India's Venture Capital Market Focussed More on Exits in 2017

By VCCIRCLE BRANDED CONTENT TEAM

Illustration by Manni/VCCircle
India's Venture Capital Market Focussed More on Exits in 2017

While 2016 continued to be a step up in the venture capital world of India after seeing an overall crossing of $2 billion in funds, venture capital firms are now preparing for a much tighter investment budget in 2017. With even the most promising firms being found unable to return on the previously invested capital amounts, venture capitalists in India are now focussing on exits this year rather than raising full-fledged funds.

2014 had seen a marked rise in venture capitalism in India. However, 2017 might well see the downward trend of the market. The occurrence of Unicorn companies (companies valued at billions) in the investment portfolios has done nothing to improve the statistics and liquidity needs either. For, most of these firms have not even been able to return the full principal amount of the investment. Subsequently, venture capitalists (VCs) are under immense pressure to return profits to their investors. The fact that LPs usually expect a turnover of around three times more than their original investment is not helping the issue either, seeing as VC firms are seeing no adequate returns from the firms they have funded.

The problem, as pressed upon by LPs, is that, while the Indian venture capital market has great potential, they are not seeing enough liquidity to prove that potential. Hence, VC firms, under this severe amount of pressure, are, more and more, look for opportunities to sell their old stakeholdings in bulk. The fact that several VC firms are coming to the end of their 10-year investment lifecycles and still have inadequate returns to show for their maiden amounts is yet another reason VCs are looking for increasing their exits.

However, the change in the rupee-to-dollar exchange rate has put a huge obstacle in front of VC firms looking for exits: For, while most of the investments were made in from 2005 to 2010, where the exchange rate was around Rs.40 for every $1, the current exchange rate has risen to around Rs.70 for every $1. Consequently, investors see either see a formidable loss on their initial investments or must contend with a supreme lack of exit opportunities for these early investments.

Further, India's Internet startups, which is where most VC firms had poured in their funds, has taken a while to mature, especially since the industry gained noticeable traction in India only in the last three to five years. Even worse is that, when there was a valuation boom of Internet firms in 2014 to 2015, it was too late and too expensive for VCs to cash in on it effectively, as most of these investments happened much earlier in these firms' lifecycles.

Thus, as VC firms are now focussing on returning profits to their investors, most of the series-A investment level VC firms have cautiously taken a step back from the investment game and reduced their investment funds for the moment. Some of these VC firms even have members who are solely focussed on exits.

On the other side of the venture capitalist spectrum, problems arise due to structural lacks in the venture capital market. The most pressing problem of these structural deficiencies is that there are a strikingly increasing number of startups coming up in the Indian business market, but there is a huge dearth of substantial new VC funds and late-stage investors that are unable to meet these investment requirements. As a result, the current trend of leading VC firms limiting their investment funds could sound the death knell for many startups, or else make it extremely trying for many startups in India to sustain them.

There are a number of new seed funds available in the Indian VC market, but this again may not come to the aid of startups. Such funds are more or less being delegated to existing portfolio companies rather than new and fledgeling businesses.

VC firms who do have substantial or A-series investment potential have also taken the step to likely delegate their fixed quota of investment funds over the course of three to five years rather than in just a few days (as the 48-hour decision-making trend in 2015 had done). Basically, the current verdict stands that venture capitalist firms in India, when they are not focussing solely on exits, are going to take their time in making investment decisions in 2017.

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