India VC Funding: Record Year & IPOs on the Horizon

Global Venture Capital Investment Surges

For those just joining us, it’s worth reiterating the current state of affairs: the global venture capital industry is experiencing unprecedented growth. The second quarter of 2021 represented the most substantial three-month period ever recorded in terms of capital invested.

Worldwide data indicates a significant boom is underway. The U.S. startup ecosystem demonstrated exceptional performance in Q2, and projections suggest this momentum will continue within the nation. Europe is also witnessing a remarkably strong year for investment.

The Exchange: A Focus on Startups, Markets, and Funding

The Exchange provides insights into startups, market dynamics, and financial activity.

Stay informed with daily coverage on Extra Crunch or subscribe to The Exchange newsletter delivered every Saturday.

India serves as another compelling illustration of this trend. The nation’s venture capital investments to date in 2021 have almost equaled the entire 2020 total, positioning it for a potential record-breaking year.

However, as the third quarter begins, a potentially more significant development is unfolding: increased liquidity in public markets.

India's IPO Pipeline and Public Market Activity

This emerging trend is being led by Zomato, a prominent Indian food delivery company potentially valued at $8.6 billion upon its initial public offering. Several other substantial Indian unicorns are also preparing for public market debuts.

Fintech companies such as MobiKwik and Paytm, backed by Alibaba and Ant Financial, are among those following Zomato. Successful and stable initial public offerings from these companies could trigger a wave of public listings from Indian businesses.

Today, The Exchange will analyze India’s recent venture capital performance and delve into the country’s IPO pipeline. Insights will be provided by Kunal Bajaj of Blume Ventures and Manish Singhal of pi Ventures.

We will also examine the early performance of Zomato’s IPO and extract valuable lessons from the available data. This analysis promises to be insightful!

A Rapidly Expanding Startup Landscape

Recent data concerning the Indian startup market reveals a highly proactive stance from venture capital firms eager to invest in the nation’s nascent technology businesses. Approximately $10.4 billion has been channeled into Indian startups this year, nearly equaling the total venture capital investment of 2020, which reached $11.6 billion (according to Tracxn data reported by TechCrunch).

This surge in funding is demonstrably influencing the market, with the size of investment rounds increasing significantly for seed-stage and other early-stage companies within the country. Furthermore, activity in late-stage funding is also robust. As pi Ventures founding partner Singhal observes, “later-stage growth rounds are experiencing a substantial increase in round sizes, valuations, and speed, driven by the involvement of hedge funds and other prominent international investors.”

The creation of new unicorns has become commonplace, with at least 16 companies achieving this status so far this year. The $3.6 billion funding round secured by Flipkart exemplifies the appetite for investments exceeding billions of dollars for leading Indian technology enterprises.

Several factors are fueling this heightened demand in India, notably a growing base of smartphone users and a large population of young adults. Comprehensive data on this trend is available in Paytm’s IPO filing, compiled by RedSeer Management Consulting for the company’s prospectus. Specifically, the fintech firm’s offering documents highlight that India’s working-age population is second only to China’s (745 million versus 849 million), but boasts a considerably younger average age of 28 compared to 38 in China.

According to Paytm’s data, India is home to approximately 700 million individuals belonging to Generation Z and the millennial generation. Combined with increasing smartphone adoption – spurred in part by telecom provider Reliance Jio, which has attracted significant investment from both investors and technology companies – this creates a young, mobile population experiencing rising incomes due to the country’s GDP growth. This combination provides a favorable environment for tech companies to experiment with innovative business models and adapt successful ideas from other regions.

Consequently, venture capitalists have maintained a positive outlook on India’s startup market.

Singhal stated, “The Indian ecosystem is witnessing unprecedented levels and velocity of investment, driven by both market maturity and broader macroeconomic factors impacting India.” He further added, “This, alongside the less favorable sentiment surrounding the Chinese market, is leading to increased [foreign direct investment] in Indian startups.”

