A survey of 75 highly influential founders and investors by ET as a part of its annual Startup Ecosystem Barometer found entrepreneurs more optimistic about their prospects.
More than half of the founders expect revenues or gross sales to double in the next 12 months, and about 90% of the investors surveyed said they will increase their investments over the next 12 months.
Much of the capital flowing in, however, is from Chinese investors. Also, the funds are mostly directed at select companies, with investors displaying a preference for deploying higher amounts of capital in winners than for backing multiple players in a category.
“The uptick (craziness, arguably) is largely restricted to the top 50 startups in the country. There is a sheer cliff after that where getting funded continues to be a tall order,” said an investor who participated in the survey.
Investors and entrepreneurs are also realising they need to try a new formula—back startups targeting the next 200-300 million internet users, where different monetisation models need to be built.
Also interestingly, a majority of the founders and investors surveyed said they expect companies founded by local entrepreneurs to triumph over foreign giants—a big shift from two years ago.
At the same time, a majority of the respondents said government initiatives such as Startup India have not been a significant catalyst for entrepreneurship, with 24% of the founders surveyed saying bureaucracy hurdles remain. Also, about 66% of the respondents said a level playing field does not exist in India for local and global companies—an issue first raised nearly two years ago by Ola’s Bhavish Aggarwal and Flipkart’s Sachin Bansal.
India’s startup ecosystem is at an interesting inflection point. While on the one hand the $16 billion acquisition of India’s most valued startup, Flipkart, by US retailer Walmart is being celebrated, in some corners a new question is rising.
Which companies will be India’s answer to BAT (China’s Baidu, Alibaba and Tencent) and FANG (US-based Facebook, Amazon, Netflix and Google) that rule their respective ecosystems? None of the most valued Indian internet companies is listed—all BAT and FANG companies are—and prospects of their listing are small.
The Indian government recently came up with a slew of measures under its draft ecommerce policy and the Srikrishna Committee report on privacy. The measures favour local companies in areas like data localisation and voting rights for founders.
An overwhelming majority of the investors and founders surveyed—66%—said a level playing field does not exist in India for domestic and foreign internet companies. But while only a small minority said foreign companies like Amazon and Uber should not be allowed in India, 56% said steps need to be taken to give both sides equal footing.
On the government’s various schemes for startups, about 60% of the respondents said Startup India and other policy initiatives have not had a significant impact on entrepreneurship.
Only 16% said the government’s policies had made a difference, with several of them saying the initiatives had helped improve sentiment about the startup community and encourage more people to try something new. Several founders said initiatives such as GST had helped them more than policies specifically targeted at startups.
The China angle
Chinese investors have emerged as a major driving force on India’s startup ecosystem. This began with Alibaba and its affiliate Ant Financial investing in Paytm in early 2015, and picked up in 2017 with Tencent acquiring stakes in Flipkart and Ola.
Chinese venture capital firms like Shunwei Capital and other Chinese companies are also making their presence felt here in areas like financial technology and social videos.
This rising influence of China is being perceived as both an opportunity and a threat. It is not clear what the end game is for big Chinese companies taking minority stakes in Indian companies.
At the same time, this presents Indian entrepreneurs an opportunity to learn from China on how to build for scale. Some respondents, however, worry that Chinese investors will abandon Indian companies after a while just as US-based hedge funds did in 2014 and 2015.
“There is more in common between China and India. However, a typical Indian company’s velocity to scale is likely (still) to disappoint the more aggressive Chinese investors,” said an investor.
Mega valuations, multiple rounds of funding, and an influx of new investors are all back in the Indian startup ecosystem. Founders and investors are seeing this change and Walmart’s mega acquisition of Flipkart has only given a fillip to this trend.
While 23% of the investors surveyed said valuations have gone up significantly, 46% said valuations have increased only marginally. A more significant increase in valuations is seen in series B rounds and beyond, where startups are looking to raise over $10-15 million.
