India offers huge potential and an improving environment for venture capital investors, particularly in technology, if they can overcome certain obstacles, argues Rahul Chandra, managing director of VC firm Helion Venture Partners.
Of the $19 billion invested in mobile internet over the 12 months to October 2014, only $90 million went into India, he observes.
The country may be at the early stage of VC investing, but growth is proving swift. The value of India VC deals rose 217% to $5.4 billion in 2014, according to data provider Preqin – similar to the 212% rise in the value of Greater China deals to $12.8 billion.
Moreover, India can lay claim to three of the 10 largest VC deals completed globally in 2014, compared with China’s two and the US’s five, by Preqin’s data.
VC has been in favour in India for the past four years, noted Chandra, who co-founded Helion. Limited partners have remained bullish about the opportunities that VC companies are addressing, he added, and early-stage deal flow has been very large.
“India’s market is where China was three years back,” said Chandra. “LPs realise India is the third and final large digital economy in the world after the US and China – there is really no fourth frontier after this.
“When we first started to invest, there were 20 million internet users in India. Today the number is 200 million,” he said, pointing to a tenfold increase over seven years. “That critical mass is what you need to build large businesses.”
But there are plenty of challenges. Chandra pointed to a cumbersome mobile payment ecosystem hampering growth. India is the first country of size to adopt multi-factor authentification, requiring users to pull an online password from an SMS message at the time of a transaction then go back to a bank screen to fill that code in, he said.
Another issue is relatively slow internet speeds and people’s unwillingness to use apps bigger than 5MB in size.
Moreover, difficulties determining creditworthiness are cited as barriers to the growth of mobile phone contracts – and the prevalence of prepay users – leading to telecom operators being reluctant to subsidise handsets.
The hope is that India now has the government to address those challenges following Narendra Modi’s election last year. Having a business-oriented government is very positive both with regard to market sentiment and regulation, said Chandra.
Helion's own progress is testament to the growing interest in the country. It raised $140 million for its first fund in 2006, $210 million for its second in 2008 and $255 million for its third in 2012. The firm plans to raise a fourth this year.
Over its lifetime, Helion's focus has shifted from acquiring larger stakes in smaller companies to smaller stakes in companies with the potential to grow very large. “We used to be very happy to own a 30% stake in a company” said Chandhra. “Now we feel secure if we have a 15% stake within an investor group that can put up $50 million for the next round.”
A growing number of interesting home-grown models are emerging out of India, said Chandra. “Flipkart has emerged as the largest e-commerce company because it has a strong understanding of how to deal with operational challenges.”
Another homegrown PE-backed firm, Micromax Informatics, has a 20% share of the smartphone market, ahead of challengers such as China's Xiaomi. The latter firm has had to change its model – of selling phones largely online – to tackle the Indian market.
Micromax scrapped a planned IPO in 2010 and is now planning the float during its April 2015 to March 2016 fiscal year.
Indeed, Chandra sees the environment for IPOs becoming more positive, spelling more opportunity for the likes of Helion.