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January 12, 2015

What the Flipkart & Snapdeal fairy tales of 2014 mean for Entrepreneurship in India

By Arun Natarajan

An abridged version of this article appeared in the Business Line dated Jan 13, 2015

Home grown E-Commerce leaders Flipkart and Snapdeal between them raised almost $3 billion from investors during 2014. Powered by the E-Commerce segment, Online Services companies accounted for as much as 37.6% of the total $10.9 billion invested by Private Equity (including Venture Capital) investors during the year, according to figures recently compiled by Venture Intelligence.

Startups are clearly back. And how. PE investments in India during 2014 were second only to their historic high of 2007. The year in which Flipkart was founded. At which time the PE investment action in the IT industry was focused almost exclusively on mature IT Services and BPO companies.

Unicorn Club Effect

What effect will the recent membership to the “Unicorn Club” – i.e., startups with valuations of $1 billion or more – of Flipkart, Snapdeal, etc. have on entrepreneurship in the country? Are we going to witness more stories of “two guys with a business plan walking into a VC firm’s office and leaving with a cheque for millions of dollars”?

Let’s first see what the data from Venture Intelligence for 2014 reveals about investments by PE/VC firms in Early Stage companies – i.e. companies that are less than five years old and are raising their first and second rounds of institutional capital. In other words, classic startup funding. (Note: the latest rounds of investments in Flipkart and Snapdeal were their seventh and eighth rounds of investments respectively. The investors in these rounds included hedge funds, mutual funds, sovereign wealth funds, MNCs and ultra HNIs from various parts of the world – including Russia, Qatar, Singapore and South Africa. While these companies are very much a product of Venture Capital funding in their earlier stages, the kind of monies they have been raising in the last couple of years is no longer in the VC realm.)

Venture Capital firms invested about $428 Million over 163 deals in the Early Stage segment in India during the twelve months ended December 2014. The investment activity was effectively flat compared to 2013 (which had witnessed 162 investments worth $378 million) and almost 22% lower than the peak year of 2012 (208 investment worth $540 million).

Investments by Industry

With 124 investments worth about $299 million, the Information Technology and IT-Enabled Services (IT & ITES) industry was the overwhelming favorite investment destination for early stage investors during 2014, accounting for 76% of the investments (70% in value terms). The volume of investments in IT & ITES were up by 7% over that in 2013, and increased by about 26% in value terms.

Healthcare & Life Sciences companies followed as a distant second attracting 11 investments worth $49 million during 2014. Not only that, the volume of HLS investments in the Early Stage segment was actually down by over 30% compared to 2013 (which had witnessed 16 investments worth about $80 million). Out of the about $9 million that Education companies managed to attract, $6 were grabbed by two online test preparation startups. Clean energy companies had to rely on interest from sector focused seed funds for the total of less than $2 million that was raised across four companies.

Within the IT slice of the pie, Online Services companies, which attracted 59 investments worth $118 million, accounted for 47% of the Early Stage investments during 2014. Enterprise Software companies retained the second spot (attracting 28 investments worth $75 million) and Mobile VAS companies were third (attracting 19 investments worth $39 million).

The Tiger Global led $15 million second round raised by women’s apparel & accessories e-tailer was the largest investment in the Online Services sector, followed by the $10 million second round investment raised by jewelry e-tailer BlueStone and the $8 million second round raised by fashion apparels e-tailer

Even among Enterprise Software companies, the top investment featured Tiger Global – which led a $10 million second round investment for Unicommerce, a provider of logisitcs management software to retailers. Unlike Online Services, where almost all the investments go into domestically focused companies, in Enterprise Software, Indian startups have to fight for the capital available with Indian VC firms with foreign companies! Nexus Ventures for instance made three investments in Silicon Valley based Enterprise Software companies in 2014 - ElasticBox, ArkinNet and BlueShift.

Among Mobile tech focused startups, consumer app makers like Tinyowl (a food ordering startup) and Vee (a mobile dating service) as well as enterprise targeting firms like Mobstac (focused on publishing) and SilverPush (focused on mobile ads retargeting) found favour during 2014.

In Healthcare & Life Sciences, specialized clinics were in focus with dental chain Denty’s, renal care chain DCDC Health Services and orthopedic surgeries focused Lokmanya Hospitals attracting investments. Eyecare diagnostics equipment maker Forus Health stood out as the sole medical devices startup to attract VC funding during 2014.

The Bottom Line

Clearly there is a giant sucking sound of dollars chasing what investors hope will be the next Flipkart or Snapdeal. The message – as indicated by how mainstream VC investors have voted with their wallets in 2014 - seems to be: if your startup is an Internet or Mobile play, we are all ears. (Many VC firms who had abandoned early stage investments a few years back - in favour of growth stage investments – are today competing with angel investors and seed funds to write sub $1 million cheques.)

For entrepreneurs from outside the Internet & Mobile sectors however, the chances of getting investor attention seems to be tough.

What if anything will cause a change during 2015?


Exits are the name of the game in Venture Capital. Even if they might not have actually sold their holdings, the mega valuations that Flipkart and Snapdeal have commanded in their later rounds of funding, have made the fortunes of their early stage investors (or at the least enabled the firms to close new funds).

If the exit momentum for Private Equity in general picks up – including through the mother of all exit routes, IPOs – then the likelihood of new funds being raised and in turn, the “trickle down” impact of more dollars becoming available for startups (of all kinds) will follow.

Regulatory “VUCA”

VCs have favoured non IT sectors in the past - like Microfinance and Education – only to be scared away by political and regulatory risk. Even for investors in Online Services companies, it’s hardly been all smooth sailing in 2014. Coming as it did soon after Japan’s SoftBank led a $210 million investment OlaCabs, the race to ban the operations of Online Taxi Booking startups post the Delhi-Uber episode, is still a live issue.

The perennial grey area in which E-Commerce companies are forced to operate vis-à-vis FDI rules and also taxation, continues to pose a threat to the sector. Unless the VUCA (Volatile, Uncertain, Complex and Ambiguous) risk in regulation subsides, VC dollars will flow to only where the current risk-reward equation appears the best.

US Bubbles & Local Ripples

There is a theory that the excitement for startups in India is highly correlated with the latest bubble manufactured in Silicon Valley and fed to the public markets in the US. And as and when those bubbles get pricked the corresponding “startup waves” in India collapse very fast.

Bubble set to burst or not, the Flipkart and Snapdeal have established that ambitious young, first generation entrepreneurs building ventures of their dreams – with dollops of venture capital to power them – are no longer stories that happen only in Silicon Valley.

And drawn by the phenomenon, in 2014, local Indian billionaires like Ratan Tata and Azim Premji have opened their cheque books to startups.

Flipkart and Snapdeal have between them acquired a dozen Indian startups.

The founders of these companies have become among the more active angel investors in the country.

The 2014 wave has left the startup soil in India much richer.

The Venture Intelligence APEX Private Equity & Venture Capital Summit - on March 12 at Mumbai - will explore the above themes and more with the help of stellar speakers. Click Here for the details.

The author is founder of Venture Intelligence, the leading provider of data and analysis on Private Company Financials, Transactions (private equity, venture capital and M&A) & their Valuations in India.