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VC Investments in India and the US are Different The investors were planning to invest in start-ups in dollars but now they are doing it in rupees.

By Kartik Hosanagar

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Post-demonetization, the ticket size of venture capital investment has shrinked, however, investors are still optimistic and are largely betting upon the fintech start-ups as the consumer base is shifting towards online payments.

VCs Shift to Rupees
With VC investors the cheque sizes have got smaller so they are bit more nervous. The investors were planning to invest in start-ups in dollars but now they are doing it in rupees. The start-ups which were raising $15 million are now raising the funds in India currency. Earlier, the start-ups used to plan in dollars and paid their employees in dollars. However, since their customers transact in rupees, the VCs and the management in the board all are shifting towards that. Investors decided not to spoil the entrepreneurs with $15 million to $20 million rounds at a young stage and they are all writing smaller cheque sizes. This is more of a cost control kind of mindset.

Post Demonetization-All's well?
I personally think, post-demonetization economic growth will slow down. But the question is, whether it will slow down for one or two quarters or for a longer term. These are the overall concerns as it will directly affect VCs ability to raise funds as they raise funds depending upon the growth of the sector. On the flipside, all our portfolio companies are looking for more and more people to come online.

Demonetization got more people on Paytm and on other digital wallets, which opened up the market for them. So from the perspective of the start-ups, it's great but the fund raisers are still skeptical as they are worried about the growth rate. I think fintech will certainly be an area of growth. I don't know if demonetization alone is the driver for the sector or whether UID or UPI is helping it grow, as well. And of course, the factor that it is hot in the US right now plays its own part.

Jugaad Mentality is Holding Them Back
The Indian start-ups are not yet there. Indian products lack Kartik Hosanagar, Professor at The Wharton School of the University of Pennsylvania behind US companies mainly because of the engineering teams which have the jugaad mentality when it comes to product building. Indian startups have the potential and they are getting at the international level slowly. It will then take at least five years to be there.

Indian Exit Model is Different

In terms of exits, eight-year deal is the worst case scenario. Sometimes VCs invest for three to seven or four to six years of period. With my fund, we almost double the amount of time available to the entrepreneurs otherwise he or she has crazy pressure to go for an IPO. And when you are forced to sell you don't get the best deal.

US VCs are still learning about how things work in India, even in terms of exits. In India, it takes way longer for a start-up to grow to the right size. They have learnt that they have to be more patient, but they can't be because when they raise money from their funds they have this same old 8-10 year lifecycle that the US funds have, so they are now looking to sell their investments to late stage investors. According to the US standard, a VC's exit is through an acquisition or an IPO. But things work differently in India.

Here IPO is Bigger Than Sell Out

When they go through series A, B, and C, often new investors come into play. But often new investors are not buying out from the existing investors and putting in new capital into the company. Companies grow faster in the US. If you are doing well, you can launch an IPO in seven-eight years despite thresholds. There the IPO is a bigger bragging point for an investor than selling to another secondary
transaction. The second point is when the company is on the acquisition, the strategic buyer pays the premium because there are strategic benefits. A private equity player is not going to get the benefit.

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

Kartik Hosanagar

Professor at The Wharton School of the University of Pennsylvania

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