“Show Me The Money”: India’s Big Promise to VCs

According to CBInsights, there are seven Indian startups are already valued at more than $1 billion. If you include Micromax, Mu Sigma, and InMobi, the number would be ten. Merely 2 years ago, there were only five unicorns.

It won’t be long before large exits confirm India’s ability to deliver meaningful returns to startup investors. There have been more than sixty mergers and acquisitions in India’s tech sector worth more than $800 million in just 2015. Indian IPOs increased nine times in 2015. Also in 2015, “21 IPOs were launched on the BSE, the Bombay Stock Exchange, compared with five in 2014, the highest number since 2011, when 37 IPOs were launched.” Sure they weren’t tech startups but it shows that the domestic appetite for IPOs is on the rise – something, tech startups are very excited about.

While many Indian startups may not take the typical path to an IPO, the opportunities for exits are real and more options continue to emerge. Here are a few of these promising signs for Indian startups and investors.

IPO Me, Please

In September, the Securities and Exchange Board of India (SEBI) approved e-commerce firm Infibeam’s plan to sell US $68 million in shares. Infibeam was India’s first e-commerce IPO in March 2016, clearing the way for future e-commerce companies. Snapdeal hopes to go public in India within the next few years. It was valued at nearly $5 billion last year, and has said it is likely to IPO in India rather than on a foreign exchange. Flipkart is, also, likely to IPO in the next few years, although rumors of a merger between Amazon India and Flipkart keep making rounds. Other tech unicorns like PayTM, MuSigma, Micromax may also entertain IPOs either in India or in the US. As they go public, they will act as proxies for the broader digital startup sector where many larger investors can’t easily participate.

Acquisitions and Investments by Major Players

India’s major startups are spending significant amounts of money to round out their portfolios as they prepare for their next, more public phase of competition. Snapdeal acquired mobile prepaid recharge provider, FreeCharge for $400 million in April, then launched a digital wallet for their bundled  services in September. They’ve acquired ten more firms over the last year, such as online loan platform RupeePower, luxury goods retailer Exclusively, and MartMobi, a mobile apps developer and TechStars alum.

Meanwhile Ola, another member of India’s Unicorn club, acquired rival rideshare service TaxiForSure for $200 million. Ola also acquired Qarth and trip-planning company, Geotagg.

According to Crunchbase, Flipkart wasn’t sitting on the sidelines either, publicly announcing three acquisitions in 2015 as well as PhonePe so far in 2016.

MakeMyTrip, the NASDAQ-listed travel firm, picked up last-minute booking site MyGola, 500 Startups’ first investment in India back in 2011, and has launched an “innovation fund” to invest in more startups.

It’s not just Indian firms who are doing the buying – Twitter picked up ZipDial, an Indian firm that turns missed calls into smartphone alerts, for an undisclosed amount (also a 500 Startups portfolio company). Yahoo bought Bangalore based, BookPad in 2014.

Times Internet, part of the media heavyweight, Bennett, Coleman and Company, recently announced leading an investment of $11.2 million in Haptik, an Indian concierge service. FreshDesk, another Tiger Global backed startup, recently announced its 5th acquisition.

What’s In It For Investors?

The Reserve Bank of India recently made it easier for foreign investors to sell or transfer their stakes in Indian startups, and loosened disclosure requirements. Relaxing rules like these should go a long way in attracting new investment dollars from overseas investors as well as continuing to make investing in startups attractive to local investors.

Prime Minister Narendra Modi, has promised to make it even easier for investors to both enter and exit startups through its Startup India Plan. This initiative, launched in January, intends to expand the country’s culture of innovation in technology startups to other areas, such as agriculture, manufacturing and healthcare.

India Accelerating

There were 141 M&A deals worth US$1.26 billion involving Indian tech startups in four years from 2010 to the end of 2013, a stark increase from years prior.  If you consider the massive growth in mobile phone penetration, the second largest Internet user base in the world, acceleration of e-commerce in India (which is expected to top $17 billion this year, having quadrupled since 2010) and a government that is committed to creating the next “Startup Nation” of 1.3 billion people, then the future of exits in India starts looking far more interesting.

