(Image Courtesy: http://images.nasscom.org/sites/default/files/userfiles/image/Tech_startup_infographic.png)
The ispirit foundation recently released a report regarding liquidity in the indian startup ecosystem between 2012 and 2016. The report compared capital raised in India , Israel and USA are compared to the total exits (M&A’s) in India, Israel and USA. The report can be found here.
Summary of the article:
a) About 391 firms contributed to $4 Billion in exits. It seems the top 7 firms accounted for $2.5 Billion and the rest 384 firms contributed to $1.5 Billion in exits. This was about 20% of the capital invested in the same period.
b) Contrasting this to Israel’s startup ecosystem – about 448 companies made exits with $29.5 Billion. This was about 180% of the capital invested in the same period.
Reasons for this:
- The proportion of VC funded startups to startups funded by other means, in india is much smaller than that compared to US or Israel. Most of the entrepreneurs in India – do not depend on VC’s, except in the high tech sector where there are possibilities of huge growth. Refer the graphic here. This proportion is not captured in this article. Liquidity attributed to only the difference between VC capital and exits is not a fair representation. The overall lending (startup financing) system has a much higher liquidity – as shown in the above figure.
- India’s VC funded startup ecosystem – is an ecosystem – mostly driven by a combination of idea arbitrage and solving problems of market inefficiencies e.g. housing.com. A well established business model is ported to the local context to solve a completely different set of problems. These problems often deal with unique legal and institutional frameworks. Such problem solving has probably been challenging for both the startups, their founders and their investors.
- Exits ; either M&A based or IPO based are controlled in India historically to protect the masses from exploitation. Kudos to SEBI for that. Because of such tight controls, there are fewer delistings on bourses – compared to other global markets. Similarly, ponzi schemes such as penny stocks don’t happen. However, capital controls prevent firms from IPO’ing without operating profits for a few consecutive quarters. A Snapchat or a Salesforce could not have IPO’ed in India. Many profitable companies prefer not to either IPO or merge because that brings additional pressure and burden on the team.
- Primarily software product export businesses have thrived more successfully. This is slowly changing ; local technology markets are growing by the day. This can only increase the rate of exits.
The future is definitely brighter
Eventually, a much larger number of successful exits – either via IPO or via acquisitions are bound to happen. The startup ecosystem funded by VC’s in India – is definitely the youngest in the world -( about 10 years old ). Infact India saw its first big (> $100 million ) investment in 2010. India is also the youngest country by mean age in the world (average age of 28 years) and this will create ample macro-economic avenues for the entire ecosystem at a scale not present anywhere else in the world. In this context, I do have a question: Will the financial institutions (lending/venture capital/other capital forms) raise to this occasion?
Because of this opportunity there could be another possibility. The VC/IPO/Capital markets are being disrupted by Cryptocurrencies and smart contracts. Will India’s fledgling and highly entrepreneurial ecosystem latch on to alt-coin based ICOs to raise capital faster globally. Only time will tell.