The rupee value against the US dollar is falling continously since past couple of weeks and if this continue to go down any further in near future then this rupee downslide could adversely impact foreign investment flows into India’s startup ecosystem. This is because of the fact that the rupee fall reduces the returns that investors can hope to get.
But given that startup investment itself is a high-risk business, the currency concerns in such investments tend to be relatively low.
Mohan Kumar, partner at Norwest Venture Partners, noted that the companies the VCs invest in have much higher risk than the currency. “We may invest $30 million today and the company could vanish tomorrow. We also don’t hedge against currency as our investment model is not based on predictability of revenue. Rather, it is based on exits that are at some five times the investments we made,” he said.
VC investment horizons also tend to be five to six years. “It is not practical to hedge for such long periods; it will be very expensive,” Kumar said.
However, some said the community would be adversely affected if the depreciation is more than 10% for five or more consecutive years.
The rupee fell to a low of 66.48 against the dollar on Tuesday – its lowest since September – before gaining after China’s central bank cut interest rates and also relaxed reserve requirements.
IT companies based in India as well as other startups whose products/services are used abroad will see an extra Rupee cash flow due to weakening of Indian Rupee.
The rupee has fallen by about 5% since the beginning of the year.
Sanjay Swamy, managing partner of seed stage venture capital fund Prime Ventures, said in cross-border transactions and discussions the negotiations happen in dollars, indicating that currency fluctuations tend to matter less. He added, however, that a stable rupee is best for everybody.