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Why India is the Next Frontier for Mobile

Girl Talking by Ramesh LalwaniUnmodified picture by Ramesh Lalwani under Creative Commons 2.0

All over the world, opportunities are flourishing for mobile development (and investment). In some countries, like the U.S.,64% of adults owned a smartphone in 2015. In China, 68% of adults have a smartphone. Yes, these countries still offer room for growth. But not like India.

Indian use of smartphones is rapidly growing. Google-sized companies will be created over the next decade to satisfy user demand, which is significantly more than in the U.S. and China over the same time period. Here’s why India is primed for massive mobile growth. This is why we are getting more aggressive in India.

Mobile Growth All Over the World

It’s hard to believe that just 20 years ago, the world had about only 80 million mobile phone users, representing 1% of the world’s total population.

By 2014, the world’s mobile phone user base had grown to 5.2 billion, or 73% of the population. 40% of that user base had a smartphone.

Based on these stats, it’s hard to argue against mobile development as a lucrative business endeavor all over the world. Even so, growth in countries like China and the U.S. is slowing. Based on what I’m seeing as I invest and work with Indian companies, India offers the greatest opportunity for mobile investment. According to a report by IAMAI and KPMG, the number of mobile Internet users is set to double by 2017 to 300 million!

India already has over 900 million mobile phones, representing 79.39% of the population, and it’s on the path to having more smartphones than the entire U.S. population. It has the second highest number of mobile phones in use, after China and before the U.S.

In 2014, the number of smartphones in India grew 54%, and is expected to reach 651 million by 2019.  In 2013,  only 6.2% of Indian people owned a smartphone. India’s smartphone usage is growing faster than any other country. It’s currently the third largest smartphone market in the world.  

Indian internet penetration is also rapidly increasing. India currently has an internet userbase of at least 232 MM users. This is only 19% of the population, which leaves quite a bit of room for growth.

Scalability

Having a population that is four times bigger than that of the U.S at 1.27 billion people, offers a massive opportunity to scale a business. Though, margins in India are typically pretty low, the numbers are massive. There are hundreds of millions of people across India  who will access new technology for the first time via their mobile phones. They will want entertainment, content, services, and communication. Startups that can figure out how to meet the demands of mobile-first urban and rural Indians will create multibillion dollar companies. Even now, most people use a mobile phone to access the Internet vs a computer or desktop – “According to Meeker’s report 65% of people accessing the internet in India do so from a mobile device and 41% of e-commerce in India takes place on mobile.”

Growth in India

According to the App Annie Index, “Emerging markets grew as low-cost smartphones continue to penetrate India and Southeast Asia. First-time smartphone owner numbers are on the rise.”

I also think that people are inspirational at their core. If you provide the best hardware, QoS, content, and services, they will pay for it as long as their payment options become easier and ubiquitous.”

Takeaways

Indian use of smartphones is growing rapidly. The cost of smartphones continue to decline. “In 2015, the number of mobile internet users from rural area doubled from 2014, and in 2016 the growth percentage is estimated to surpass all the previous figures.

  • India is a market that can’t be ignored by corporations, investors, and startups
  • Growth in mobile usage and GDP is surpassing the US and China
  • Internet penetration is second to China and there’s still a tremendous amount of growth left with less than 25% of the population online
  • India is one of the youngest countries on the planet with a massive workforce

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Meeting Indian Startups Applying to 500 Startups Accelerator Batch 6

#500StrongGood morning Founders!

You might have heard that 500 Startups recently announced a public application process. This is the first time we’re accepting applications for all companies that want to join our accelerator. In the last batch of the 500 Startups Accelerator, we had four great companies from India. The highest number from any country outside of the US. I’m hoping India can be represented just as well in the upcoming batch which starts in April 2013.

If you’re doing something exciting in education, jobs/employment, travel and you’re looking at markets in India or globally then you may want to put in your application soon. We will consider all applications, however, companies with traction, strong teams, past successes, and even a few referrals from 500 mentors and/or other 500 founders will go a long way.

