A Beginner's Guide to India's Venture Capital Landscape

ndia has a unique position in the global economy, especially relative to China. While China is a global manufacturing powerhouse, India is the same in IT services. Geopolitically, it is an ally of China through the BRICS consortium but it is also a regional rival with significant disputes over borders and such. 

While China is a homogenous (over 90% Han Chinese) state with one-party rule, India is a religiously and ethnically diverse society with a democratic government. Colonialism lapped at the shores of China while it deeply penetrated Indian society such that the British directly ruled for a century with all of the profound social, political and economic disruptions that that entails. 

However, one positive aspect of this is that India has been highly successful in achieving leadership positions beyond the technical/engineering ones in Silicon Valley and elsewhere. Indians seem to adapt better to the norms of the English-speaking world since British culture penetrated their society so deeply. 

This has beneficial implications for their participation in entrepreneurial finance as there are many Indians and Indian-Americans who are either inside venture capital firms or understand how they operate such that they can harness this important asset class. That along with the fundamental pull of the competitive advantages intrinsic to modern day India is leading to an explosion of venture capital in this emerging market.

The Growth of Venture Capital in India

In recent years, the venture capital industry in India has experienced explosive growth. While global venture capital investment has cooled off a bit in 2022, venture capital investment in India reached a decade high of $38.5 billion in 2021. It is estimated that there is over $400 billion in valuation across more than 50,000 startups in India. 

In relative terms, in 2021 venture capital investments in India grew 3.8x over 2020 which is actually faster than the boom in China (1.3x). 

Over the last decade, venture capital investment has grown from a modest $3.1 billion in 2012 to $38.5 billion in 2021—an almost 13x increase. This 3.8x growth of Indian investment in 2021 ranks high globally as it compares favorably to the 1.9x and 1.3x experienced by the US and China respectively. Moreover, globally India’s share of global venture capital funding almost doubled from less than 3% to 5.6% in 2021. India has emerged as a viable destination for venture capital. 

Aside from the growth in the volume of venture capital in India, what we’re also noticing is a change in the character of the deals. There is a growing trend towards more and larger deals which reflects larger valuations and more opportunities. Between 2020 and 2021, the number of deals almost doubled from 809 to 1,545 while the average deal size also doubled from $12.4 to $24.9 million. Just as importantly with regards to the high valuation businesses that venture capitalists find the most attractive, the number of $100 million financing rounds increased to a record 92 including 7 rounds of more than $500 million for companies such as Swiggy (online food delivery), Eruditus (edtech) and Dream11 (gaming).

An important but subtle contributing factor in the ability of Indian entrepreneurs to successfully attract venture capital investment is cultural. Increasingly, Indian entrepreneurs many of whom have been trained abroad in the United States and the United Kingdom have been willing to cede more control to venture capitalists and embrace them as true partners. 

This is in marked contrast to previous generations who wanted to maximize personal control over their ventures and were therefore not as open to the non-financial contributions—access to talent, business contacts, commercialization recommendations, etc.—that venture capitalists increasingly offer. Due to the influence of the English language and culture as well as overseas training, the current generation of Indian entrepreneurs are not as insular as their Chinese counterparts and Indian predecessor generations which is a distinct advantage in the increasingly global venture capital milieu. 

They are eager to partner and understand how to use global venture capital partnerships to their advantage. The role of the Indian diaspora in this transformation should not be underestimated. Many Indians have achieved success both in Silicon Valley tech firms and venture capital entities. A Stanford Business School study indicated that out of 1,078 founders across 500 US unicorns, 90 entrepreneurs (8.3%) were born in India. 

This is an astounding figure considering that only 1.4% of the US population is South Asian. It is also the highest number of any immigrant population and more than 3x the number for China. These Indian entrepreneurs who are clearly capable of becoming angel investors in the future are an organic advantage that India possesses. 

