India’s big exit mess and what we can learn from it

There is a huge problem looming over startup investors in India, and not enough is being said about it.

India’s startups have seen a funny turn of events of late, with storied founders asking for government protection, and revered investors making charges of “capital dumping” by foreign companies – only to be torn apart by colleagues in the industry.

Getting lost in this noise is the most important issue at hand – and, according to some, the real reason why these “debates” happened in the first place. It is a story of worried investors, writeoffs, and few exit routes for the money that has gone into building the third biggest entrepreneur hub after the United States and the United Kingdom.

“When the valuation bubble deflates, investors get hurt. Some late-stage investors won’t even get their principal back. Early-stage investors will do better. But they too will have to eat humble pie as they write down their previous mark-to-market valuations,” said Sharad Sharma, co-founder of iSPIRT.

A total of US$8.23 billion was pumped into startups in India in 2015. In 2016, that number fell to US$4.07 billion, according to Tracxn.

While 152 startups were acquired in 2015, the total acquisition amount was of around just US$1 billion, says the startup research firm. (Tracxn only calculated deals that were officially announced.) In 2016, the deal number rose to 160, bringing in about US$1.2 billion.

As valuations get shaky, and profits and IPOs become more elusive, many investors are now stuck, looking for exits via deals and mergers and acquisitions.

Asking more questions

Tech in Asia spoke to multiple investors to gauge their sentiments about possible exit routes. Most of them did not want to be named because either their firms have active investments in the startups we discussed, or because they aren’t officially allowed to talk to the media.

“It is a fiduciary duty for VCs to show an exit path. But at this point, there is none,” said a source at a VC firm. “Big VCs are still raising funds, but investors are asking more questions.”

Herd mentality jacked up valuations.

The problem, they explained, is that business models like online shopping or ride-hailing are highly competitive, with comparatively low barriers to entry. (Read: it isn’t that hard to copy).

Stuck

Quagmire

Reputation

Lessons