India’s internet ecosystem has matured over the past decade with the occasional bumps and bruises but going by this year’s investment roster, one can safely say it has emerged stronger and, hopefully, wiser.
Domestic internet companies attracted investments worth $7.4 billion in the first three quarters alone, show data from research platform Tracxn, positioning 2017 to emerge as a record year in terms of deal flow with more funding due from strategic investors.
Investments in internet companies had reached a peak in 2015 at $7.6 billion before dropping to $4.4 billion last year.
About $6.9 billion of the inflows this year have gone into series B and higher growth-stage deals, reversing the much-lamented pause in growth-stage capital the previous two years.
What this suggests is that investors are still queuing up for businesses with strong metrics. With investors having recovered from their wounds from previous years, deal-room dynamics have undergone a significant shift in terms of what they expect from businesses as also entrepreneurs.
Conversations among investors and entrepreneurs have taken a new shape with sharper margin constructs, lucrative market opportunities and mature entrepreneurs forming the top of investors’ demand list. Expectations of multi-billion-dollar businesses have given way to more realistic expectations of multi-million-dollar businesses.
One key factor venture capitalists have embraced involves going beyond mere testing of an innovative idea to measuring for actual change in consumer behaviour in favour of it.“Earlier, we used to get carried away by an idea presented to us but we have realised that it was never about the idea, it’s about the problem,“ said Karthik Reddy, Managing Partner at Blume Ventures.
Naturally, market opportunity and the potential market size of a business have become key filters for investors, Reddy said. “The focus now is on what problem area you are tackling, which is then directly correlated to the market size and opportunity. Market opportunity has become top-of-the-stack for us because that drives whether even a sub-segment of something can make a big enough company,“ he said.
That kind of focus has brought on a significant change in the startup ecosystem. The knowledge and maturity needed to be able to identify problem areas and tackle them has paved the way for more experienced individuals to take up entrepreneurship.
“There were at least 20 (investment) applications from IIT-Bombay and IIT-Delhi guys last year, but this year there have been none. We are seeing a lot more mature entrepreneurs in the age group of 30-35 years,“ said Navin Honagudi, investment director at Kae Capital.
“They have seen the pain points, resolved them, and then decided to start up on their own; entrepreneurs who really want to focus on building profitable businesses.“
Smarter margin constructs have also become key for founders and investors. Questions regarding building the right margin constructs are being asked much earlier in the investment cycle, at the series-A fundraising stage, according to investors. Variables such as customer acquisition costs and predictability for customer acquisition are on top of investors’ check list.
“Questions such as how much revenue depends on repeat usage versus new customers and, therefore, what is the elasticity of revenues towards marketing are some of the variables being studied,“ said Vinod Murali, Managing Partner at venture debt firm Alteria Capital.
Beyond healthy balance sheets, a company’s ability to access varied pools of capital over and above equity is also testament to its survival potential, say investors.
“What are the forms of capital streams that a company is accessing? Can there be some innovation in that or more conversations that allow for reduction in cost of capital? These are all signs that maturity of business is increasing. Weaving it into your business so you can have better growth that is not expensive (is now being sought),“ said Murali.
Investors, too, have realigned their strategies, realising that seeking out only potential multi-billion-dollar companies may not be sustainable. Instead, they are taking cognizance of investment opportunities in companies that involve tremendous execution and heavy offline work.
“(Investors) are now looking at opportunities that could be a few hundred million dollars,” said Anupam Mittal, an early-stage investor and founder of People Group. “They have realized that the large global opportunities have gone, and so expectations have become more realistic.”