Bajaj, Blume’s head of capital markets, also pointed out that “any reduction in deal activity across [Indian] early-stage, growth-stage, and pre-IPO startups from Chinese investors has been more than offset by investment from U.S. investors.” He also noted the ecosystem’s strong recovery from the COVID-19 pandemic. “The pandemic compelled startups to prioritize margins and profitability sooner than usual, and those that successfully made this transition have garnered even more investor interest and emerged stronger following the pandemic.”

However, a key challenge for India’s startups and unicorns lies in achieving successful exits. This is why TechCrunch is closely monitoring the Zomato IPO; a positive market performance could trigger a wave of public offerings from domestic startups.

Numerous companies are poised to potentially go public. A March 2021 report by Credit Suisse identified at least 100 Indian unicorns, collectively valued at $240 billion, with several considered strong IPO candidates. These include Flipkart, currently valued at $37.6 billion; edtech leader Byju’s, with a $16.5 billion valuation; ride-hailing giant Ola, which indicated its recent $500 million funding round was in preparation for an IPO; Tiger- and SoftBank-backed insurance aggregator Policybazaar; delivery startup Delhivery, which recently secured a $100 million investment from FedEx Express; and makeup retailer Nykaa, whose competitor Purplle recently raised $45 million.

A Tolerance for Risk?

The worldwide stock market isn't a unified entity; standards vary, and a company’s valuation on the U.S. Nasdaq, for instance, could differ significantly from its valuation within its home market.

Consequently, Zomato’s initial public offering (IPO), frequently highlighted as India’s inaugural unicorn offering, serves as a crucial indicator. The central question is: what level of interest will exist for shares in a company prioritizing growth while currently operating at a loss? This isn’t merely academic; Paytm also remains unprofitable, mirroring a common trend.

A substantial number of unicorns globally prioritize expansion over immediate profitability.

Zomato’s public offering will furnish both investors and other unicorns with a gauge of the Indian stock market’s current sentiment.

What does the current landscape look like? The demand for Zomato’s IPO shares during the subscription period this week substantially exceeded the available supply. Initial signals were positive, a trend that continued throughout the week. According to the Economic Times, Zomato’s IPO “received bids for 27,51,27,77,370 shares, representing 38.25 times the issue size of 71,92,33,522 shares.” This represents a remarkable disparity between share availability and investor demand.

While the actual trading performance of Zomato remains to be seen in the coming days, the present data suggests a bullish outlook. This favorable environment likely positions the Paytm and MobiKwik IPOs for potentially successful listings.

This could encourage other unicorns to proceed with their own public debuts.

In essence, the present IPO wave validates India’s thriving startup and venture capital ecosystem; these exits will facilitate the recirculation of capital back into the nation’s emerging tech companies, fostering further venture funding and potentially more exits in the future.

The very occurrence of these exits marks a significant milestone for the market. Bajaj emphasized that “2021 is poised to be a pivotal year for India as a destination for growth investment. This represents a genuine turning point for venture capital, as it allows numerous institutions to invest in India with greater confidence, and the assurance of an exit within a reasonable timeframe.”

However, certain considerations are warranted. The Indian government is exhibiting increasing authoritarian tendencies—although it is not alone in facing such challenges—and escalating tensions with China could also negatively impact India’s economy. Nevertheless, with favorable demographic trends, India is projected to experience sustained economic growth, creating a conducive environment for the development of more startups and unicorns.

On a company-specific level, Bajaj cautioned that firms entering the public market must be prepared for rigorous scrutiny.

“Companies pursuing an IPO must embrace the discipline of financial planning, providing clear guidance and forecasts to investors regarding their annual and quarterly performance, understanding that their stock price will be penalized for subpar business growth. An IPO also offers considerable advantages—enhanced liquidity, improved talent acquisition through stock awards and options, and better access to credit facilities from banks for both working capital and long-term expansion.”

The success of the Zomato IPO will be closely watched to determine if it meets current expectations. Should it succeed, anticipate a surge in news regarding Indian unicorns.