Schedule

You can download the iCal file here.
  • Education Put in your application by 13th of February 2013
  • Jobs/employment by 14th of February 2013
  • Travel by 15th of February 2013
  • Others by 16th February 2013

By the 20th of February, I will start emailing interesting startups with dates and times to meet Dave and I in Bangalore, Mumbai and Delhi/NCR. If you have been thinking about how you can be a part of the 500 Startups family, this is your chance.

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10 Things to Consider Before Approaching a VC

A lot of very very smart, experienced investors have put similar information out there over the last few years. If you’ve read it before, consider this a reminder. If you haven’t read it before then consider this a starting point. This post shouldn’t be seen as a comprehensive list. It’s more of a response to various pitches I’ve been getting from multiple sources over the last month.

“Understand the investor’s mandate, fund size, investment reqs. Pitch the right investors and build releationships with others” – TJ Sassani, Founder of Zozi.

  • Research

  • Before going out and trying to approach investors, take the time to create a spreadsheet of the various investors you want to approach. This will be your scrappy CRM for managing your investor pipeline. Some of the columns in your spreadsheet could be:

    1. Why you want them to be investors
    2. Can you get an intro to the investor from someone that the investor knows and trusts
    3. Have they invested in your market in the past
    4. At what stage do they typically make investments
    5. What is the fund size
    6. What is their typical check size
    7. What criteria do they use in determining if you’re a fit for them

    Once you’ve built this matrix (and customized it according to your needs), filter out the investors who don’t invest in your market or don’t invest at the stage you are at. Then look at the other criteria and keep filtering. Once you’re down to a list of investors that have an investment thesis that your company would fit into, begin your approach. You may want to consider speaking with the investor that is least likely to invest in your company first. Pitch them and get feedback. Incorporate that feedback into your pitch. Become awesome (if you aren’t already) at your pitch each time you pitch someone new and move up the ladder. The investor you want most to be in your current round should be the last one that you pitch to so that you’ve received enough feedback to make your pitch really awesome.

  • Connecting with Other Founders

  • This is something that you should consider doing as part of your research. Try to connect with founders that have raised money from some of the VCs in your pipeline. Connect with them, meet with them if possible and discuss very specific questions that will give you some insight into the VC and if there is a fit with you, your company, the stage at which your company is at, specifics that you would like the VC to help with and what the VC can help with. Finding what companies a VC has invested in is usually not that difficult. A good place to start for recent investments is AngelList.

  • Understanding a VCs Motivation and Economics

  • VCs typically invest in many many companies. Out of the investments they make, the majority don’t yield positive outcomes (check out this report by the Kauffman Foundation). Hence, most VCs need to invest in companies that are going after large opportunies, have balanced teams, focus on execution and have a higher probability of a large positive outcome to help offset some of their losses. There are many reports/blogs/articles and books that talk about the economics behind VC funds and I would urge founders to read as many of these as possible before approaching VCs. If you haven’t read this post by Mark Suster yet, you should.

  • Market Opportunity

  • One of the most important things that founders need to think about and understand is the fact that investors, generally, need founders to go after large markets. If the market you’re targeting is Rs. 500 Crore and it’s not growing rapidly, then opportunity isn’t large enough to go for venture funding. Even if your business winds up controlling 80-90% of a Rs. 500 Cr market, the market is still too small and wouldn’t yield a large enough return for the VC. For example, after dilution, if the investor winds up holding 10% of your company, in the best case, it would probably not be worth more than Rs. 100 Crore. Something like this would make a great lifestyle business, however. So think about your market carefully before deciding to raise venture funding.

  • Ideas Vs. Products with Traction

  • Ideas are a dime a dozen. They don’t matter. What matters is execution and traction. If you’re looking for funding at the idea stage, you had better have strong successes in the past. Most investors (VCs and angels) won’t invest in ideas. They want to see that you’ve built something and that you have some measurable traction and possibly, some defensible intellectual property that’s worth something. If you have a revenue stream, even a small one, already in place, it adds significantly to your chances of getting investors interested.

