Small Industries Development Bank of India (SIDBI), the apex financial institution engaged in the promotion, financing and development of Micro, Small & Medium Enterprises (MSMEs), under its World Bank group programme, released the State of Sector report: “Private Investing in India – Venture Capital Focus” which highlights that despite India being one of the fastest growing economies of the world, the Venture Capital (VC) asset class holds a meagre 17 per cent share of private investments in India and has witnessed low capital flows in the past few years. However, SIDBI believes that the VC industry is poised for growth with expansion of investor class and incentives to promote entrepreneurship.
Venture capitalists are investors investing in start-ups and early stage growth companies. In India though the start-ups environment has been supportive, the VC investments have gone into larger funds focusing on later stages of investment, and with a proven track record, or into funds focused on smaller seed / angel stage investments. A funding gap is observed at the mid stages of investment, with a limited number of funds and Limited Partners (LPs) operating in this part of the value chain. Exit scenarios in the Indian market have also contributed to low confidence among investors.
Shri Mohammad Mustafa, IAS, Chairman and Managing Director of SIDBI said, “We believe, an openingup of the investor class and bringing more domestic LPs into the ecosystem will propel industry growth. Creating structures to bring in more domestic capital and involving different investor classes in the ecosystem will provide fund managers with the required funds to invest in start-ups, ultimately leading to the development of more businesses and employment generation. Engaging with LPs through networking events and supporting new funds with risk capital are other potential ways to develop the ecosystem. Improving cash exit opportunities and educating LPs and fund managers about this asset class are other initiatives which need to be taken up on priority, to develop the ecosystem.”
Key highlights of the report are:
- India currently has 195 (~55% of all registered funds in India) active funds (made investments in India since the start of 2017). The VC industry in India has moved from a scale-up phase to an evolving phase, with firms affecting selective deals over the past 3-4 years.
- Total number of deals have declined from ~1,600 in 2015 to ~800 in 2018 while the average deal size has increased from ~USD 1.5 million in 2015 to ~USD 2.1 million in 2018 (deals with value up to USD 20 million).
- IT has emerged as the largest sector in terms of deal value and volume followed by consumer discretionary sector.
- An interesting trend to note is the diversification at later stages of investment. While angel / seed investments primarily go into technology and consumer discretionary, many of the start-ups are not able to achieve scale to raise later stages of investments.
- The latest trends have also seen funds across stages shift towards traditional businesses which have technology as an enabler. Sectors such as healthcare, vernacular and natural language processing and e-tailing have thus come up and are receiving a higher share of VC investment.
- The ecosystem for angel / seed stage has evolved with a growing number of start-ups and an increasing number of funds and investments at the angel / seed stage, over the past 10 years. However, the ecosystem for other stages of investment is still evolving.