Keep the faith in Indian start-ups, don't blow the whistle
The question is whether there is really a valuation bubble that might burst like the technology meltdown at the beginning of this century. It may be safe to say that there may be some reality check, but nothing like the horrors of 2001-02.analysis Updated: Mar 14, 2017 18:19 IST
"We don't sell anything," said the young man, wearing a just-out-of-bed look in ill-fitted jeans and casual shirt. That was understandable. He runs an online social platform, which brings together people to have discussions and express their creativity, not to do transactions. But what he said next sounded a bit odd. "We are not really looking to make money at this point. We can easily put off monetisation by a year or so."
This young man's company had, a few months before we met, raised $5 million from investors. Three days later, it raised another $15 million.
How should this be looked at? Mindless splurge by investors or a calculated bet on the future?
This young man is not the only one raising money without a certainty of returns, certainly not as far as the accountant's eye can see. In the first half of this year, there were at least 380 deals that infused $3.5 billion into India's start-ups. That is more than the amount in all of 2014. The Times of India reported, quoting data from the Hong Kong Stock Exchange, that Snapdeal's valuation had risen from $2 billion to $4.7 billion even as its losses shot up five times.
Naturally, some voices have begun to sound the warning note. A weighty one is Nikesh Arora's. The SoftBank president told The Economic Times that valuations had raced "far ahead" of where they should be.
The question is whether there is really a valuation bubble that might burst like the technology meltdown at the beginning of this century. It may be safe to say that there may be some reality check, but nothing like the horrors of 2001-02.
The world--and India--is in a very different place now. Most of those raising money are internet or technology start-ups. Thanks to mobile, internet usage has come of age in India with more than 300 million users. Of those, close to 10% could be doing transactions online. In 2001-03, internet penetration in India was pathetic, and it declined further once the plethora of companies offering free internet fell by the wayside.
These numbers are not the only thing driving investors. There is something called The Fear of Missing Out, or FOMO. That it has become an acronym should tell you something about its acceptance. Many of those investing in India are global investors who missed out on opportunities in China, such as Alibaba and Tencent. They wouldn't want to miss the bus in India. So they are not only casting their net in India but also casting it wide. So wide they might catch similar fish.
Sequoia has invested in both Grofers and PepperTap, which compete in online grocery shopping; in both Zomato and TinyOwl, which compete in food delivery; and in Practo as well as 1 MG Technologies, which are both into healthcare.
Tiger Global was a large investor in both Flipkart, the online market place, and Myntra, which was focused on fashion. Flipkart acquired Myntra. Tiger went ahead and invested in ShopClues, another online market place, though with a different clientele. Nexus, another investor in ShopClues, is also invested in Snapdeal, which, too, is an online market place.
Some 400 e-commerce companies are said to have raised funding. There are only a handful of investors. There will be some cross-cross.
There is no sin in that. Once investors conclude that a certain area is the one for the future, they would like to hedge their bets by investing in more than one. The important thing is to create the proverbial Chinese Wall between them, have no common board members, and let them run as completely different businesses.
Until of course promoters and investors decide that two or more start-ups are better off coming together, regardless of whether they have a common investor. Ola acquiring TaxiForSure was one such, Snapdeal acquiring FreeCharge another. Some companies will just shrink or disappear. Yebhi.com was a bright start four years ago. It is now a shadow of that star.
Such things happen in any new industry. Most recently, it happened in telecom.
The good thing is that investors retain their faith in India's start-ups. Nikesh Arora has written some of the biggest cheques in recent times, worth about a billion dollars. And SoftBank has said it will invest $10 billion over the next few years in India.