<article>Last year was a different story.</article>

Last year was a different story.
India&#8217;s private equity market rose to new heights, thanks to improving macroeconomic conditions, a slightly better environment for exits and changes in valuation expectations, according to management consultancy <a style="color: #000080;" href="http://www.dealstreetasia.com/stories/43590-43590/" target="_blank">Bain &amp; Company</a>.
Total India PE deal value in 2015, including real estate, infrastructure and smaller deals, grew to approximately $23 billion—an increase of 51 per cent from 2014 and an increase of 34 per cent over peak levels of 2007 ($17 billion), according to the &#8220;India Private Equity Report 2016&#8221;, whose authors surveyed 29 venture capital and private equity firms.
But this year has been slower. Fundraising has become more difficult due to the government&#8217;s inability to pass crucial reforms, and uncertainty over the state of the economy. That might lead to further underperformance in the stock market,  which could hinder successful initial public offerings (IPOs), the primary mode of exit for private equity investors. PE firms are also worried about growing instances of their investors — referred to as limited partners (LPs) — and sovereign wealth funds investing directly in Asian companies. The usual practice was them going through these funds when they wanted to make an investment in startups or listed firms.
Ditto with the VC space. When one looks at the venture capital scene in India, the talk is largely about valuation markdowns, down rounds, business model pivots, shutdowns and investment write-offs.
Venture funding in India turned red-hot in 2015, only to taper off this year as investors turned wary of soaring valuations. “This is the first time India is witnessing a cycle where startups are seeing valuation markdowns, down rounds, business model pivots and shutdowns, Ben Mathias, MD, Vertex Venture Management, the VC arm of Temasek Holdings, said in a <a href="http://www.dealstreetasia.com/stories/in-india-we-are-seeing-first-wave-of-startup-mortalities-ben-mathias-48954/" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=http://www.dealstreetasia.com/stories/in-india-we-are-seeing-first-wave-of-startup-mortalities-ben-mathias-48954/&amp;source=gmail&amp;ust=1474417965819000&amp;usg=AFQjCNF12XvJS8_N4czuIQBXwG4k7bmNpA">recent interaction</a>.
Amidst the shortfall in funding, fintech company Paytm’s reported $300 million <a style="color: #000080;" href="http://www.dealstreetasia.com/stories/india-paytm-parent-in-talks-to-raise-around-300m-from-mediatek-temasek-others-51809/" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=http://www.dealstreetasia.com/stories/india-paytm-parent-in-talks-to-raise-around-300m-from-mediatek-temasek-others-51809/&amp;source=gmail&amp;ust=1474417965819000&amp;usg=AFQjCNEZPQDV5iYk8mdwLsrxQj6WElsgvw">fundraise plans</a> have rekindled hope that investors might be willing to spend more than they did in the first half of the year. Earlier this week, Paytm nabbed $60 million of this at valuation of $4.83 billion.
“Good companies are always going to be able to raise money.  The environment in India hasn’t changed, the economy hasn’t changed, the consumer base hasn’t changed, the needs of the consumers hasn’t changed. It’s just that the funding environment has changed”, <a style="color: #000080;" href="http://www.dealstreetasia.com/stories/india-paytm-parent-in-talks-to-raise-around-300m-from-mediatek-temasek-others-51809/" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=http://www.dealstreetasia.com/stories/india-paytm-parent-in-talks-to-raise-around-300m-from-mediatek-temasek-others-51809/&amp;source=gmail&amp;ust=1474417965819000&amp;usg=AFQjCNEZPQDV5iYk8mdwLsrxQj6WElsgvw">explained</a> Sid Talwar, Partner at Mumbai-based venture capital firm <a style="color: #000080;" href="http://dealstreetasia.com/tag/lightbox-ventures">Lightbox Ventures</a>, in an <a style="color: #000080;" href="http://www.dealstreetasia.com/stories/43855-43855/" target="_blank">earlier interview</a> with DEALSTREETASIA.
Will 2017 be the year where only the smart guys with the best business plans get funded while the rest fade away? Or will it turn out to be another record year?
Find out at DEALSTREETASIA &#8211; MintAsia PE-VC Summit on September 30, in Singapore, where game-changers such as Sid Talwar, Partner, Lightbox, Deepak Sahadpuri, Founder and Managing Director, DSG Consumer Partners, David Gowdey, Managing Partner, Jungle Ventures, Pravan Malhotra, Venture Capital, International Finance Corporation and Anand Prakash, MD, Asia Climate Partners, among others, delve deep into the fast-changing ecosystem and come up with answers to your most pressing questions about investing in the world’s fastest growing economy.
