VC firms to gain USD 4 billion from exits in India’s maturing startup ecosystem

And Sequoia and Lightspeed are expected to make 1.5 billion from selling stakes in OYO Rooms. Is the Matthew effect forming in the country’s venture capital market?

Source: Unsplash.

Venture capital firms in India are set to rake in USD 4 billion from exits this year, owing to the country’s maturing early stage investments cycle, according to research firm Venture Intelligence, and partially answering a conundrum that has long perplexed the local VCs: though they have put down their faith alongside USD 48 billion for local startups over the past ten years, their faith is not proportionally rewarded.

The exit value for 2019 will see a jump from USD 2.8 billion across 56 deals in 2017 and USD 1.8 billion in 2016.

In the past few years, the lack of return has led many local VCs to change course and focus on high-quality deals rather than quantity, resulting in the shutdown of near 1,000 startups from 2014 to 2016, as reported by Quartz India.

That said, the decline in investment does not indicate a dearth of capital. VC deal values increased five-fold over the past 10 years and recorded USD 3.4 billion in 2017, says a report by Bain & Company and the Indian Private Equity and Venture Capital Association (IVCA). The average deal size hovered between USD 8.7-10 million this year compared with USD 6.6 million in 2017 and 2016’s USD 3.8 million.

It appears that these days big-ticket investments are gravitating toward fewer and top-tier startups, which could speak to a worrying sign. Indian investors are now prone to writing bigger cheques for fewer mature startups, making it harder for early-stage startups to raise fundings.

India VC’s return conundrum is a result of the lack of exit channels, such as IPOs, merger and acquisitions (M&As), and secondary sell chances. However, the situation is gradually changing. Some VCs are churning out decent returns by selling stakes in their portfolios.

For instance, Sequoia India and Lightspeed Venture Partners will make close to USD 1.5 billion by selling half of their stake in global hospitality chain OYO. The two firms currently hold from current 10.24% and 13.4% respectively.

Accel Partners will also be selling partial stakes in Freshworks, BookMyShow, and Swiggy. Among others, Multiple PE and Nexus Partners sold partial exits in courier service Delhivery worth USD 100 million this year. Saamaa Capital also made a name for itself by exiting 21 companies out of 43 investments. That includes 14 profitable exits including Paytm, Snapdeal, Mezi and Sula Vineyards.

Soon, 80% of startup founders can expect exits by 2024. And if the latest VC exits are anything to go by, the future would be a win-win situation for both selective investors and startups looking to join the unicorn club.