Venture capitalists put $1 billion into early-stage projects in 2014 on back of rising ecommerce deals

Mumbai: Venture capital investment in India has already breached the billion dollar mark this year-with a few months still to spare-signalling the growing attraction of a booming startups sector.

Fund managers are pouring money into consumer internet and technology firms that have cornered over half of the total deal flow this year. According to EY, there were 189 early-stage deals in the first nine months of 2014-total worth of Rs 6,764 crore, or $1.09 billion. This is significantly higher than deal flow for all of 2013, when there were 179 deals worth Rs 3,900 crore or $630 million.

As more Indians show a willingness to transact online, entrepreneurs are queuing up. Their ventures promise sky-rocketing growth, proving to be irresistible to venture investors.Indian online retail is expected to reach Rs 50,000 crore by 2016 from about Rs 12,000 crore in 2013."Over the past 18 months, the venture industry has begun to see several breakout companies driven by the significant growth and adoption of internet in India," said Niren Shah, managing director at NVP India.

NVP has backed firms like online classifieds player Quikr and furniture etailer Pepperfry, which have collectively raised nearly Rs 1,000 crore. Similarly, in the past quarter alone, taxi aggregators Ola and TaxiForSure raised a combined Rs 400 crore.

Realty portals like Commonfloor, Housing.com and IndiaHomes have also collectively raised over Rs 500 crore this year. Mobile recharge services company Freecharge has raised over Rs 200 crore, with rival PayTM also eyeing a mega round of financing.

Experts, however, believe inter et penetration, which will only increase with cheaper smartphones, is only one side of the coin. "More importantly, consumer behaviour pattern is also rapidly changing as they transact online, which makes the space quite attractive. Also there are increasing number of entrepreneurs coming into technology, consumer goods and healthcare, which underpins the India growth story," said Raja Lahiri, partner of Grant Thornton India.

EY's data on early-stage deals does not include large late-stage rounds of digital businesses like Flipkart, Snapdeal, Quikr, Make-MyTrip and Info Edge, among others. These would have collectively raised another $2 billion, or Rs 12,000 crore. These large rounds and mega valuations play a hand in boosting sentiment of early-stage investors.

In fact, venture investors are also backing startups in healthcare, education, financial services and food or agriculture ventures. This year, the likes of online test preparation portals Embibe and Toppr, financial services portals like Policybazaar and BankBazaar, agriculture equipment maker MITRA and supply chain firm Allfresh have all raised VC funding.

Some early-stage bets are showing increasing mark-up in valuations during follow-on rounds. "The belief is that large market leaders will create disproportionate value and those seem to the bets that investors are willing to back with large cheques," said Suvir Sujan, cofounder of Nexus Venture Partners, which was an early investor in etailer Snapdeal and logistics startup Delhivery.

"Startups, which used to come for funding three-four years after they were founded, are now coming in the first couple of years," said Rajesh Raju, MD at Bangalore-based Kalaari Capital. The VC has recently backed online travel startup TripHobo and jewel-lery etailer Bluestone. Entrepreneurs themselves have realised that it is a good time to raise capital.

"Investors realise that the Indian market is going through a once-in-a-lifetime change and digital will be the largest channel for distribution," said Adhil Shetty, founder of BankBazaar, which raised Rs 80 crore from Sequoia Capital earlier this year. The last time India saw such a boom was in 2007, when the total early stage investment just crossed $1 billion across 95 deals, according to data from EY.

But this time, capital is flowing to a lot more ventures. What could be a wet blanket, though, is global sentiment. "This trend of significant investments into internet is expected to continue in the next year driven by increased confidence of VC funds, strong growth, the coming-of-age of verticalised ecommerce companies and increased interest from overseas and strategic investors.However, any major declines in global tech markets could likely impact this trend adversely in India," said NVP's Shah.

Also new investors are now looking at deals in India, as they have funded similar businesses like ecommerce and online classifieds in markets like China. "I was in Hong Kong last week, and every other fund that I met had made a 6x returns on Alibaba in two and half years. Betting on that possibility again is definitely worth it," said Sandeep Murthy of Lightbox Ventures, whose portfolio includes Greendust and Zoomin.

But as the volume of dealmaking increases at the early stage, the ecosystem also needs to mature. "We are still not used to seeing significant mortality rates and company failing in India is a taboo. But in Silicon Valley it is celebrated, and this is a culture shift that we have to make as well," said Aashish Bhinde, executive director looking after digital media at investment bank Avendus Capital.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.