs and M&As. However, in certain spaces we are seeing meaningful scale every year. Despite stumbling blocks, the ecosystem has continued to evolve. Hence, exit concerns are being significantly mitigated. It is only a matter of time that several VC funded companies will have "material cash exits". Given the current interest from large strategics like Amazon, Alibaba, etc., it is expected that we will see at least one large M&A exit in the next 12-18 months. Further, given the improving unit economics, I also expect a few global IPOs to be filed by Indian start-ups in the next 36 months.

(This article was first published in the December issue of Entrepreneur Magazine. To subscribe, click here)

Niren Shah

Managing Director, Norwest Venture Partners India.

Niren Shah, Managing Director, Norwest Venture Partners India.
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