There’s something very interesting brewing in India’s startup ecosystem. In the first six months of this year, venture capital funds poured a billion dollars more into local startups compared to investments made in the entirety of last year.
A Venture Intelligence report said in the first half of this year, Indian startups raised a whopping USD 12.1 billion across 382 deals—exactly half the number of deals VCs participated in to invest USD 11.1 billion in 2020. These numbers suggest that the check sizes are going up.
Going against the norm, VCs have begun writing hefty checks for early-stage companies. Until last year, a seed round used to range between USD 500,000 and USD 1 million. Currently, it can easily reach USD 4 to 6 million, and in some cases even more. Series A rounds have doubled from USD 5–6 million to anywhere between USD 10 and USD 12 million. Meanwhile, Series B rounds have shot up in the range of USD 25–30 million from USD 12–15 million, according to investors KrASIA spoke to.
This is primarily happening in segments that have had tailwinds due to the pandemic, like e-commerce, healthtech, and D2C companies.
“Just by looking at the investment size, it is difficult to say what is a Series A or a Series B. What was yesterday’s Series A is today’s seed round. Similarly, yesterday’s Series B has become today’s Series A,” said Arun Natarajan, founder of Venture Intelligence, a Bengaluru-based research firm.
Last week, healthcare platform Eka.Care landed a USD 4.5 million seed check from early-stage investors and a clutch of seasoned serial entrepreneurs. Last month, Elevation Capital led Series A round of USD 38 million—one of the largest Series A rounds in the country—in a teen-focused fintech startup FamPay.
“Startups’ pace of raising money has also increased. Many startups are going for frequent funding rounds despite being well-capitalized,” observed Natarajan.
For instance, edtech startup Teachmint raised around USD 17 million in May and another USD 20 million in July. Likewise, Chargebee, a subscription billing and revenue management platform, raised USD 125 million in April 2021, just six months after closing a USD 55 million round.
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There is enough capital in the market chasing companies with resilient founders who have a good business sense and a strong team, Vinay Singh, a partner at Fireside Ventures, told KrASIA in a recent interview.
“Valuations are thus going up in the private market. It is the reflection of demand and supply of money in the market,” Vinay Singh, partner at Fireside Ventures, said. “We have seen the bull cycle before in 2012–15 and 2004–08. I think we are in the middle of that.”
Higher valuations and bigger check sizes are being spearheaded by Tiger Global and, to some extent, SoftBank and Falcon Edge.
“Flushed with liquidity, other investors are reacting to the tune set by Tiger Global. Other investors are scrambling to catch up,” Natarajan said.
The New York-headquartered firm has invested about USD 1.4 billion across 28 deals in Indian startups in the first six months of the year, compared to USD 586 million across 21 deals in 2020.
“Deals have gotten expensive as more VCs are willing to invest in startups. If you have more investors lined up for the same deal, it’s going to cost them more,” Anil Joshi, managing partner of Unicorn India Ventures, told KrASIA.
Although founders are happy with the rise in check sizes as well as higher valuations, this could be a litmus test for them. Joshi said if entrepreneurs cannot utilize the fund to scale the company and justify their high valuations, they might find it difficult to raise money in the future at the same valuation.
“That will make things worse for the startups,” he said. “They may have to go for a down round, which will dilute the value of stakes for the existing investors, resulting in their losses.”
“Startups, particularly at early stages, should raise money that they need, not what they are offered. This mitigates the risk of losing investors’ capital,” he added. “And once they have validated their offering and seen some traction, they can raise a bigger round.”
Moreover, some investors believe raising more money than required may do early-stage startups more harm than good, as it throttles innovation which happens when products are created cost-effectively.
“Back in 2016, the entire ecosystem imploded because many big VCs were writing USD 2 million seed checks since startups like Oyo and Ola had become really big,” Anirudh Damani, managing partner at homegrown early-stage VC firm Artha Venture Fund, told KrASIA in a previous interview. “When you give early-stage startups too much money, it is a recipe for disaster. You need to let them innovate frugally.”