More importantly, 62% of the founders surveyed said funding prospects have improved significantly, and 9% even believe India’s startup ecosystem is in peak territory, like in 2014-2015. But there seems to be an element of sobriety to this funding boom, unlike in 2014 and 2015. Respondents don’t expect the number of new startups to shoot up like it happened previously.
“We won’t see another bubble in early stage soon,” said an investor. Also, the ecosystem is seeing the emergence of much more experienced entrepreneurs that before.
In ET’s Startup Ecosystem Barometer in 2016, 35% of the investors surveyed said they mostly gave term-sheets to founders in the age bracket of 25-30 years. In this survey, only 23% said they most commonly offered term-sheets to founders in that age bracket.
Term-sheets to founders in the age bracket of 30-40 years have increased from 58% in 2016 to 73%, indicating that VCs are betting on entrepreneurs who have at least 5 years of experience.
In terms of the origin of investors, even as the influx of yuan from China increases, for founders American dollars are still the preferred source of funding, followed by capital from Indian VCs.
After two years of relative sobriety, there is a sense of animal spirits coming back into the Indian startup ecosystem. Since 2016, startups have been spending cautiously as capital was not flowing freely and profitability/break even became the priority over growth.
Over 55% of the startups surveyed expect their revenues or gross sales to double in the next 12 months. Growth is becoming a higher priority over profitability again. But at the same time, startups are not completely ready to go for growth at all costs, as improving unit economics remains a priority.
While 56% of those polled said that they would expand their employee base by over 25%, surprisingly 29% are still filling in just key positions.
Another surprising finding was that 70% of the startups said they have either broken even or become contribution margin positive, which is primarily making money on each transaction. This could be due to the sample set of companies valued at over $100 million that ET polled.
“Unit economics have improved in spite of high growth. Higher sales, improved gross margins, and cost efficiencies in last mile delivery and supply chain have resulted in this improvement,” said one founder.
The debate around which company will win Indian internet’s biggest segments remains open. While Flipkart says it is ahead of Amazon India in terms of gross sales, the Seattle-based online retail giant contests this. So is the case between Ola and Uber.
Digital payments is a new battleground, pitting Paytm, WhatsApp and Flipkart-owned PhonePe against each other.
When ET did this survey two years ago, respondents expected Amazon India and Uber to emerge as the market leaders in their respective categories. Flipkart and Ola have proven that wrong. This time, 57% of the respondents said Ola, Paytm and Flipkart would emerge as the winners.
Some respondents said while market share dynamics would keep going up and down what matters is which company is able to build businesses and return capital.
“Flipkart has already delivered a multi-bagger exit, as will Ola and Paytm,” said a founder.
India’s Unicorn Club is poised to double to about 20 members this year. The new Unicorns are from sectors such as software, logistics, hospitality and financial technology, diversifying the pool from primarily online retail and advertisement-based models.
Companies that have entered this club in 2018 include food-delivery application Swiggy, online financial services provider Policybazaar, online education services company Byju’s, and online-to-offline retailer Paytm Mall.
But even as this club expands, there are questions on whether the older members will remain in it and how many will be able to build lasting enterprises by going for an IPO.
“Honestly, there are more strugglers than shooting stars in the here-and-now list. That said, some of the new ones are, in my honest opinion, better positioned,” said an investor.
ET designed two different questionnaires for the survey—one targeting entrepreneurs and the other, investors.
Respondents were given multiple-choice answers to pick from but also had the option to elaborate on their choice. Some questions were common to both—like on level playing field and the influence of Chinese investors on the Indian startup ecosystem.
The survey was distributed to about 120 founders and investors. They were chosen carefully—founders of companies worth at least $100 million, serial entrepreneurs, and managing directors of venture capital firms. They were allowed to respond anonymously. Of the 120 people ET reached out to for the survey, 49 founders and 26 investors participated.
The survey was led by ET’s Madhav Chanchani. Inputs From – Biswarup Gooptu, Mugdha Variyar, J Vignesh, Supraja Srinivasan, Varsha Bansal & Pratik Bhakta. Illustrations: Anirban Bora & Graphics: Yogeesh Mh.