India’s technological moment arrives flush with the unicorns

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The Zomato Ltd. food delivery app. became the country’s first unicorn to debut, raising $ 1.3 billion with backing from Morgan Stanley, Tiger Global and Fidelity Investments. The parent company of digital payments startup Paytm filed a draft prospectus for what could be India’s largest IPO at $ 2.2 billion, while retailer Flipkart Online Services Pvt raised 3 , $ 6 billion for a valuation of $ 38 billion, a record funding round for an Indian startup.

“Indian entrepreneurs have been quietly creating startups for a decade now, the country’s internet infrastructure has improved dramatically over this period and there is a very good appetite for tech stocks around the world,” said Hans Tung. , Managing Partner of Silicon Valley-based GGV Capital, which manages $ 9.2 billion in assets. “Investors are starting to see the huge potential and they expect India to be a China.”

Read also: Zomato’s hotplate

Unlike China, where online usage is much more developed, many of India’s 625 million internet users are just dipping their toes into the world of video streaming, social media, and e-commerce. Online shopping opportunities are particularly attractive, as e-commerce accounts for less than 3% of retail transactions. Tech startups in India are still paying to build supply chain and delivery networks.

India’s population is expected to overtake that of China this decade, and the current investor mood couldn’t be more different in neighboring countries. China is holding back its tech companies, wiping out more than $ 800 billion in stock market valuations from its February peak and squeezing the net worth of its most famous entrepreneurs by billions. This month, the government abruptly pulled ride-sharing service Didi Global Inc. from app stores, months after regulators forced Jack Ma’s Ant Group Co. to suspend a successful Eleventh IPO. hour. The crackdown is expected to continue as regulators limit the power of internet companies and take back control of user data.

Indian tech companies “can attract global investors who have burned their hands in Chinese tech companies,” said Nilesh Shah, group chairman and managing director of Kotak Mahindra Asset Management Co. in Mumbai. lead to a reassessment of many existing companies and drive the market up, he said.

Record funding

India saw a record $ 6.3 billion in funding and deals for tech startups in the second quarter, while funding for China-based companies fell 18% from a high of 27 , $ 7 billion in the fourth quarter of 2020, according to data from research firm CB Insights.

Flipkart, one of the two largest e-commerce players in India along with Amazon.com Inc., is among a number of startups that plan to tap into the public markets over the next 24 months, with a lineup that includes ETechAces Marketing & Consulting Pvt, the parent company of the insurance market. ., logistics provider Delhivery Pvt. and the Ola carpooling service from ANI Technologies Pvt. IPOs will give retail investors the option of owning a stake in startups, which was only available to global private investors.

In these private markets, India has launched startups valued at $ 1 billion or more in recent months with unprecedented speed. In April, half a dozen unicorns were born within four days, while the intervals between fundraisers contracted to weeks for many startups.

“$ 1 billion is the new $ 100 million,” said Krishnan Ganesh, a serial entrepreneur who now promotes companies that have attracted investors such as Sequoia Capital, Lightspeed Venture Partners and Qualcomm Ventures. market and capital flows have increased tenfold. “

Optimism about India is tempered as one of the world’s worst coronavirus outbreaks threatens to erode decades of economic gains, with more than 31 million infections and more than 400,000 deaths. At least 200 million Indians have regressed and are earning less than the minimum daily wage of $ 5, according to estimates from Azim Premji University in Bangalore, while the middle class has shrunk by 32 million in 2020, according to Pew Research Institute.

Investors in India are not immune to political risks either. Tech startups also face an increasingly stringent regulatory regime, with Narendra Modi’s government cracking down on foreign retailers, social media giants and streaming companies. The administration is expected to introduce a data ownership and storage bill during the month-long parliamentary session starting Monday that would restrict how they can manage user information.

On top of that, some analysts are concerned that the equity markets may be a bubble ready to burst and that many companies’ valuations are well above their fundamentals. They warn that retail investors in new-age companies that have yet to generate profits will need to look beyond traditional value metrics like EPS and P / E and must be able to assess factors such as investing in building a loyal following as startups evolve. up.

Habit formation

“A lot of these companies are building customer acquisition habits and therefore losses can be anticipated,” said Ramesh Mantri, chief investment officer at Mumbai-based White Oak Capital. “What really matters is the potential to generate cash flow.”

New businesses also have competitive advantages over many traditional brick-and-mortar competitors, which have high real estate costs and often suffer from broken distribution chains and complicated structures. These constraints mean that the many retail, banking and healthcare chains have not reached even the smallest towns, let alone the millions of people who live in remote rural areas.

“The proliferation of smartphones and the internet has enabled tech entrepreneurs to create new-era business models to reach the far corners of the country,” said entrepreneur Ganesh.

And the promise of attractive returns for major investors as startups increase the number of public equity sales could spur new rounds of funding. For example, Japanese firm SoftBank Group Corp, which sold Flipkart three years ago at a profit, returned to invest in last week’s fundraising round.

“Consumer internet companies in India have come of age,” said tech mogul Nandan Nilekani, chairman of contractor Infosys Ltd. whose IPO in 1993 introduced investors to a computer services industry that now has nearly $ 200 billion in annual sales and makes billionaires from its founders. “When these new startups convert their pole position into profit and cash flow, their future is secure,” said Nilekani.

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