When Tiger Global led over USD 100 million funding rounds for healthcare firm Innovaccer and B2B commerce platform Infra.Market, quadrupling their valuations and turning them into billion-dollar startups in February this year, it gave a quick glimpse into what was to come in the following months.
Taking a cue from the New York-headquartered hedge fund, other global VC firms rushed to write large checks for Indian startups. This culminated into an iconic week last month when the world’s third-largest startup ecosystem saw six unicorns being born in mere four days—April 5 to April 9.
What’s more noteworthy than their unicorn status is the valuation jump these startups saw. For instance, Meesho’s valuation went from USD 700 million to USD 2.1 billion, Cred’s valuation jumped from USD 806 million to USD 2.2 billion. Medtech major PharmEasy managed to command a more than two-fold valuation jump to USD 1.5 billion, while ShareChat’s valuation rose by a whopping 223% to USD 2.1 billion.
Tiger Global has since emerged as the backer of eight unicorns of the 12 new billion-dollar companies India spewed this year to date and is reportedly gearing up to transform more soonicorns into unicorns. Meanwhile, venture capital firms including SoftBank, Steadview Capital, Sequoia, Temasek, and Prosus have opened their purse strings for late-stage deals, and that too, at remarkably high valuations.
“Regardless of the second wave, we are seeing unicorns being announced on an everyday basis,” said Arun Natarajan, founder of research firm Venture Intelligence. “A lot of money that VCs didn’t invest due to uncertainty last year is now being put to work in digital companies that have scale and momentum behind them.”
Natarajan said this year’s high-valued investments largely happened in late-stage companies, which is in contrast with the funding spike Indian startups saw in the last quarter of 2020. “Last year, the [VC] focus was more on early-stage and seed funding. Only a few large deals were peppered here and there, especially in edtech and software-as-a-service companies,” he added.
According to India Venture Capital Report 2021, there were about 500 deals of less than USD 5 million in 2020, compared to 390 a year before. Last year, a total of 22 startups raised over USD 100 million from VC and growth equity investors. Because of the smaller deal sizes, the cumulative deal value slightly declined to USD 10 billion last year from USD 11.1 billion in 2019, even as the deal volume grew by 7% to 810 deals over a year-ago period.
The swelled-up valuations have got many industry insiders to raise eyebrows. However, many investors KrASIA spoke to believe this isn’t just some valuation bubble in making.
“From the perspective of mid to long term, the valuation jump of some of these startups seem justified, although there may be an overvaluation in short term,” said Anil Joshi, managing partner, Unicorn India Ventures. “All of these companies are market leaders in their categories. If someone has to come and challenge them, they will have to do a hell lot of job.”
“Even if there is a drop in their valuation, it will be momentary since digital penetration in these businesses is in single digits which implies a huge opportunity for growth,” he said.
Natarajan from Venture Intelligence believes VCs are well aware of what they are betting their money on.
“To a large extent, these deals are priced to perfection because if anything short of perfect is likely to happen, they run a lot of risks,” Natarajan said.
Chasing massive opportunity
Anirudh Damani, managing partner at homegrown VC firm Artha Venture Fund, feels “there is some froth in the startup ecosystem, but not everything is froth.”
As COVID-19 has sped up digitization in the world’s second-most populous country, the market size for Indian tech companies has increased, which Damani believes justifies the spike in valuation.
According to him, online companies have been able to meet the orders that come from the remotest parts of India. “Over the last 12 months online players have delivered to 99% of Indian pin codes,” he told KrASIA. ” It is the first time we have got a unified market.”
“The massive opportunity has led to a valuation hike at later-stage investments,” he said. “Crazy valuations are happening, where there is actual traction.”
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Damani added that since a lot of late-stage companies are now profitable at the unit economics level and are staring at a massive consumption market that was unlocked last year, VCs are chasing them to invest.
“This digital revolution is going so fast that the growth in the related numbers is exponential,” Ashish Gupta, manager–research at tech industry lobby Nasscom, wrote in a blog in February, explaining the soaring valuations of startups with marginal revenue. “Gone are the days when we used to talk about rise in users of a particular app in a year. Nowadays growth is calculated month-on-month and that too is multifold. Simple logic here: More the users, more the eyeballs, and hence more the investors.”
The money at work
That investors are making big bets on the Indian startup ecosystem despite the second wave of novel coronavirus straining the Indian healthcare system and the overall economy, is primarily because of the liquidity boom in the US, explained Natarajan.
