This year has been a watershed for India’s startup industry but a series of external factors have come to weigh in. In August, the US’s tech-heavy index Nasdaq went into a freefall sparked by China’s devaluation of its currency, and as the world’s second-largest economy struggled to arrest its slowing growth.India’s benchmark indices also plunged. In a dipstick survey of leading entrepreneurs and investors by ET, a majority of the participants said they expect startup valuations in India to begin correcting in six months, despite the rush of risk-capital into the country.But they also said the valuations are reasonable.
The incongruity begins to clear when startups founders and investors explain their positions. Consumer internet firms with high valuations are hitting hurdles as venture capital funds begin to assert themselves and asking the companies to fix the loose ends in their business models. But for the scores of new startups in exciting areas from ondemand delivery to cloud-based software product development, investors are happy to open their purses.
“We are doubling down, we are an early-stage investor and valuation is still not a criteria for investment in early stage, “said Subrata Mitra a partner at Accel Partners India best known for its early bet on Flipkart and software maker Freshdesk.
In short, early-stage startups still live in a world of abundant opportunities, but later-stage tech companies seeking Series-B and C or follow-on institutional rounds of funding are likely to face a marked slowdown in growth.
“The valuation sensitivity will go up and for some of the later-stage deals under consideration, this will be a dampener,“ said Vani Kola, managing director at Kalaari Capital.
Investors are questioning the business metrics of startups that have raised significant amounts of equity financing and forcing them to focus on fundamentals and profitable unit economics instead of discount-led growth, as has been the case till date. “Unit economic will become the focus going forward. Solid companies will come out stronger and frothy valuations companies will die,“ said Jitendra Gupta, cofounder and managing director of Citrus Pay Solutions.
Securing follow-on fi nancing will be tougher as inves tors turn selective about which companies to bet on. Experts say this is a fallout of back-to-back capital infusions, overheated valuations and a thrust on growth over profitability, which investors ar could come back to haunt them. fear could come back to haunt them.
“Even in the US, the best companies raise rounds which are one year apart where valuation jumps are really high.Entrepreneurs should instead of focusing on jumping rounds look to create genuine value,“ said Anand Lunia, founder of seed-stage VC firm India Quotient.
The pace of deal-making, however, is not expected to slow, with almost every investor polled by ET stating that deal flows will continue to rise in spite of market upheavals and the anticipated fallout on startup valuations.
A number of hedge funds including Tiger Global that have enthusiastically backed some of the biggest names to emerge in India’s startup ecosystem are believed to be reexamining their strategies.
In April, ET wrote that a combination of macro headwinds and an anticipated cyclical investment downturn could see hedge funds slow their investment pace.
In the past 18 months, hedge funds such as Tybourne Capital Management, Steadview Capital, Hillhouse Capital and Valiant Capital Partners pumped millions of dollars into some of India’s biggest consumer internet companies, including Snapdeal, Flipkart, Ola and Quikr, in the process driving up valuations.
“From 2006 to 2008, we saw prop books and hedge funds say that they will be in India for the long run, some even having teams on ground. But after 2008, we did not see most of them in the country,“ said Anand Prasanna, director of US-based investment firm Morgan Creek Capital.
The ET poll threw up some more interesting observations.
At a time when startup activity in India has seen investable opportunities pop up nearly every day, 70% of the investorspolled said they continue to invest at the same pace as before, while 10% said they are now more cautious.
“Investors are happy that there is some slowdown as they are now able to invest more rationally and not under pressure to pull the trigger,“ said an entrepreneur in talks to raise a $100-million funding round. “Those who have money in the bank will get more aggressive as they will be able to get better deals.“
But some investors looking to get more aggressive, even as venture capital firms have begun to watch how business models are being built more closely. India-focused VC funds are on the road to raise more than $3 billion this year, and several firms like SAIF Partners, Kalaari, Accel Partners and Lightspeed Venture Partners have raised new funds.
With inputs from Madhav Chanchani in Mumbai