<h4 style="text-align: justify;">To register for DEALSTREETASIA-Mint Asia PE-VC Summit on September 30, click [<a style="color: #ff0000;" href="http://www.dealstreetasia.com/buy-ticket/" target="_blank">here</a>] </h4>
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&#8220;I think that it&#8217;s going to be tougher for startups to pitch their plans to venture capitals, which is good because it should be tough. We should have smart guys, with smart companies coming in the venture ecosystem. I don’t think it will be as frivolous as 2015. Having said that, I don’t think that you will see a massive drop in the quantum of funding,&#8221; Talwar said. After launching Fund II, Lightbox has invested in companies such as Embibe, tech-enabled fast food chain <a style="color: #000080;" href="http://dealstreetasia.com/tag/faasos">Faasos</a>, furniture subscription business <a style="color: #000080;" href="http://dealstreetasia.com/tag/furlenco">Furlenco</a>, automobile marketplace <a style="color: #000080;" href="http://dealstreetasia.com/tag/droom">Droom</a>, and online jeweller <a style="color: #000080;" href="http://dealstreetasia.com/tag/melorra">Melorra</a>.
&#8220;Good companies are always going to be able to raise money.  The environment in India hasn’t changed, the economy hasn&#8217;t changed, the consumer base hasn’t changed, the needs of the consumers hasn’t changed. It’s just that the funding environment has changed,&#8221; Talwar said.
The average deal size across all deals increased by 15 per cent to $22 million in 2015. Excluding deals smaller than $10 million, the average deal size increased from $55 million in 2014 to $63 million in 2015. &#8220;The majority of GPs we surveyed expect average deal sizes to continue to rise over the next two to three years. They feel that healthcare and nancial services will be the most attractive sectors in the next two years,&#8221; the Bain report said.
Funds cited improvements in capital markets and the macroeconomic environment as the primary factors for the increased exits in 2015.
Funds further expect exits to increase in the next two to three years. However, they believe that underperformance within the IPO market, macroeconomic instability and a mismatch in valuations could be potential hindrances.
&#8220;Right now people are not as quick to commit, people are absolutely more cautious. If you ask them why they are more cautious they are not able to give you a very clear reason. They think why should they not wait, interest rates have gone up, people are more nervous. Few of my LPs said had you come in September or October, there was a fear of missing out. Now there is a fear of getting in. They don’t want to go in early,&#8221; said <a style="color: #000080;" href="http://dealstreetasia.com/tag/deepak-shahdadpuri">Deepak Shahdadpuri</a>, Founder and Managing Director, <a style="color: #000080;" href="http://dealstreetasia.com/tag/dsg-consumer">DSG Consumer Partners</a>, which is raising a new $35 million fund.
&#8220;I started investing in 1999, so around 15 years, and this is probably the third cycle I’ve been through, and in my view this will be one of the better vintages. People are nervous, “me too” companies or undeserving companies will not be funded. Investors have become selective,&#8221; Shahdadpuri had said in <a style="color: #000080;" href="http://www.dealstreetasia.com/stories/37543-37543/" target="_blank">this interview</a> with DEALSTREETASIA.
<h4>To see confirmed speakers for DEALSTREETASIA &amp; MintAsia PE-VC Summit, click [<a style="color: #ff0000;" href="http://www.dealstreetasia.com/events/" target="_blank">here</a>]</h4>
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Consumer technology was the largest sector in terms of PE and VC investments in 2015, contributing approximately 30 per cent to overall deal value and accounting for approximately 41 per cent of overall deal volume. Deal values in the sector grew from $4.7 billion in 2014 to $6.9 billion in 2015. Deal volume was up from 295 in 2014 to 432 in 2015. The top 10 deals in the sector accounted for approximately $3.5 billion, representing half of the total investments.
&#8220;While the horizontal e-commerce platforms are selling to customers in tier-II and III cities, most consumer Internet companies see the majority of their volumes and value from consumers in the tier-I cities, since they tend to be better from a logistics, ability to pay, delivery costs, convenience, etc., perspective. We have not commented on the tier-II/III cities opportunity in India as being less or more attractive and definitely see it as a significant opportunity in the future for Internet companies,&#8221; said David Gowdey, managing partner, Singapore-based <a style="color: #000080;" href="http://www.dealstreetasia.com/?s=Jungle+Ventures">Jungle Ventures</a>.
