Adversity brings out the best or the worst in people. The downturn in India’s start-up funding market over the past 12 months brought out the worst in the founders of some of the country’s most valuable start-ups.
Strapped for capital and under assault from foreign competitors with deep pockets, such founders came down to playing the nationalist card and seeking the government’s help in keeping non-Indian players out of the market.
For India’s venture capital industry, on the other hand, the downturn has been a time to introspect, salvage, consolidate and rebuild.
We look at some of the highs and lows that marked the country’s venture capital market in the past 12 months.
1. The year started in the shadow of the first serious downturn that this market has seen in the decade since venture capital re-established its roots here as an asset class. Hedge funds, which fanned a valuation bubble in the start-up funding market for nearly two years, had fled late last year, leaving behind a yawning gap in the late-stage funding market. Hedge funds may have deserted the start-up market but global limited partners, institutional investors who back venture capital funds, stayed committed, in fact, upped their commitments. Two of the country’s biggest ever venture capital funds were raised in the last 12 months. In February, Sequoia Capital India, the country’s largest venture capital firm, raised a massive $920 million fund, dwarfing even some of the big private equity funds raised here lately. Last month, Accel Partners India closed commitments for a $450 million fund, only the second fund of that size since the one raised by Nexus Venture Partners in December last year. Limited partner commitments have also flowed into smaller funds. In May, Bengaluru-based Saama Capital raised a $31 million third fund. In October, Mumbai-based Blume Ventures closed $60 million in commitments for its second fund. By London-based researcher Preqin’s estimates, as of September, India’s venture capital industry was sitting on dry powder, or uninvested capital, worth more than $3 billion.
2. Limited partners, however, remain concerned about poor returns on their past investments. In a bid to alleviate those concerns, fund managers at venture capital firms went into overdrive to shore up exits. The numbers for the closing quarter of 2016 are yet to come in. However, in the nine months of the year ended September, venture capital firms closed 54 exit deals worth $1.41 billion, exceeding the 43 exit deals worth 1.39 billion closed in all of 2015, according to data compiled by Chennai-based researcher Venture Intelligence.
The exit run isn’t yet as robust as both limited partners and fund managers would like, but a handful of deals set this year apart. In July, online travel services company Yatra delivered a partial exit to its investors, Norwest Venture Partners, TV18 Group and Valiant Capital, when it struck a reverse merger with Nasdaq-listed special purpose acquisition company Terrapin 3 Acquisition Corp. The deal involved an $80 million cash payout to Yatra’s investors. Yatra debuted on Nasdaq this week following the completion of the merger. Another significant deal was the August acquisition of payments company Citrus Payments Solutions by South African internet conglomerate Naspers in a $130 million all-cash deal, a rare event in India’s venture capital market. The deal was a big payday for Sequoia Capital India, which had invested about $10 million over three funding rounds for a reported 32% stake. The offline retail sector served up a surprise big exit—in August, private equity firm TA Associates bought an undisclosed stake in womenswear maker TCNS Clothing Co. for $140 million. Most of that went into buying Matrix Partners’ undisclosed stake in the company, earning the venture capital firm a 5x return on its original investment.
3. Not all exits were happy events. As venture capital firms got to work consolidating their past investments, fire sales, write-offs and stock-swap deals were equally visible through the year. Things kicked off early with the much speculated January acquisition of property search and listings platform Commonfloor by online classifieds platform Quikr in a reported all-stock deal. The deal gave Commonfloor’s backers, Tiger Global Management, Accel Partners India and Google Capital, who collectively invested more than $60 million in the company, stakes in Quikr. In May, another troubled start-up, TinyOwl, was ushered into a stock-swap merger by its investors. The online food ordering service merged with hyperlocal delivery service Roadrunnr. The combined entity now operates as Runnr, with Sequoia Capital, Nexus Venture Partners, Matrix Partners and Blume Ventures as investors. The four venture capital firms had collectively pumped close to $40 million into the two companies prior to the merger.
Rocket Internet, the Berlin-based start-up incubator and investor was involved in two deals that are widely believed to be distress sales. In April, it sold its online furniture store FabFurnish to Kishore Biyani’s Future Group for an undisclosed sum and in July, online fashion store Jabong was picked up by e-commerce company Flipkart for just $70 million, a massive erosion from the $503 million Jabong was valued at in 2013. The other notable distress sale this year was Titan’s acquisition of a majority stake in jewellery e-tailer Caratlane for $53 million in May. The deal just about enabled Caratlane’s backer Tiger Global to cover its reported investment of $52 million.
By most accounts, the consolidation and cleaning out of portfolios is still well underway and will continue well into the next year. The portfolio to watch, though, will be New York-based hedge fund Tiger Global’s 60-odd start-up investments here, including e-commerce bellwether Flipkart.
4. The sticky issue of leadership transition in the venture capital industry found itself in the spotlight this year in the aftermath of a bitter spat in December last year within the investment team at Helion Venture Partners. Helion is one of India’s oldest home-grown venture capital firms and it came apart at the seams when its second line of partners, Alok Goyal, Rahul Chowdhri and Ritesh Banglani, quit the firm in a huff. The younger partners wanted more of a say in how the firm was run and a greater share of profits. The founding partners, Sanjeev Aggarwal, Rahul Chandra and Ashish Gupta, didn’t share that view. The standoff exposed the fragile power equations that exist in what is still a fairly nascent industry. The incident served as a wake-up call to several other venture capital firms that have been around as long as Helion and will hopefully deter such ugly and public quarrels in future.
5. Sometimes, even the ugliest fights have good outcomes. Helion’s Goyal, Chowdhri and Banglani have since started up on their own with Stellaris Venture Partners and are in the middle of raising their debut fund. Earlier this year, SAIF Partners principals Mukul Singhal and Rohit Jain broke away from the firm, amicably, to start their own seed investments-focused venture capital firm Pravega Ventures. Earlier, former Ventureast partners Sateesh Andra and Ramesh Byrapaneni struck out on their own to launch Endiya Partners, focused on seed and Series A investments, and raised initial commitments for their debut fund in January. When seasoned fund managers strike out on their own, especially in the midst of a downturn, it is the surest sign of a venture capital market that is maturing.