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Venture capital investment keeps dwindling in India

Market transitioning toward more complicated investments

Indian Prime Minister Narendra Modi announces the "Starup India" initiative in New Delhi in January 2016. (Courtesy of the Indian government)

NEW DELHI -- Venture capital investment is still shrinking in India despite Prime Minister Narendra Modi's "Startup India" initiative to nurture new businesses.

While venture businesses for Internet services continue to draw attention, venture capital investment in the first three months of this year totaled 68 in number and $314 million in value, according to Venture Intelligence, the research arm of TSJ Media. The number of investment roughly dropped in half from a year earlier and was the smallest in 11 quarters.

As seen in the chart below, venture capital investment peaked out in 2015 and has since remained on the decline.

The chart shows a clear contrast with stock price movements of listed companies. The Sensex index of the Bombay Stock Exchange has kept rising since late last year, setting a new all-time high in early April. So clearly, investor expectations on businesses as a whole have not withered.

Investors are shunning newly-founded venture businesses in a nebulous condition. While overall venture capital investment decreased 17% year-on-year in the January-March period, investment in newborn firms plunged 50%, Venture Intelligence reported. Venture companies entering a growth phase attracted investors to a moderate extent.

Investors are shifting the foundation of their assessment of venture businesses away from gross merchandise value toward sales and profit, an executive at Avendus Capital, a venture capital firm based in the major western Indian city of Mumbai, said at a venture capital investment-related event in February.

The foundation is likely to shift further to earnings before interest, taxes, depreciation and amortization, the executive added.

As far as electronic commerce is concerned, GMV represents the total value of merchandise sold through an online site over a given period. Investors therefore are growing more practical in assessing the financial conditions of venture businesses, analyzing them from the viewpoint of whether they can earn profit rather than whether they offer services in demand.

Emerging trends toward survival of the fittest and natural selection may be behind the shift in investors' assessment of venture businesses.

Stayzilla, a major room-booking website operator founded in 2005, announced a decision in February to close its service. The founder of the company was arrested the following month for a delay in paying a certain amount of dues.

Although startup leaders protested the arrest, Stayzilla undeniably got a beating in the business sector, which is filled with rivals and was weeded out due to its financial difficulties.

Personal experience

I directly experienced a case of natural selection going on among startups. For more than a year, my elementary school daughter has been attending a soccer school in a New Delhi suburb, managed by a venture business. Last autumn, the lineup of coaches and recipient of lesson fees were suddenly changed.

Founded by Indian and British persons, the management company was forced to close its service amid a glut of education-related businesses in India.

While e-commerce is a sector flooded with venture businesses, even well-known companies are retreating from it.

Top Indian e-commerce company Flipkart recently raised a total of $1.4 billion from eBay, a leading U.S. e-commerce operator, major Chinese internet company Tencent Holdings and American software giant Microsoft. In the deal, eBay drew attention as it sold its Indian business to Flipkart. Although the Indian version of eBay keeps operating as an independent e-commerce site, the San Jose, California-based company has withdrawn from the Indian market amid intensifying competition.

Modi launched the Startup India initiative, which includes a corporate tax exemption, in January 2016 as part of his efforts to create jobs. A question now is whether opportunities for developing venture businesses will soon vanish.

Venture capital investment in business-to-consumer (B2C) companies is expected to keep decelerating, said Arun Natarajan, CEO of Venture Intelligence. But opportunities to raise funds are increasing for business-to-business (B2B) startups as investment in them is continuing, he said.

Starting in around 2015, when investment in venture businesses peaked, many hedge funds and other investors, in addition to venture capitalists, invested in startups. However, as their investment has decreased, venture capital investment remains on the decline.

The Indian market for venture capital investment may be in a transition period toward a more complicated phase where investors with high discerning ability discover B2B companies boasting original technological prowess and other strong potential.

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