“The first quarter of 2020 was the continuation of the 2019 trend, but in the second quarter when covid hit, a lot of investments dried up. That is when a lot of capital was drawn into the country on the back of Reliance Jio,” he said. “Because of that, the numbers got propped up very significantly, which had a cascading effect towards the end of the year, boosting investors’ confidence.”
Meanwhile, the liquidity situation of US-based limited partners (LPs), which was a little shaky in the middle of the last year completely eased up toward the last quarter of 2020 on the back of public markets, said Natarajan. Big VC funds started pumping in millions of dollars in the companies that had tailwinds, especially in edtech and enterprise tech firms that catered to digitizing SMEs.
“The angels and smaller investors thus felt the FOMO (fear-of-missing-out). They didn’t want to miss out, so they started investing in the early stages. It started late last year and continued till the first two months of this year,” Natarajan said.
“Now big guns are back. Today IPOs and SPACs are happening, investors are getting a lot of liquidity. If an early investor wants out, he has late-stage guys willing to buy out his earlier investment,” he said. “We are also seeing public market capital, such as hedge funds investing into the private market, which typically happens when there is too much liquidity.”
He added that VCs are aggressively looking for good companies to park their money as they can’t keep it locked up in banks with zero to negative interest rates.
Moreover, SoftBank, which “was licking its wounds from the WeWork fiasco and Uber not performing well till last year,” according to Natarajan, is now back with a thick checkbook. However, Tiger Global’s appetite for growth-to-late stage deals—the flavor of the season—is the biggest driver bumping the valuation of late-stage startups. Unicorn India’s Joshi feels that since top tier VCs are writing more checks promptly, many investors now want to be a part of this opportunity.
The upcoming startup IPOs have further gravitated global investors toward the cap tables of some of the large Indian startups.
“Thanks to the current market rally in which many IPOs got over 100% listing premium…many investors might be targeting that from their investments in startup once they roll out the IPOs,” wrote Nasscom’s Gupta.
Not a repeat
It was May 2014, when Tiger Global decided to go all out in the Indian startup ecosystem, making a bet on the country’s internet growth story. In the first five months of 2015, Tiger put in USD 5 million or more in 17 startups such as logistics firm Delhivery, beverage company Chaayos, insurance marketplace PolicyBazaar, e-commerce firms Shopclues and Limeroad, e-grocers Grofers and Local Oye, EV startup Ather Energy, ride-hailing platform Ola, and edtech firm Vedantu.
In 2015, Tiger Global pumped in USD 2.58 billion across 34 deals in Indian startups. Enthused by Tiger’s pace of closing deals, other VCs followed suit and began investing in early-stage companies that didn’t even have a clear business model or a path to profitability, which led to a valuation bubble.
“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,” Damani said. “When you give early-stage startups too much money, it is a recipe for disaster. You need to let them innovate frugally.”
The funding deluge and the subsequent valuation bubble lasted till the beginning of 2016, which is when Tiger realized it had misread the market and India’s internet growth story wasn’t following China’s. While the number of internet users continued to grow, the paying users were largely confined to metro cities.
After Tiger put a break on its investments in India, the country saw a steep downfall in venture capital inflow in homegrown startups. Over the next three years, startups’ valuations went through a course correction, pushing Indian startups to focus on unit economics. As the pandemic hit in 2020, it brought in a sea of change in terms of funding crunch, followed by a sudden funding spree by global investors, including Tiger Global, all of whom leaped up at the opportunity presented by mass adoption of online services by millions of consumers and enterprises.
Tiger Global pumped in USD 586 million across 21 deals in 2020, once again becoming the top VC firm in the country, in terms of deal value. The VC fund has visibly continued its deal-making spree at a faster pace this year.
Joshi feels the situation is different now as compared to a few years ago.
“Given the rapid digital adoption of services, investors have more conviction this time,” he said. “With COVID-19 situation still persisting, people have begun to form a habit of buying things online.”
Damani agrees. “In one year, we won’t know what is going to be normal, buying things online… or buying them offline! ” he said.
While the valuation hike this year feels like déjà vu, Damani pointed out that, unlike last time, only late-stage companies are able to command higher valuation, “which is keeping the sanity in the startup ecosystem.”
However, maintaining these steep valuations may be critical for these companies.
“VCs who invest at a later stage in some of these high-valued companies, usually have a lot of conditionality,” said Natarajan. “If the next round happens to be a down round, then a lot of clauses [like rights to take more equity at a lower valuation] for these new investors would kick in which is not great for the existing shareholders, and founders.”
“If these companies are able to deliver on their numbers and keep up with the valuation then there is no problem,” he said. “But if they fall short, it is going to come back and bite them.”