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Venture Capitalist Acting As a Catalyst For Startup Ecosystem In India, VC investments grew to $3.6 billion in July-September from $1.5 billion in the June quarter

By Alok Patnia

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World's third-largest startup ecosystem, India has become a magnet for global venture capitalists (VCs). The country's startup ecosystem has been the centre of attraction for global as well as homegrown VCs.

In the pre-COVID 19 era, projections indicated that by 2025, India may have 100,000-plus startups, employ more than 3.25 million, and produce 100-plus unicorns, with a total market value north of $500 billion. In 2019, investments went at a very high stake. It was a milestone year for the Indian VC industry with $10 billion in capital deployed, the highest ever and about 55 per cent higher than 2018. India also witnessed a 30 per cent increase in deal volume over 2018 as well as larger average deal sizes across all stages.

Then came the Black Swan, COVID-19. The world is still reeling from the after effects of the pandemic. Startups are facing a situation that they have not seen in a long time. Sources of capital have desiccated, supply chains broken, liquidity crunch is widespread. While this might seem gloomy, this also presents an opportunity global VCs to make a difference.

The VC investments have started picking up. In India, VC investments grew to $3.6 billion in July-September from $1.5 billion in the June quarter, powered by mega deals that included the $1.3 billion raised by online retailer Flipkart. Large tech investors focused on India during this time.

Apart from providing startups with much-needed funding, they also provide them with guidance and mentorship at various stages of their growth journey to unlock their potential. VCs play a major role in influencing the strategic direction of the firms in which they invest.

Helping operations, business development and sustainability

Operations: A big part of early-stage startups have outstanding products but they do not have the right strategy/plan of action to execute the same. Many VCs, with their specialized team and experience help the startups to build and nurture their products.

Tracking of OKRs, mapping of KRAs, creating a roadmap, setting benchmarks are some of the areas where many VCs generally collaborate with startups.

This is also where special focus has to be given, especially in the new normal.

Relationships: Because of their ownership relationship, VCs have a strong incentive to share their knowledge with the new ventures in which they invest. VCs tend to play an active role in the new ventures that they invest in and have even been considered to be part of a venture's human resources (Florin, Lubatkin, & Schulze, 2003). This is largely because of the high level of risk associated with VC financing and that VCs want to not only protect their investment but do whatever it takes to ensure a high return.

Promotion: Having a good product/service is simply not enough. Distribution of that product/service is the key. VCs play a key role in collaborating with the founders and providing them with toolsets, connections and guidance to ensure that the spending in marketing and sales is effective. Apart from that, the promotion of the startup is one of the most crucial functions of a venture capital fund.

Sustainability: VCs, in addition to providing capital to the startup, often help founders in making sure that they have sound unit economics. While in the new economy, growth trumps profitability, it is still important to have a sound revenue model to sustain long term growth and stability to stakeholders.

Venture capitalists as drivers of economies

Venture capitals play a macro-economic role in driving the economy as a whole. They are the forerunners of innovation and profitability of new ventures. As a general rule, innovation is often more easily found in budding new ventures as compared to established organizations. Established organizations have a set of defined processes which are too shackled to support growth. While an economy needs large organizations to scale the innovation efforts, it needs new ventures to conceive one. The new ventures, at the same time, need funding and support during the initial phases. This is where a venture capital plays its role as a catalyst of economies.

Silicon Valley in the US and to some extent Shanghai in China show, how venture capitalists with their funding efforts and keen economic and financial expertise can indeed be an asset to the economies of the countries.

Generation of employment opportunities

By boosting innovation, promotion of entrepreneurship, venture capital institutions encourage self-employment opportunities and also inspire budding entrepreneurs to take risks and venture into untapped sectors.

Opportunity for homegrown VCs

In a circular dated April 17, 2020, the Indian government amended the extant FDI policy for curbing opportunistic takeovers or acquisitions of Indian companies due to the ongoing COVID-19 pandemic. The amendment stipulates that any country which shares a land border with India can invest only under the government route. India shares land borders with Afghanistan, Pakistan, China, Bhutan, Nepal, and Bangladesh. Earlier, only an entity established in Bangladesh and Pakistan needed to adopt government routes for consolidation deals in India.

With Chinese VCs technically blocked from the scene, this presents a unique opportunity for homegrown VCs to step up and keeps the Indian startup scene thriving.

Overall, venture capital fills the vacuum where traditional sources of funds actively cannot participate in funding ventures. VC funding comes with smart advice, hand-on management support and other skills that helped the startup vision to metamorphose in to marketable products. The Indian VC ecosystem has come a long way from its modest beginning. There is still a lot of room for improvement. There is a need for the startup ecosystem to develop, more government support and participation is required, tax and legal compliances need to be simplified to encourage for homegrown VCs to set up their India-centric fund.

Alok Patnia

Managing Partner, ProfitBoard Ventures

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