The outliers
Among all the early-stage startups that have raised big checks, the ones that top the chart are those that are replicating Thrasio’s model in India, which entails acquiring internet brands and growing them.
Last month, 10Club, one of the contenders in the space, raised a USD 40 million seed round, the largest so far in India, Venture Intelligence data shows. Last week, GlobalBees, a three-month-old startup backed by baby care product unicorn FirstCry, raised an unprecedented USD 150 million Series A round. Another startup, Mensa Brands, got VCs to write USD 50 million Series A check.
The large check size in these companies is a function of the roll-up strategy. Unlike companies that grow organically, the intention is to raise money for companies following Thrasio’s model to acquire brands, Gaurav Sharma, head of private equity in India for Investcorp, told KrASIA in a recent interview.
“These deals are often driven by the founders of these companies, who are usually serial entrepreneurs and their investors who are betting on the former’s credibility and track record,” Natarajan said. “This is good news for existing D2C brands as they now have a new pool of acquirers. These exit opportunities have given their valuation a boost. Earlier, these exits were far and few in between.”
Raising new rounds of funding to buy out the competition is not limited to companies whose model is to acquire and grow internet brands. Many late-stage companies this year have taken this route to consolidate the market.
Online medicine delivery platform PharmEasy raised over USD 900 million this year to buy out diagnostics chain Thyrocare in a USD 600 million-plus deal. Likewise, edtech giant Byju’s has raised almost USD 2 billion in multiple rounds in the last 18 months to fund its acquisition of rival Toppr, higher learning platform Great Learning, digital reading startup Epic, and offline coaching chain Aakash.
With consumer internet startups getting saturated, the capital has started to spill over to other sectors such as deep tech, which otherwise would not have gotten the mainstream investors’ interest.
“As the edtech sector is done and dusted this year, investors are open to spending their time and money on other sectors,” said Natarajan. He believes that while the size of investment in these sectors is nowhere close to the consumer internet segment, it is still bigger than before.
The next bubble?
Despite VCs flushing the world’s third-largest startup ecosystem with capital, investors who KrASIA spoke to believe there might be some froth, but it is not quite a bubble.
While growth and late-stage internet startups, which have a massive user base, have seen a rapid rise in valuations on the back of increasing digital adoption since earlier this year, early-stage startups have also begun to follow the trend.
According to Fireside’s Singh, the valuations of early-stage startups have rightfully gone up and are in line with the revenues they are delivering.
“About three to four years ago, brands doing INR 3–4 million (USD 40,000–54,000) in revenue would come to us to raise their pre-Series A check, after raising a couple of crores (USD 270,000) from friends, family, and angels,” said Fireside’s Singh. “Now when they come to us, they are already raking in a couple of crores of revenues (INR 10–20 million) with the same amount of money. So, the same dollar is helping them make more money because of higher digital adoption.”
Generally, valuation is a multiple of revenue. The higher the revenue, the higher the valuation. “The revenue multiple is also inflating because there’s a lot more investor interest,” Singh said. “I wouldn’t want to call it a bubble since startups are also growing faster.”
“When valuations go up, they go to an extent where they almost become bubble-like. And when the economy turns leading to cash crunch in the market, valuations start looking far more benevolent,” he added.
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While liquidity is available in India from global investors, a string of startup IPOs, beginning with Zomato’s, have further boosted their confidence. “With a successful Zomato listing and a few more IPOs in line this year, more investors are looking at them as an exit opportunity,” said Natarajan.
Joshi agrees. “With Zomato’s shares getting oversubscribed at a premium, investor confidence has increased substantially, so more investors will be attracted to the Indian startup ecosystem, and more capital will flow in.”
“The supply [of capital] is going to be the same at least this year,” Joshi said. “And if the demand is not well-matched with enough quality startups, more capital will chase good deals. So, the situation is going to be the same whether there is a pandemic or not.”