    If you’re at the idea stage, talk to as many people as will listen about your idea and get feedback. Learn as much as you possibly can during this time and don’t worry about someone stealing your idea. Chances are, people have thought of similar ideas, they just haven’t done anything with their ideas. Don’t be that guy. Go build your idea.

  • Investments in Your Vertical

  • It’s important that you spend time understanding if the VC you’re approaching has done investments in your vertical. For example, e-commerce is a very broad vertical. It may be sufficient to determine that VC X has invested in e-commerce companies in the past hence, your e-commerce business selling gourmet chocolate online fits in to their investment thesis. However, to be really prepared before approaching them, you may want to research if they have invested in online food ordering or other food and beverage related businesses before. It can only help if they have.

  • Investments at Your Stage

  • Making sure there is a fit in the life cycle of your startup and what VC X typically invests in is critical. For example, if you just launched your prototype, have 1000 users on board and are looking to raise 50 lakhs in funding, you probably shouldn’t approach a VC who does much later stage and larger deals. At your stage, you are probably better off approaching an accelerator program.

    At the same though, you shouldn’t shy away from connecting with and building relationships with investors that may be a better fit for later stages in the lifecycle of your startup. Everyone is busy so don’t despair if an investor declines to “have coffee” with you. Keep trying.

  • Get a Refferal

  • I can’t stress this enough and I’m sure you’ve heard and read about this multiple times. Read it again. Get a referral to the VC(s) that you’re targeting. What does this mean? Well, it means that you need to start thinking very early on about some of the VCs that you want to approach. Find out who do you know that knows them – founders, mentors and/or advisors in some of their portfolio companies, angel investors that co-invest with them, etc. Start building relationships with these folks early on. Don’t expect to meet someone once or twice and ask them to make an introduction to a busy VC. It doesn’t work like that. If you ask someone for a premature introduction, you will most likely turn that person off and they may be unwilling to help you in the future.

  • Your Pitch Deck

  • Assume all of the other items above have worked out well and you’re ready to start connecting with the VCs in your pipeline. Sending an email detailing what your business is and who your team is, etc. is not a good way to start the relationship. Remember, you’re not the only person the VC is speaking/meeting with. Most VCs are extremely strapped for time. After getting the introduction, send over a deck with some very simple but impactful slides. If you’re going to send over 20 or 30 slides, don’t expect it to get even a glance. Start with Guy Kawasaki’s 10/20/30 Rule and after that, take a look at The Triple Play of Presenting and Dave McClure’s 10 tips for the perfect investment pitch.

    I would make a slight modification to this. If you have any traction, e.g. number of users, number of downloads, revenue, etc., then you should start the first slide with this data. If I open a deck and I see some meaningful (though early) traction, I’m more inclined to go thru the rest of the deck to see what other pleasant surprises are contained in the deck. Move the “Problem” slide to the second slot and the “Solution” slide to the third position. Move the “Team” slide to the second to last, right before the “Money” slide. Rip out the projections slide for some early investors but keep it in for other later stage investors unless you have some traction on the revenue side and can make actual projections. Most early stage projections are completely useless so let’s not event waste time on them.

  • AngelList

  • If you aren’t using AngelList, you’re losing out on an incredibly valuable resource for connecting with investors. I’ve done a few talks in New Delhi/NCR about the importance of AngelList for Indian startups and I think many Indian founders are beginning to see the importance. Though it’s a chicken and the egg problem with regards to Indian founders and Indian investors on AngelList, the one thing that you can be certain of, is that many many US investors are on AngelList and they are watching India closely. The boundaries and borders are coming down. More and more US based investors are getting active in India (we’re one of them) and AngelList gives you a direct line to them. Long story short, before contacting an investor, make sure you have a properly filled out AngelList profile ready to go. Include your AngelList profile, Twitter and Facebook in investor communications. It helps them to get to know you and see what’s happening.

So what do you think about these tips? Any more to add?

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Venture Fund Economics

A great post by Fred Wilson titled “Venture Fund Economics: Gross and Net Returns“. Do take a look if you’re even remotely interested/involved in a startup.

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