Ultimately all venture capitalists are the same. They are attracted to lucrative exit opportunities. As the Indian economy has matured, those opportunities have become more numerous. Just as importantly, over the last decade, the number of companies that have matured to the point that they are ready to exit has grown such that it is very lucrative for venture capitalists. For example, in 2021, venture capital exits grew to over $14 billion in total value with IPOs accounting for 40% of exit value:

Notable IPOs in 2021 included Paytm (India’s largest mobile payments and commerce platform); Zomato (India’s largest food delivery company); Policybazaar (an online insurance policy company); Nykaa (a beauty, wellness and fashion e-commerce company); and Indigo Paints (a home improvement company). This reflects the diversity of VC investment opportunities in India.

In contrast, secondary and strategic sales accounted for more than 60 deals amounting to $8.7 billion or 60% in total venture capital exit value. This reflects the growing interest of foreign capital in the Indian market as global venture capital investors were a key driver in the growth stage deals of the secondary market. However, this market was a bit lopsided as BillDesk’s $4.7 billion acquisition by PayU accounted for the vast majority of the exit value in that market.

The Role of Foreign Venture Capitalists

Foreign venture capitalists have played a unique strategic role in the growth and development of venture capital in India. As noted earlier, they have been particularly active in larger deals and late-stage growth deals which is a global trend. Among the top foreign venture capital investors in India are Tiger Global, Sequoia Capital, Alpha Wave Global, Accel and SoftBank. Tiger Global, SoftBank and Alpha Wave Global reshaped the dealmaking landscape in India in that they had over 60% of their deals in the greater than $50 million bracket while Sequoia and Accel were more active in the less than $50 million bracket with 70% of their deals in that area. A salient factor driving increased foreign investor interest in India is the recent regulatory turmoil in China with several canceled IPOs including that of Jack Ma’s Ant Financial which would have been one of the largest in history valuing the company at over $300 billion. Simply put, global VCs are looking to diversify their risk in Asia and India is well-positioned to benefit from this strategy.

Unicorns

A major gauge of the vitality of the venture capital context in a particular country is the number of unicorns—privately held startups valued at over $1 billion—produced by those investments. In 2021, India produced 44 unicorns versus 42 in China and 305 in the United States.

Overall, India ranks 3^rd globally in terms of the number of unicorns with 73 versus approximately 500 in the US and 170 in China respectively. 

Why India?

Increased venture capital investment in India is being driven by a number of social, economic, and industrial factors. India is maturing. It is now the 5^th largest economy in the world with a GDP of $3.5 trillion and a per capita GDP of $2K. The World Bank estimates that the Indian economy will increase by more than a third to $5 trillion over the next 10 years. The other attractive aspect of the Indian economy is its scale: India is a highly diverse nation of 1.4 billion people and it is rapidly overtaking China to become the most populous country in the world.

Not only is this population large but it is young. Unlike China, which is ageing rapidly due to the demographic miscalculations intrinsic to the one-child policy, almost 30% of India’s population is under the age of 14 and 50% of the country’s population is below the age of 25. This young Indian population represents a gargantuan-sized consumer market that will be among the first to adopt the latest cultural and technological trends. They also form the basis for the 1.5 million new engineering graduates that India produces annually which is a figure second only to that of China. These graduates will provide the human capital required to build the technological innovations that VCs invest in.

India’s information technology services industry has served as a catalyst to attract venture capital to the country. India emerged onto the global economic scene by building an internationally competitive IT services industry. The IT services industry accounted for 8% of Indian GDP in 2020 and is project to increase by 25% to contribute 10% of Indian GDP by 2025. India is the leading outsourcing destination globally accounting for $227 billion in revenues in FY 2022. Exports from this industry were at $149 billion in FY 2021. 

This industry is a leading source of R&D as IT spending in India is expected to increase to $101.8 billion in 2022 from an estimated US $81.9 billion in 2021. Having established a beachhead in IT services, Indian entrepreneurs are increasingly branching into software development as the software product industry is projected to reach $100 billion in revenue by 2025. 

This is increasingly attracting foreign investment as the computer software and hardware sector garnered $85.5 billion in FDI between April 2000 and March 2022, which is the second largest foreign direct investment amount in India and accounts for 14.5% of cumulative FDI inflows. It is in this way that over the last few decades, the IT services industry has been laying the foundation for India’s evolution into a modern economy. 

