Venture Capital in India – The Summit Push

As the season for year roundups begins, here are my thoughts, originally published in Economic Times…

It is now my eight year in succession of claiming a great year for venture capital. I have been in the business for all of eight years. But then, I am also an amateur marathoner and a climber. And in all of these three trades, it takes years of perseverance to scale the summit. As I look back on 2013, I am more convinced than ever of the decisiveness of this moment.

At the surface, 2013 was a slower year for venture capital investments than recent past. It seems that by the time the year closes, we might be 10% down relative to 2012. The sentiment also seems to have gone through a trough, even though there seems to be some revival in the last quarter. Why then the optimism?

The first reason is the emergence of key investment themes which could redefine the complexion of technology ventures in India. While ecommerce innovation continued to get funded in 2013, the second place has been taken by global product innovations coming out of the Indian market. This enhances the market that Indian startups will play in in the future, as well as the significance of those companies on the global stage. Next on the rung is mobile application startups – given the large base of mobile consumers in India, and the nature of India as a mobile-first market, innovation in mobile applications could also lead to global leaders in the space. This opportunity set is likely to get further strengthened as payment systems around the mobile mature – something that 2014 should bring in, both around electronic payments as well as micropayments. These emerging investment themes represent significant broadening of technology venture activity, beyond the classic services and internet spaces.

Equally important has been the strong performance of Indian startups on the exit front. 2013 marked a watershed moment as far as exits of technology venture backed companies is concerned. For example, just between four companies, namely Justdial, Redbus, GlobalLogic and Prizm, over $2B of market value was affected in 2013. These companies, amongst themselves, also represented strength of variety of exit mechanisms – from an IPO trading at 100% premium to issue price, to strategic exits, and a PE buyout. Such a stream of exits provides increasing validation to viability of venture capital in India.

Thirdly, 2013 reversed the policy tide to assist the flow of foreign direct investment in India. From relaxation of FDI limits to rationalization of GAAR, and from IPO facilitation to allowance of preferential clauses for investors, the silent wave of reforms in the latter half of 2013 has started to undo the damage that the regulatory arrogance of 2011/2012 had initiated. There is increasing expectation that this momentum will continue into 2014, without being held hostage to the results of the impending general elections.

Against this backdrop of 2013, it is an exciting 2014 that knocks on our doors. And like the final push to a summit, this stretch does not require us to do different things – it indeed requires us to persist with what we have done well in the past. It calls upon entrepreneurs to dream big and execute well. It calls upon investors to support entrepreneurs and keep focused on realizing returns as investments mature. And it calls upon the regulators to provide an enabling environment for businesses. From the momentum that we have seen towards close of 2013, it might very well be that 2014 is a better year in terms of fund deployment as well. However, the lasting contribution of 2014 could very well be in establishing strong proof points around India as an attractive venture market.

Wishing everyone in the startup ecosystem an exciting and rewarding 2014.