The last decade has truly catapulted startups into mainstream businesses, introduced new consumer behavior, made the market more competitive and even harder to monetize. However, 2019 was a year that defined the next phase of the startup ecosystem. Why do I say that? With the Flipkart exit labeled as the largest global e-commerce exit in 2018 and the increasing number of startups offering ESOP (employee stock option) secondaries to their employees, the startup ecosystem has delivered value, wealth and given birth to the Indian “startup mafia”. The flywheel seems to have turned one complete cycle.
2020 will mark the beginning of the next phase of this flywheel.
Angel investing in India has passed the “MVP stage” and it will find “Product Market Fit” in 2020 and become more mainstream
The number of angel investors in India is estimated to be around 5,000 to 10,000, based on published numbers in 2019. The trends we observed in 2019 on LetsVenture:
- Average cheque sizes doubled from $11k to $22k
- Increase in the number of experienced investors willing to adopt the “Syndicate Lead” model. Experienced investors (with good exit track record) were willing to share deal access with passive investors, in lieu of carry - think of this as a virtual deal-by-deal fund model.
- An increase in the number of informal networks investing as a group, from India and outside India. Informal networks bound together by alma mater, profession, city and domain expertise.
2020 will see Angel Investing and Syndicates become mainstream. We will see the following factors contribute to this:
1. The Emergence of the Indian Startup Mafia
With more growth capital being invested into Indian startups, ESOP secondaries have become more real. While the wealth creation among startup employees has given birth to the next breed of entrepreneurs, it has also created a new breed of angel investors – investors who understand startup risks, understand the challenges and are willing to contribute time and experience along with capital.
2. A Better Educated, Informed Investor
This decade has unlocked capital from investors who have understood the risks of investing in startups. There is an increased awareness of the mechanics of angel investing, with local city councils, government bodies and community networks starting to focus on investor education.
3. Ease of Investing
The SEBI (Securities and Exchange Board of India) regulation around the Angel Fund category of AIF that allows accredited investors to invest via a SEBI registered AIF has simplified and organised early stage investing. Think of this as UPI (United Payments Interface) in payments that allowed for innovative and practical use cases to be built upon a standard protocol. Similarly, this regulation has allowed for a strong protocol to emerge that is now making it easier to structure early stage investments and bring much needed transparency to deal making.
Indian rupee capital will begin to dominate private markets
Indian family offices have now become the new aspirational target for fund managers and entrepreneurs. They represent patient capital that is strategic for founders.
Founders who are now increasingly building solutions for the Indian consumer and need help with navigating the market and regulation.
In 2019, we saw funds raise money from Indian family offices. Inventus, IvyCap, Chiratae, 3one4 Capital, Speciale Invest are some of the venture funds that have raised rupee capital.
The ecosystem also saw an increase in family offices participating directly into early stage and growth investments, alongside venture capital funds.
On the other hand, the family offices’ aspiration to invest into startups reflects the growing need for old economy businesses to diversify and create allocations for the new age economy with eyes and ears closer to the ground. This is a powerful indication of the maturity of Indian startups and the role they will play in the coming decade.
Global secondary funds will cement their position in India
Private capital tracker Venture Intelligence shows that PE and VC exits through the secondary sale route have been steadily increasing, both in terms of volume and value in the last few years due to the delay of technology IPOs.
VC investors netted about $2.8 billion in 2017, up from $1.8 billion in 2016. In 2018, we saw 58 deals totalling $5.4 billion and in 2019 we might well surpass this number given that we have seen significant secondary deals in our unicorns like Oyo, Lenskart, Dream11, amongst others.
As Indian unicorns and technology startups stay private longer (as is the global trend) and as large late stage investors (Softbank, Alibaba, Naspers) continue to make a bee line for Indian unicorns, we believe that the period between 2020-2025 will see an uptick in global secondary funds making their presence felt in India. These funds will play a critical role in giving exits to early investors and ESOP holders in these companies.
Incubators who only offer funding will be passé. Smart capital will become the new norm.
Incubators who only offer capital and a promise of connections to investors as an outcome to founders will be passé. In 2019, we have seen the increasing struggle of incubators to attract good startup founders to their cohorts. With the increasing number of funding events, and noise around startup investing, good founders have more capital chasing them and will now look for value added investors or “strategics” leaving little play for vanilla incubation or acceleration offerings. We will see new business models and new value-added services being offered as well as a shift towards focused sector based or technology based incubation.
I believe that 2020 and the decade to come will be looked back upon as the timeframe in which the “entrepreneurial revolution” in India took place. This revolution will change how people look at job opportunities, and how wealth is created for stakeholders.
Our work at LetsVenture will be to keep the wheel of capital churning at every stage of the investment cycle as we set about organising the private market in India.
Shanti Mohan is the co-founder and CEO of LetsVenture. The views in this article are her own.