Global Venture Capitalists- A Boon for Indian Startups

With the huge untapped potential of Indian market and the market of developed nations coming to saturation, venture capital funds from developed countries have now started funding startups of developing countries due to the immense growth potential of the developing economies. India stands at 4th position in the world only behind United States, United Kingdom and Israel in terms of number of startups that start every year, according to NASSCOM report of 2015. Since 2014, India is witnessing more than 70 active venture capital funds or private equity firms, mostly from outside the country and almost more than 500 angel investors looking forward to try their luck in Indian startups, since the Indian e-commerce industry is estimated to be a $50 billion industry by 2020.

Among the huge list of venture capital funds, the most active VC firms in India include Tiger Global, a venture capital fund based in New York has already invested in 15 Indian tech start-ups including giants like Flipkart, Policybazaar, Shopclues, Quikr, Delhivery, Limeroad etc. Tiger Global has invested whopping $1 billion in the year 2015 only while Sequoia Capital another VC from USA has invested around $208 million in various Indian startups. Tiger Global Management is the VC that backed Dropbox, Whatsapp, and Airbnb etc. Other major VCs/PE firm betting large in India include Japan’s Softbank, Hong Kong based Steadview Capital, Accel partner of US, Nexus Ventures, Kalaari Capital etc.

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With the growth of Indian tech startups pioneered by Flipkart in the year 2007, venture capital funds have proved to be a real boon for many other Indian startups. Following success story of Flipkart, the world witnessed a series of Indian startups taking customers for a ride. These include Olacabs an app based taxi booking service started in the year 2010 similar to that of its international counterpart Uber, which was again a startup of San Francisco started in the year 2009, Redbus an online ticketing website for booking bus tickets, Snapdeal for selling products online etc. Encouraged by the success of few, startups started concentrating on how to make lives of people easier and hence began coming up with convenience services and various kinds of different platforms. As a result of this various quick service delivery startups began such as Eatlo, an online startup of Bangalore that delivers food on demand, TinyOwl and Zomato were started to help customers receive know how of various available restaurants in their cities and localities. Now, Indian startup companies are also focusing on development of mobile gateways for payment. Startup companies such as Paytm, Inmobi, Free charge etc. started working in this direction. Educational tech startups are a new hot bee among investors. Since, it is anticipated that in the coming years entire educational system will be digitized, online tutoring websites and apps have got a boost from investors. Cloud based services or platforms are also becoming increasingly popular among Indian startups.

Venture capital firms are the firms that provide early stage financing to the startups that have huge growth potential in their business model which are at a very nascent stage. They basically invest in projects that are untried so far. However, the risks associated with these types of investments are huge but then the returns are also very high if the startup is a hit. Venture Capital firms try to cover the loss that they make in unsuccessful ventures through the profits generated by a hit startup. These kinds of firms not only help the first generation entrepreneurs through their money, but also help them through their knowledge, expertise and contact base. These firms help the entrepreneurs to gain their first few customers with the help of their contact base. Venture capital firms earn money from the startup they are investing in by owing or raising the equity in that startup. Generally, the Venture Capital firm that gives first round of financing to startups demands a huge chunk of equity share in that particular startup, so that they can reap most benefits when the startup is in growth stage, or becomes large. Venture Capital firms not only invest in green field investments but they also tend to invest in turnaround ventures as well.

The term venture capital is so inclusive now that it includes whole range of financing from seed capital to buyouts. Seed financing refers to the capital provided to facilitate the commercialization of the new product from the laboratories or the R&D centers of the entrepreneurs to the market. Start up financing is done to establish a legal company structure around a marketable product. Mezzanine financing is the last stage of financing before an IPO. Follow-on financing is also done at a later stage when the company needs more funds to grow or to expand further. Such kind of financing is done by, Ola, Flipkart, Snapdeal etc. either from their existing investors or from the new venture capital firms or private equity firms for the purpose of expansion. However, proper due diligence needs to be done before doing any kind of financing.

Due to the huge growth of these Indian tech startups, backed by venture capital funds from outside the country, large business houses of India as well as Indian government have also started supporting these startups. Tata group, one of the oldest business houses of India, has already invested in multiple startups since last year. It includes Snapdeal and Urbanladder as well. In the regular budget this year, government also allocated Rs. 10,000 crore funds for the startup ventures.

Venture capital funds prove as a boon for Indian startup companies, since they provide the funds, knowledge as well as expertise. Venture capital sector is one of the most vibrant sectors in the Indian financial services today. This sector has started to gain huge popularity in the recent past. According to Thomson Reuters, not only in India but in various other countries of the world as well, it has been noticed that the returns from the venture funds have beaten the returns arising from NASDAQ as well as the returns from Standard and Poor consistently from all time horizons. Hence, this type of investing provides a win-win situation for both the provider of funds i.e. venture capital firms as well as the receiver of funds i.e. the startups or the companies. They bridge the gap between the demand and supply of funds.

Venture capital firms are different from that of angel investors. But the functions of the angel investors are similar to that of any venture capital firm. The only difference is that angel investors invest their own money into the startups while venture capitalists put in institutional money or the money received from a pool of various different kinds of investors such as pension funds, insurance funds, high net worth individuals etc.

Apart from all the shiny tech startups of India that makes apps or provide online platforms to provide various services directly to the customers, these venture capital firms in India are also known for backing enterprise startups. Enterprise startups are those startups which are not useful directly to the end user but are responsible for developing services that make various other processes or things simple for other businesses. They are basically of two types: Application and platform or tools. Application startups are basically useful for businesses so that they can simplify their various underlying processes. Examples of these kinds of startups include Capillary, Peel Works, MindTickle, Zoho etc. Startups also develop various platforms for various markets such as IT department, developers, media etc. Examples include Knowlarity, Exotel etc.

Hence, these venture capital funds give young and budding talent in India and various other countries a chance to prove them and develop something that may remain fruitful for the generations to come.

This article has been authored by Saloni Malviya







•Financial Services by R.Shanmugham

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