Foreign Investments in Startups – A reality check

The moment the word ENTREPRENEURSHIP strikes our heads, what do we think of? Birth of a large number of startups,startups with creative ideas which tend to take technology ahead, provide us great services or transform our lives as a whole. We might also think of these startups as ways of providing employment to a large crowd and making its founders billionaires at the same time. Well if I am not wrong, that is it!

In this article, I would like you to take a brief look at one more word that has strong ties to the word entrepreneurship, The Investment.

Now what I mean when I talk about investment right now is the fund raising of startups. Let us think of this,”Does the capital of Indian startups actually land in Indian hands in the long run?” The answer is a big NO.

So what is the cause of this problem? On doing a little thinking, we discover that most of the successful Indian startups have foreign Angel Investors and Venture Capitalists as their major stakeholders.

                      

This has multifold effects on the Indian entrepreneurs.

The positive ones(which have been responsible for Foreign Direct Investment FDI being promoted) are: the excessive wealth poured into indian startups which help them prosper, substantial developments in certain technologies which have further lead to India’s overall growth and creating employment which indeed is related to the flourishing startups.

But can the dark side be simply ignored? Can we forget the long term losses to be incurred? Obviously not!

Lets consider a situation. India is seen as ‘A Land of Opportunity’ by foreign investors and this is why they are interested in investing in India. What if due to any changes in the any Indian policies, some other nation(let us say, Indonesia) becomes a greater ‘land of opportunity’ than India? Would the scenario of FDI still remain the same? The most probable outcome that we all can think of is the investors withdrawing most of their money from India and investing in Indonesia. Now this, might lead to some terrific problems for the Indian entrepreneurial system. This is usually referred to as the Volatile nature of foreign investors.

 

Now moving onto another disadvantage, let us take a few examples, some foreign corporates with huge investments in the Indian startup ecosystem.

I hope you have all heard of The Tiger Global Management(TGM), a US Corporate which stands first in the list of leading foreign investors in India. It first set its foot in India in 2005, and loudly roared in the Indian startup jungle till 2015. From 2005-11, it made highly calculated moves making about 2-5 investments per annum. 2011 onwards however, the scenario drastically changed with TGM taking a giant leap by making 12 investments in just one year. After 2011( a milestone year in the history of TGM India), the number of investments fell again to some extent. In 2015(probably the best year in the millennium for TGM), when the number of its investments shot up to a 38! This seems big right?

In fact, not only the number is large but the amounts were also huge enough to make TGM the major stakeholder in most of the startups it invested in, some of them being: nearly $100million in ‘Shopclues’ in Jan 2015, almost  $150million in ‘Quickr’ and $35million in ’Grofers’ in the month of April. And not just this much, April 2015 also witnessed a huge investment of approximately $400million in ‘Ola’, and the list goes on…

The year 2016 however saw a setback in TGM’s investments as there were more EXITS than investments, just 4 in 2016. But it would, i think, be wrong to exactly call it a setback as there is a common saying, “EXIT is not the end. For many entrepreneurs, in fact, it is just the beginning.”

So, TGM still continues to lead among the foreign investors in India.   

                          

Next we talk about Softbank, a Japanese corporate, that has been taking keen interest in pouring its money into India in the recent years.In Oct 2014,it had invested an amount of $627million in ‘Snapdeal.com and about $210million in ANI Technologies’ taxi-booking service Ola Cabs while in Nov 2014, acquired 36.5% stakes in ‘ScoopWhoop‘. In Dec 2014, it further invested $90million in ‘Housing.com’ which lead to its total investment in India sum up to nearly $1billion and also, clearly declared that their investments in India would shoot up to an approximate value of $10billion in the upcoming years. In the years 2015 and 2016, Softbank once again invested nearly $500million in ‘snapdeal.com’, about $120million in ‘Grofers‘, about $20million in ‘housing.com’, nearly $100million in ‘OYO‘.

With such huge investments made recently, Softbank has now become the 3rd highest foreign investor in India after The Tiger Global Management and Sequoia Capital and has become a major stakeholder of many Indian startups in a couple of years.

 

Now, having seen the investment scenarios of two major foreign investors in India, we can simply say that the prime reason behind foreign corporates being the major investors clearly marks the extent to which the Indian startup system has been cultivated and how promising it’s future is.

But what if we look through a different lens? Do we still see it all bright? Let us find out.

Being a major stakeholder, these corporates greatly determine the business operations and strategic directions of the startups they’ve invested into. Other than this, they often pressurise the startups to make a profit-oriented Business Model, which is not always good for all of them and obviously, we all know that majority of the profit ultimately goes to the major stakeholders who are these corporates themselves. So, does this not mean that huge foreign investments in Indian startups and companies ultimately lead to foreigners( Americans in case of TGM and Japanese in case of Softbank) taking away majority of the profits? Just think!

ecellblogger

ecellblogger wrote 53 posts

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