<h4 style="text-align: justify;"><a style="color: #ff0000;" href="http://www.dealstreetasia.com/stories/53254-53254/" target="_blank">Have you booked your seats for the Asia PE-VC Summit 2016?</a></h4>
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Funds surveyed in the report said top-line growth was the leading cause of value creation in portfolio companies. They also emphasise the need to build strong internal portfolio support teams and develop operating partners to create value in a disciplined manner. However, this intent has not translated into action as the scaling up of portfolio teams has been muted.
And while India has the advantage of being a single market as compared with the various nations — and governments with varying priorities — that make up Southeast Asia, it is still not homogenous.
&#8220;India is not exactly a uniform market since significant variances exist in language, social nuances and local permits/regulations across parts of India, but these are not major hindrances to business growth if solved smartly. VC funds are largely investing in technology and Internet-driven business and apart from very few sub-categories such as financial services, transportation, etc., most other business models have low dependence on regulations and government,&#8221; Gowdey said.
But India does present a potentially huge market. The urban middle class population, currently just 5 per cent of the total or 27 million people, has the potential to expand. &#8220;India represents an enormous opportunity for Internet companies and like China or the US, has a large enough domestic ecosystem to sustain very large businesses. However, that said, the population of a country should not be viewed simply in absolute terms. When assessing the scale of the opportunity a country or market presents, one must look at the real addressable market size and the spending power within that base, that is rural consumers versus urban consumers are very different. A recent study by Goldman Sachs reveals the urban middle class represents only 5% of the Indian population, so only 27 million people vs 156 million in China,&#8221; Gowdey said.
The dry powder — or funds available to invest — is there, and waiting to be invested. &#8220;There is more money in India today than there has ever been. Over the last one year, the valuations went very high and people are re-looking at how to value companies and that’s causing a little bit of pause when evaluating a company. The other thing that is happening is that although there are billions of dollars, most funds that are based in India are doing rounds that are up to Series B. Our problem isn’t that there is not enough money for A and B rounds, our problem is that we don’t have a venture ecosystem that can lead a Series C or D round,&#8221; Talwar said.
India can also do better by taking the right lessons from Singapore. &#8220;Over the last five to 10 years, the Singapore government has been very progressive in terms of how Singapore can be the centre of technology development in the region. Their efforts have included incentives to start-ups, incubators, angel investors, VC firms and even investors—limited partners—in VC funds. There is probably a great deal that other countries can learn from their efforts,&#8221; said Gowdey.
For experienced investors though, such cycles keep repeating themselves every 4-5 years, and has its own benefits. &#8220;I started investing in 1999, so around 15 years, and this is probably the third cycle I’ve been through, and in my view this will be one of the better vintages. People are nervous, “me too” companies or undeserving companies will not be funded. Investors have become selective,&#8221; Shahdadpuri said.
For firms like DSG Consumer Partners, the real competition this year will be from angels, who are more nimble. &#8220;The valuation at the seed level was never crazy, but the step up from seed to Series A was very large, and that is not going to change. There is a lot for funds in the mid market where they invest $20-30 million. Very few funds are there who are happy to write the Rs 3 crore, or Rs 6 crore cheques so that gives me an advantage. My real competition is with angels, because they are more flexible, and I’m competing with firms like <a style="color: #000080;" href="http://dealstreetasia.com/tag/blume-ventures">Blume Ventures</a> and <a style="color: #000080;" href="http://dealstreetasia.com/tag/kae-capital">Kae Capital</a>, in which I&#8217;m an investor, but these firms historically have been technology focussed investors,&#8221; Shahdadpuri said.
Overall, this is an opportune time for investors to increase their funding in India, by developing strong teams for fundraising, deal making and portfolio management. The Indian economy might fare even stronger than last year, with a stable currency, low commodity prices and low inflation.
&#8220;I don’t know what has changed, but the big global brands want to acquire Indian assets if you’re the market leader, or have distribution, or have a brand that they can leverage. It is very clear that the consumer is spending, which will only go up. Brands will get created, and there will be a huge appetite to buy them,&#8221; said Shahdadpuri.
<h4 style="text-align: justify;">To know more about the agenda for the Summit, click [<a style="color: #ff0000;" href="http://www.dealstreetasia.com/events/" target="_blank">here</a>]</h4>
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