Multi-billion exits at Flipkart may spur deal activity in start-ups

Expect an increase by 2nd quarter of this year

The multi-billion exits at Flipkart may lead to an increase in deal activity in start-ups by second half of the year, say start-up observers.
 
The exits will boost the confidence of limited partners (LPs) who invest in venture capital (VC) firms. This will encourage VCs to deploy more as they would be more confident of raising new money, says a VC-turned-entrepreneur. ‘’Flipkart gives confidence to investors that India can produce global-scale firms,’’ says the partner at a VC firm.
 
“Already deals are more competitive, valuations are going up. I see an increase in the pace of deal activity in second half of the year,’’ adds this person. “The number of entrepreneurs, investors and ticket sizes should increase deal activity 1.25x to 1.5x in 2018 over 2017,’’ says Rehan Yar Khan, managing partner, Orios Venture Partners.
 
There was slowdown in Series-C and Series-D deals between 2105 and 2017, as aggressive players like Tiger Global, Naspers and Softbank paused. ‘’We heard murmurs of lack of exits and returns from India which should get addressed by this deal. This will definitely swing the sentiment in reverse direction,’’ says entrepreneur K Ganesh. 
 

He thinks the deal would encourage investors, both VCs and LPs, to take bolder steps and come in aggressively into nascent, underpenetrated sectors like what e-commerce was 10 years back. ‘’We will see lot more LP money coming into India given the great returns that Softbank, Naspers, Tiger and Accel have made in the deal. Greed, in the positive sense and FOMO (fear of missing out) will make investors come into India lot more boldly and quickly,’’ Ganesh says.
 
He hopes this will spur Indian investors, domestic capital, Indian businessmen, industrial houses; Indian corporates take this asset class seriously. ‘’They have been watching silently and in many cases writing obituaries of new age business models, commenting on the lack of unit economics, discounting when foreign investors have come in, realised the potential, invested billions of risk capital, made stellar returns right on our back yard,’’ he says.
 
There are four key takeaways for venture capital from Flipkart deal.
 
One, it is a validation that taking the risk to become a founder or an early stage employee in a start-up is profitable. ‘’The two Bansals who started Flipkart are now worth $1 billion each, for 10 years of work! With $500 million payouts, ESOP holders have also made rich dividends. That’s the fastest wealth’s been created in India,’’ says Khan of Orios. Expect many of these ESOP holders to take the start-up plunge.
 
Two, the fund investors in Flipkart have seen handsome returns, the earliest ones making 400x and the most recent ones making close to 2x. This is cash coming back to the ecosystem that will find its way back to more start-ups. This is just the start of the Indian exit story, Delhivery, Nazara, and others have lined up IPOs.
 
Three, alternate investment as an asset class now has good validation. The Indian investor which has traditionally played the stock market can consider venture capital as a strong return option when listed equities are looking rich. Four, talent development in India will become stronger, with Amazon India, Flipkart and Paytm all having access to international talent and practices. This means more quality start-ups will emerge from the alumini of these companies.
 
Ravi Kaushik, partner, WaterBridge Ventures feels the Flipkart deal also brings Indian VC-backed companies on the radar of foreign companies and VCs and this could also allow exits for the VCs who came in earlier. Not everyone thinks the Flipkart deal will lead to higher deal activity.
 
‘’VCs don’t invest knowing they can raise a new fund but invest as and when they find new opportunities,’’ says Kaushik. VCs point out that there’s a lag period between raising money and deploying.
 
‘’I don’t know if this would lead to increase in deal activity but it allows for investors to feel that large outcomes are possible. For funds in the midst of raising money, this kind of events add to the data that the next ten years would be equally exciting as the last ten,’’ says Rahul Khanna, managing partner, Trifecta Capital.