The State of Early Stage Investing in India

VCs are “Cautiously Optimistic” while seasoned Angels are “Wearily Cautious” when it comes to early stage investments in India, states the new report “The State of Early Stage Investing in India” by GSF.

The Indian early stage ecosystem is evolving fast but its not a perfect evolution. Indian market has already witnessed the bubbles and busts, highs and lows, it has rush of investor money, it has been regarded as the “hottest” new market and also rejected as the one to be wary of.  Indian market has gone through uneven evolution, every year it sees a few new “flavors of the day” investment themes.

GSF after collaborating a number of reports and data, post GSF2012 discovered conflicting signals from the early stage investors in India, both VCs and Angels. To unleash the state of early stage investing in India it gathered views of leading VCs and Angels directly to uncover their intentions for 2013.

  • Investment Volume: VCs are “Cautiously Optimistic” while seasoned Angels are “Wearily Cautious”

The year 2012 witnessed that most VCs made less than ten investments and most Angels restricted to less than five; several active Angels didn’t invest at all in 2012. The year observed a growing amount of participation by VCs in Seed rounds. In fact, there was more Seed level participation than Series A participation by VCs.

  • Collaboration: VCs and seasoned Angels are investing across stages now, and are collaborating in deals

Both Angels and VCs invested across “stages”, thus breaking the old paradigm of sequential entry “Angels before VCs” and the growing collaboration between Angels and VCs further corroborates this paradigm shift. Almost 61% of Angels surveyed, said there was greater collaboration in 2012 than in 2011; they sense that this collaboration will keep increasing as VCs continue to move down the “value chain” of investing. These behaviors indicate the emergence of a new hybrid investment paradigm for early stage, with inter-dependent players. VCs will develop strong partnerships with select angels and participate in their deals, thus gaining low risk exposure to multiple industries, without the cost of intensive diligence. Angels, on the other hand, gain from these partnerships by developing high quality exit options.

  • Exits: Lack of exits/ insufficient exit options is the key concern for VCs and seasoned Angels

One of the biggest concerns of VCs and Angels alike is the continued lack of exit opportunities in India. Angels witnessed very few exits in 2012, VCs too felt exits were highly constrained, with strategic divestments forming the bulk of their exits in 2012. They expect this to continue in 2013, with strategic exits remaining the vast majority despite their sub-optimal returns.

  • Investor Sentiment: Investor sentiment indicates slow recovery after a muted 2012 for most VCs and seasoned Angels

Investors are very wary of e commerce investments, which come as no surprise, as they watch the bubble burst and wait for the industry to stabilize. 2012 has tightened their purse strings but at the same time, they are keen on non-ecommerce sectors in 2013 and getting the investment momentum back on track. The only exceptions to this general outlook are Seed Funds.

Investors Speak

“There seems to be a little bit of slowdown, but not much. Future is hard to predict. I think that 2011 was an exception for the industry, not 2012. So if we can hold up at 2012 levels, I am happy,” Leading VC.

“We remain very bullish in our outlook for the year 2013 and ahead. Would like to point out though that we see exits and up rounds coming from global strategics / M&A / VCs – more than just Indian corporate,” Seed Fund.

“VCs appear to have become more cautious and in many ways are behaving like PE players. They want to take little risk and true ‘venture’ style investing seems to have taken a backseat as execution challenges in India are significant. I expect it will take another 12-18 months for Series A investments to start flowing again,” Leading Angel

“Yes. The slowdown is evident. But there is enough gunpowder that is dry. Things should get better in 2013,” Leading VC.

It appears that 2013 will be a watershed year for India. While VCs are just about to recover from the impact of “E-commerce Exuberance” in 2011, seasoned Angels will dig deeper to keep their companies going and are facing a situation where their resolves are being tested. New Angel investors will be providing fresh capital to early stage startups and a few accelerators and incubators have announced aggressive plans for 2013.

Mobile Internet is building up rapid momentum with 3G and 4G network rollouts with smart phone prices dropping, the combination of these two powerful forces will unleash a huge swathe of the Indian population on the internet.

Recommended Read

Internet Startup ecosystem Q1, 2013 Deals Report

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