We get into 2014 coming off a year that has been eventful to say the least for the venture capital market in India. In 2013, investors hunted for bargains, squeezed out exits and right-sized portfolios, even as the overall environment for dealmaking slowed down on account of internal and external factors. New funds raised for the India market have been few and far in between. Global investors are less willing to pump money into the Indian startup market today than they were say three years ago. Still, as it enters it ninth year of sustained early stage investing, the Indian venture capital industry has matured and stabilized at a scale not seen here earlier.
We recap the top five developments that defined the venture capital industry in the last 12 months.
1. Shutdowns and write-offs
Nobody likes startup shutdowns but they happen and are a necessary part of the venture capital process. We don’t have the complete list from 2013, but here’s a selection of the ones that went down:
- Canaan Partners writes off Cellcast investment
- Info Edge to write off investment in 99Labels
- iStream scaling down due to fundraising challenges
- Investopresto fails to raise follow-on funds; shuts shop
- Jewellery etailer 21Diamonds shuttering India arm
- Times Internet shuts down Hutk
- Blume-backed mutual funds comparison site Moneysights shuts shop
- Social app platform Adpeto ceases operations
- Info Edge writes off Floost
- Is Dhingana shutting down? CEO says they’re restructuring
2. Some tough love for angel investors from Raisina Hill
Union Budget 2012, as you may recall, practically crippled the angel investment ecosystem in the country with the imposition of the so-called ‘Startup Tax’. The government subsequently moved to make amends and Union Budget 2013 directed capital markets regulator SEBI to prescribe investment norms for angel investor pools and bring them under the ambit of Category I AIF venture capital funds. This implied that angel pools would be able to avail of the pass through status currently available to such funds. SEBI notified the norms in late June. The norms are a step forward but there’s a lot of room for improvement. Importantly, they don’t address investments made by individual angels — those who are not part of any organized angel pool — who still constitute the majority of angel investment activity in the country.
However, the silver lining is that with Budget 2013, startups and angel investors found a prominent place in the government’s lexicon and that’s a big step forward for the startup economy. Angel investors have also realized that they need to have stronger lobbying for their unique needs and have taken a step in that direction with the formation of the Angel Association of India.
We’re hoping Budget 2014 will hold more cheer for entrepreneurs and their benefactors.
Justdial made enough noise on its own in 2013 to merit a place on this list. After a couple of missteps, the local search and listings firms Justdial finally pushed through its initial public offering (IPO) early last year. At a mop-up of Rs 950 crore (more than $170 million) it turned out to be the year’s biggest IPO on the Indian bourses. The offering was oversubscribed 11.63 times by institutional and retail investors. It also fetched profitable returns for the company’s venture capital investors Sequoia Capital, SAIF Partners, Tiger Global and SAP Ventures who sold part of their stakes in the company.
The IPO though is only the beginning of an ambitious plan mounted by founder VSS Mani to usher his 18-year old company into the ecommerce space. The company is in the initial stages of pivoting the Justdial platform from search services to a marketplace for small businesses. If he succeeds, Justdial could well emerge as the Indian ecommerce sector’s dark horse and leave established rivals such as Flipkart and Myntra far behind.
4. Ecommerce finds a new groove with the marketplace model
Continuing with ecommerce, despite all the talk about a bubble and inflated valuations, ecommerce companies continued to draw top dollar from venture capital investors, signaling that the industry is here to stay. But that wasn’t the big story for ecommerce in 2013. With Bangalore-headquartered Flipkart leading the way, ecommerce companies scrambled to pivot to the marketplace model from the earlier inventory-led model. This was triggered partly by the launch of Amazon’s marketplace in India and partly by regulatory restrictions that bar the ecommerce sector from raising FDI (foreign direct investment) — most venture capital investments would be categorized as FDI. The marketplace model also enables ecommerce companies to cut down operational costs drastically since they would no longer have to carry inventory on their books.
The other significant, and unfortunate, development that saw ecommerce grab the headlines was ShopClues founder Sandeep Aggarwal’s by the FBI on insider trading charges in the US. Aggarwal was subsequently released on a bond.
5. Exits are still tough but getting there
Finally, the most significant development from 2013 was a flurry of exits that saw investors cash in on investments across sectors. India remains a market challenged for exits. Return multiples still average at 5X (five times the original investment). While most exits during the year were average, two stood out — redBus and Justdial.
Here’s a selective list of the exits that made news in 2013:
- Moody’s acquires research and analytics firm Amba; Helion scores third exit
- One97 acquires messaging app Plustxt; angel investors exit
- Yahoo buys to-do app Astrid; Nexus scores eighth exit
- Lok Capital exits MFI Satin CreditCare
- Naspers-backed Ibibo Group acquires redBus
- Justdial debuts on bourses at Rs 590 per share