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2017 needs return of top tech investors

MUMBAI: Indian startups, which did not break a sweat to raise capital in 2014-15, saw the balance of power shift to investors in the past year. Most significantly, the fat cat, large cheque writers and a string of hedge funds, which aided the headiness in the market, cooled off completely resulting in a prolonged uncertainty in the ecosystem.

Tiger Global, the biggest shareholder in Flipkart, took a wager on 17 new companies in 2015, creating a never-seenbefore euphoria among local startups and fuelling valuations even for young companies. The New York-based investment fund pulled back to the extent of not making any investments last year.Ditto for Japan’s SoftBank and Yuri Milner’s DST Global, both of which made zero fresh investments in 2016.

Data gleaned from venture capital funds indicated the average round size for companies that raised more than $35 million stood at a little under $89 million last year against nearly $124 million a year ago. As many as 25 startups were able to rack up more than $35 million against 40 in 2015, even as average deal sizes across early stages remained largely unaffected.

While Chinese investors like Tencent and strategics such as South Afri ca’s Naspers stepped in to fill the void through a mix of late-stage financing and mergers and acquisitions (M&As), the repercussions of a prolonged dearth of heavyweight investors backing companies to scale up to the next stage will start to become more acute in this year.

Consumer Tech Cos Need Capital To Scale Up

An investor in a global tech fund, which has a substantial exposure to India, said capital is critical for consumer internet businesses to build infrastructure and to bring users online through discounting in markets like India.

“It was a similar situation in China between 2007 and 2013 when they needed billions of dollars to build the market. Global sentiments will also need to pick up and that may happen with a successful Snapchat IPO.We would need a trigger,” he said. Investor pullback was evi dent throughout 2016 in the US as well, where cros sover funds that had fuelled the late-stage boom slowed down considerably even as they readjusted their portfolios by marking down valuations of their companies.

“This ecosystem behaves like a food chain and when any part of it gets disrupted, it obviously has upstream or downstream effects. In 2016, it required VCs to reserve a lot more capital for their portfolio companies and therefore less capital was available for new investments. Even as one wants to think independently as a VC, and back one’s conviction as a founder -reality is that the food chain till IPO exists for a reason,” said Avnish Bajaj, MD at early-stage fund Matrix Partners India, which has backed Ola, Practo and Quikr, among others.

While these investors turned cautious, Amazon and Uber, which are fighting a bit ter battle with Indian rivals Flipkart and Ola respectively, strengthened their commitment locally . Their massive war chests has kept away many investors who do not see an upside coming in now and taking a bet on these home-grown companies.

Unicorns May Raise Funds, Valuations To Soften

Globally, too, mega rounds of $100 million and above, which helped create hundreds of socalled unicorns (or private tech startups valued at $1 billion and more), declined and valuations sobered. For sentiments to turn, this year at least one local startup will have to raise a large round amounting to $400-500 million or an investor needs to exit at a $1-billion valuation through sale or an IPO. “Lesser growth capital makes earlystage ecosystem more cautious and less likely to invest for the long term. Investors were cautious last year but expect 2017 to be different as more founders prove their business models,” said Abhay Pandey , MD at Sequoia Capital India.

MUMBAI: Indian startups, which did not break a sweat to raise capital in 2014-15, saw the balance of power shift to investors in the past year. Most significantly, the fat cat, large cheque writers and a string of hedge funds, which aided the headiness in the market, cooled off completely resulting in a prolonged uncertainty in the ecosystem.

Tiger Global, the biggest shareholder in Flipkart, took a wager on 17 new companies in 2015, creating a never-seenbefore euphoria among local startups and fuelling valuations even for young companies. The New York-based investment fund pulled back to the extent of not making any investments last year.Ditto for Japan’s SoftBank and Yuri Milner’s DST Global, both of which made zero fresh investments in 2016.
Data gleaned from venture capital funds indicated the average round size for companies that raised more than $35 million stood at a little under $89 million last year against nearly $124 million a year ago. As many as 25 startups were able to rack up more than $35 million against 40 in 2015, even as average deal sizes across early stages remained largely unaffected.

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While Chinese investors like Tencent and strategics such as South Afri ca’s Naspers stepped in to fill the void through a mix of late-stage financing and mergers and acquisitions (M&As), the repercussions of a prolonged dearth of heavyweight investors backing companies to scale up to the next stage will start to become more acute in this year.

Consumer Tech Cos Need Capital To Scale Up

An investor in a global tech fund, which has a substantial exposure to India, said capital is critical for consumer internet businesses to build infrastructure and to bring users online through discounting in markets like India.

“It was a similar situation in China between 2007 and 2013 when they needed billions of dollars to build the market. Global sentiments will also need to pick up and that may happen with a successful Snapchat IPO.We would need a trigger,” he said. Investor pullback was evi dent throughout 2016 in the US as well, where cros sover funds that had fuelled the late-stage boom slowed down considerably even as they readjusted their portfolios by marking down valuations of their companies.

“This ecosystem behaves like a food chain and when any part of it gets disrupted, it obviously has upstream or downstream effects. In 2016, it required VCs to reserve a lot more capital for their portfolio companies and therefore less capital was available for new investments. Even as one wants to think independently as a VC, and back one’s conviction as a founder -reality is that the food chain till IPO exists for a reason,” said Avnish Bajaj, MD at early-stage fund Matrix Partners India, which has backed Ola, Practo and Quikr, among others.

While these investors turned cautious, Amazon and Uber, which are fighting a bit ter battle with Indian rivals Flipkart and Ola respectively, strengthened their commitment locally . Their massive war chests has kept away many investors who do not see an upside coming in now and taking a bet on these home-grown companies.

Unicorns May Raise Funds, Valuations To Soften

Globally, too, mega rounds of $100 million and above, which helped create hundreds of socalled unicorns (or private tech startups valued at $1 billion and more), declined and valuations sobered. For sentiments to turn, this year at least one local startup will have to raise a large round amounting to $400-500 million or an investor needs to exit at a $1-billion valuation through sale or an IPO. “Lesser growth capital makes earlystage ecosystem more cautious and less likely to invest for the long term. Investors were cautious last year but expect 2017 to be different as more founders prove their business models,” said Abhay Pandey , MD at Sequoia Capital India.

Lack of capital doesn’t mean startups stop growing, it’s just that the pace of growth reduces significantly . A bunch of Indian unicorns like Flipkart, Ola, Zomato and Snapdeal are likely to raise fresh capital this year. With Ola taking a 30-40% cut in its valuation at $3 billion, there is a strong chance of others following suit, a latestage investor said, who did not want to be named. Shareholders and founders are far more realistic now, which will mean companies that looked expensive may start to make sense now .

“We should expect more consolidation but overall the big cheques will still come from the same funds albeit in smaller numbers, which means they will continue to be cautious. We saw 2016 was a year of adjustment to pullback -this year will be one of working with the new reality,” said Albinder Dhindsa, co-founder & CEO, Grofers.The express delivery startup, which emerged as one of the most well-funded companies in 2015, had a muted last year as its business model changed and the company pruned costs to save capital just like many of its peers.

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