NRIs – You have a new asset class for the investment in India
As I am embarking on my two months visit to the USA till mid-January 2022, I reflected on how the Startup ecosystem has changed in India. During my previous visit to the USA in 2019, I met a group of friends who wanted to explore investing in the Indian startup ecosystem. They were all eager to explore and understand the startup ecosystem. They wanted someone who understand the startup ecosystem in India to guide them to the right startups for investment.
Pre-Covid days startup ecosystem had two major challenges – Investment was not easy to come and exit for the investors was a challenge. The only option for the exit was the next bigger round of funding. India’s startup ecosystem in the post covid world has entered a different trajectory. It has an ecosystem that is vibrant and quickly catching up with the best of the world in terms of innovation and availability of capital. The rapid increase in digital payment, almost 150% increase in the healthcare union budget, hyperlocal eCommerce, remote working solutions, acceptance of online education delivery, adoption of OTT platform, online gaming and Pharma are areas under focus in the post covid world. Startups in these sectors are likely to do well over the next few years.
The startup asset class is rapidly becoming mainstream asset class and catching fancy for the investors. Non-Resident Indians (NRI) who have traditionally looked to invest in India primarily through real estate or share market should now look to this exciting asset class. End of this blog, I have put my thoughts on what NRI should consider before participating in the startup investment.
Following are the new and encouraging trends that are observed in the post covid Indian startup ecosystem.
Exit through IPOs: Startups have started to get successful IPOs with rich exits to the investors. PayTM just concluded a successful subscription of Rs.18,300 crores – the largest IPO in Indian history. Other major IPOs announced in 2021 include those of Food aggregator Zomato, online insurance broker Policy Bazaar, online pharmacy PharmEasy, and fashion retail company Nykaa. All these companies are attracting global institutional investors. The Sensex crossed the 61,000 mark for the first time in October and is trading at 40 percent over year-ago levels.
Increasing M&A: The number of M&A transactions since January 2021 till now stands at 119 as compared to 86 such deals for the whole of 2020, according to YourStory Research. This amounted to an M&A value of $1.3 billion in 2020; in 2021, the figure hit $3.8 billion. These are only the disclosed deals; a majority of them are undisclosed and the value may actually be higher. M&A space is likely to grow as more traditional businesses, MNC and well-funded startups look for the opportunities. Following are a unique few examples of how the M&A space for startups is evolving.
o Byju invested over USD 2 billion to acquire 8 companies (Startup acquiring other startups)
o Tata Digital acquires BigBasket (Food and Grocery Ecommerce) and 1Mg (Healthcare) with over USD 1 Billion transactions. (Traditional business acquiring startups)
o Startup PharmEasy acquires Thyrocare – a traditional player in Healthcare. (Startup acquiring established leading brand)
o Walmart acquired Flipkart by investing USD 16 billion (MNC acquiring startup)
Emerging trends:
- Startups investing in other startups. Zomato pumps in $275 million in 4 startups in 6 months; eyes investment worth $1 bn in India. These are all future M&A candidates.
- Neo-rich startup founders with recent successful exits like Sachin Bansalfrom Flipkart are investing back into startups and building their portfolios. Sachin Bansal made 22 investments in diverse startups from automotive to Fintech after exiting Flipkart.
- Given the enormous potential, it is not surprising that VCs are putting in more funds than ever. This year VCs are likely to invest over 30 billion (More than INR 2,30,000 Crores)
All these trends have just started and I am confident that they will only accelerate in the coming days. India in 2021 had one unicorn on an average of 10 days. 32 Unicorns by the end of October. An average number of days is likely to shrink further. In November first two weeks, 3 more were added to the list. Now there are 35 unicorns in 2021 till date as per Venture Intelligence report. This is almost equal to all unicorns added in the entire decade in India. It’s not just paper returns, but real cash exits have started to happen.
Macro indicators are also encouraging China is slowing down, India economy has bounced back strongly, Government encouraging policy framework to enable startup ecosystem. Opening up of defense sector in India for the private players. UPI has revolutionized digital payment in India. It has beaten USA and China in the number of digital transactions by a huge margin. India recorded 25.4 billion digital transactions in 2020. This is 1.6 times compared to 15.7 billion digital transactions in China and over 21 times the 1.2 billion transactions seen in the US. In the coming years, there will be more innovative and successful startups coming out from India.
So, what does all this mean for NRIs?
1. NRIs who are looking to invest in India, there is an exciting new asset class emerging.
2. Startup investment provides good diversification in your portfolio along with a share market investment.
3. Get associated with the startup ecosystem as a mentor to understand what works. This way you can also help startups to connect with the international market.
4. Startup is a riskier asset class with huge return potential. Instead of putting one big amount into one startup, spread your risk by investing in multiple startups smaller amount. Build your startup portfolio.
5. To select the right startup, you need someone in India who understands the startup ecosystem.
In summary, NRI can help Indian startups with not only investment but opening doors for the startups to reach out globally. This will not only help India, a startup but your investment.