Overview of Venture Capital Landscape in India

Abstract

It is difficult to find an overview of the Indian venture capital industry because no systematic attempt has been made. To fill this critical gap, the author wants to offer an overall understanding of the Indian venture capital industry. The definition of venture capital is tricky, and the author proposes to use the term to refer only to start-up, early stage, and growth venture capital–stage funding. The term thus encompasses only traditional venture capital. To create an overall understanding or overview of Indian venture capital, the author will cover the following:

• • How has the venture capital industry in India developed in recent years and how will it continue to develop in the future? Which factors influence its development?

• • How does it compare to other private market investment asset classes in India and other developed venture markets such as the United States and Europe?

• • How are Indian venture funds structured in terms of organization? What are the sources for the funds invested in Indian venture capital?

• • What are the investment patterns of venture capital investment, in terms of, for example, venture stage, industry sectors, investment size, deal trends, and geography?

• • What exit mechanisms are used? Which exit mechanism has been more favorable and why?

• • What levels of return are achieved?

TOPICS: Security analysis and valuation, statistical methods, emerging markets, risk management, private equity

Key Findings

• • The Indian Venture Capital ecosystem has matured over the last 15 years, it is still a relatively young VC ecosystem as compared to developed markets like US & Europe, with around 4% share of Global Venture Capital Investments. This growth is noticeable and is in stark contrast to 2004, when venture investments were almost negligible in India.

• • While India received around 2.6% of global private-market investments from 2009–2017 period, Private Equity comprising of growth, buyout, turnaround & mezzanine funding have attracted majority (48%) of these investments. Share of Venture Capital was 16% of the overall private-market investments during this period.

• • Share of Series A Investments in value terms has fallen to 13% in 2016–2019 period from 40% in 2005–2010 period, with Series B & above gaining ground during these years. This reflects that VC ecosystem is maturing and promising start-ups are being funded throughout their growth Journey.

• • Mergers & Acquisitions (47%) followed by Secondary Sales (29%) have been the most preferred exit routes in terms of number of exits as of 2018. The ecosystem needs to create large no. of IPO exits across the value spectrum to build a more sustainable exit scenario. Further, unlike US, India doesn’t have a robust data repository on returns and other benchmarks of Venture Funds. Industry Associations and regulatory bodies need to evolve more scientific ways to track returns data to create an accurate picture of the ecosystem.