Trend Changes in Indian VC Investments

Contributed by: Meera Siva

It is a great time to be part of the start-up world now. Or is it really?

In his talk “Trend changes in Indian VC investments” Chandrasekar Kandasamy draws on his over 26 years of experience in the VC/PE industry to take a candid look at the landscape. Chandra is currently launching a new fund and was formerly the Investment Director with Peepul Capital. Chandra has sourced, led, and/or managed over 60 investments in his career. He was earlier the Managing Partner of ePlanet Capital, where he established and managed operations in India . Prior to that, he was with The Carlyle Group as a Director and was instrumental in setting up Carlyle’s India operations. Chandra also worked for Intel Capital and ICICI Ventures.  Chandra was a World Bank sponsored intern at Poly Ventures in New York , holds a Bachelor of Electrical Engineering from Anna University in Chennai, and an M.B.A from BIM.

The good, the bad and the ugly

The start-up investment ecosystem has many positive aspects. Many first generation entrepreneurs are not afraid of failures, thanks to better social perception. There is more capital available as many investors are willing to take risks rather than be content with investing in traditional assets such as real estate. Many of the ideas funded in India have been tried in international markets – so there is some learning. Getting management bandwidth is easier as many mid/senior level managers in established companies are willing to join start-ups and report to founders, who are quite young. Thanks to mobile and internet penetration, many businesses are more viable now.

That said, bulk of the funding is flowing to companies in the consumer internet space and there are many me-too versions in the system. This can lead to many failures but that is just par for the course in the start-up world, where success rate is always low.

There are a few country specific issues. Listing in the public market may not be an exit option in India compared to US or China since investors do not favour unprofitable companies. Lack of listing option and fall in valuations as some capital leaves in the next 18 months or so can lead to dip in investments. Returns in dollar terms for foreign investors have not been great in the last few years due to rupee depreciation, likely eroding their ongoing interest.

Challenges

Chandra feels that there are challenges to overcome currently. There are still limited serial entrepreneurs who understand the issues in scaling up a company. There is also lack of local funds such as pension funds or banks who willing to take this exposure. Corporate investors, barring a select few, have not had a great track record of returns globally.

Funds are trying to enhance value through strategic mergers. The case in point is Tiger Global owns both Quickr and its latest acquisition, property site Commonfloor. The former is growing well, compared to the later and the hope is that the combined company will be valued higher.

In general, valuations are high in the market and due diligence by investors is down. Investors are also handing over more capital than the founder can handle, with the hope of speeding-up growth. This may lead to unintended consequences as there are issues of corporate governance with many start-ups as they may not know how best to handle capital. New generation of venture capitalists and individual investors have not learnt many of the start-up investing lessons and are bound to repeat mistakes. This can create some heart-burns. Also, in the US , most of the value addition is created through management change. But in India , replacing the founding team is not easy.

What’s in store?

Still, India offers one of the best investment opportunities globally. Many of the other countries such as Philippines , Eastern Europe , Brazil , Indonesia , Srilanka etc have their own set of issues. It is therefore unlikely that established venture capital firms will leave India anytime. There are other positives as well – good talent, large consumption market and many solutions that can be applied globally. Any slumps, that are part of the investment cycles, may only be short-lived for 2-3 years.

That said, there may not be many job opportunities for finance professionals in the VC/PE world. Buy-out firms offer potential. Selling is the key skill in the VC world and those with operational experience in start-ups, rather than those with financial skills will likely be more sought after.

-MS