Indeed, these IT services are increasingly being reinforced by the most extensive 4G mobile network in the world as Reliance Jio is building a telecom network that is capable of providing connectivity to India’s 1.1 billion smartphone users. This is the infrastructural backbone that is enabling the delivery of myriad ecommerce and fintech services to India’s vast population by the country’s burgeoning digital startups.

Key Investment Sectors

Building on the success of India’s IT services and software industries as well as the ubiquitous adoption of smartphones along with the rollout of an extensive 4G network, venture capital has demonstrated strong interest in both B2C and B2B commerce, edtech, consumer technology, fintech and software as a service which collectively account for over 75% of all VC investment as of 2021. These sectors are where most of the deals and highest amount of deal value are situated.

As was the case in many other countries and regions, the Covid-19 pandemic acted as a powerful accelerant inducing people and companies to embrace digital technologies as never before precisely at the time that Reliance Jio’s 4G infrastructure made that more feasible. The huge increase in venture capital investments in e-commerce, online food delivery, and edtech reflects the influence of the pandemic as people were forced to stay at home and use their smartphones to conduct increasing amounts of business in novel ways.

Investors

Part of the attractiveness of India as a venture capital destination is the wide variety of investors who are able to effectively function within the country. Firstly, the number of active VC funds has grown to 665 and this increasingly includes micro VCs, family offices as well as larger investors.

Corporate VCs are also increasingly active in India including Amazon Alexa Fund which is undoubtedly attracted to the ecommerce opportunities as well as Google Ventures, Reliance Capital and Samsung Ventures which likely sees synergies in India’s huge smartphone market.

Likewise, the range of institutional investors is diverse and runs the gamit from global VCs to corporate VCs, domestic actors and even sovereign funds. PE firms like Blackstone are also active.

Due to increasing competition and the wide variety of opportunity, more and more of these actors are specializing which should prove beneficial to entrepreneurs seeking strong and deep expertise:

Among the top Indian venture capital firms are Nexus Venture Partners which is a Mumbai firm that has completed over 300 deals and raised over $1.4 billion in capital across five funds. It has offices in Silicon Valley and focuses on early-stage and seed investments in data security, consumer and business services, and mobile and data analytics. Prominent companies in its portfolio include Zomato, Unacademy and Rapido.

Bangalore-based Kalaari Capital has completed 205 deals and raised $479 million over 3 funds. Notable investments include SimpliLearn, Dream11 and Haptik. The firm focuses on a wide variety of investment sectors—software, cleantech, eCommerce, and mobile—at different stages including seed, early stage, and late stage. Sequoia Capital India is the Indian branch of the eponymous US firm that is based in Menlo Park, California. It was founded in 2006 in Bangalore and has invested $3 billion across 575 deals in 8 funds since then. It invests in fintech, cleantech, robotics, healthcare, and mobile at the early and late stages.

Finally, one of the most rapidly growing Indian venture capitalists is Blume Ventures which was founded in 2011 by Karthik Reddy and Sanjay Nath. The firm invests in seed, early stage, and Series A and Series B rounds. To date, it has raised $378 million across 6 funds and invested in 278 deals including Cashify, HealthifyMe, and Purplle. It focuses on edtech, fintech, SaaS, B2B services, and eCommerce.

This is just a sample of the venture capital firms that operate in India but what should be evident is their comfort in working globally between Silicon Valley and India, the explosive growth that has occurred over the last decade, and the wide variety of opportunities in different sectors at different stages that are available to venture capitalists in India.

India has arrived on the global stage as a major player in the venture capital arena. It has many advantages but it also must confront the major bottlenecks posed by its poor transportation and energy infrastructure. These bottlenecks desperately need innovative VC-backed solutions. Also, as Chinese wages rise and tensions increase with the West, India is well-positioned to benefit from investment that is being redirected away from China. Entrepreneurial leadership will be necessary to help the country realize its full potential and continue to build prosperity.