When we think of territories which could rival Silicon Valley in the ability of their tech companies to bring in investors, India might not be the first place that comes to mind. That is precisely what is happening, however. According to Bank of America Merrill Lynch, investor meetings are now  demonstrating tremendous interest in India. This financial institution has in fact reported that it expects companies in India to raise approximately $100 billion of capital over the next three years. (For related reading, see article: Should India Be On Investors' Radars?)

Why Investors Are Turning Their Attention to the Indian Tech Startup Scene

Among the many reasons that investors are showing increased interest in tech startups in India is the fact that the Indian government has taken proactive measures in the sectors of power, coal, and roads in order to ensure that the economy thrives. 

Recognizing the potential that India holds for attracting investors from around the world, Prime Minister Narendra Modi has been on a journey to point out to prospective investors how much India has changed in just the last few years. Modi has even gone as far as to inform industry leaders that his country is willing to take whatever corrective measures are necessary to ensure that India can be transformed into a hub for manufacturing, which could serve to further bolster the country's tech sector. 

Over the last couple of years alone, a number of venture capital (VC) funds and seed fund companies have opened up with the express purpose of supporting the tech startup scene in India. Such companies include Indian Angel Network, Nexus Venture Partners, Seedfund, and Kai Capital. Domestic VC firms are not the only investors interested in tapping into the potential presented by Indian tech firms. Foreign firms are also showing interest. (See article: The Stages In Venture Capital Investing.)

Where the Interest Lies in Indian Tech

Just one of these startups is PepperTap, a grocery delivery service that enables users to have everyday household items delivered to their homes via a mobile app. The company recently announced that it has brought in $10 million in funding from Sequoia Capital and SAIF Partners. While a grocery delivery app service might seem rather mundane, it is a sector that is taking off in India. Grofers, another such service, has also announced the generation of $35 million in funding from Tiger Global and Sequoia Capital. Also, ZopNow, based in Bangalore, managed to raise $10 million in funding from a variety of sources, including Accel Partners, Dragoneer Investment Group, Times Internet, and Qual-Comm Ventures.

The concept of purchasing groceries online is one that is rapidly growing throughout India, largely driven by a burst of mobile delivery startups that make it possible for consumers to have the items they need delivered to them within about an hour in most cases. PepperTap, currently operating in West Delhi and Gurgaon, has formed partnerships with several stores in the local area.

New startups are not the only companies looking to tap into this emerging sector. Amazon India has also expressed interest in this sector, and has even launched a special app using a specialized logistics system to meet rising demand to have items delivered from local kirana stores. Items can typically be delivered within three hours. 

Google Aims to Make a Footprint in India

Investor interest in India has reached such a peak that even Google Capital has announced it will be joining Tiger Global, SoftBank, and other investors in an effort to establish an office for itself there. Although this late-stage fund is only a year old, its outpost in India would be its first office to be set up outside the U.S..  According to Google, the company sees a lot of sense in focusing on India at this juncture in time, in light of a trend of increased adoption of smartphones, along with the country's active startup community. 

Beyond the mobile grocery delivery startup sector, India has seen a tremendous amount of funding flood into the country. Last year, Tiger Global raised some $2.5 billion, the majority of which has reportedly been specifically set aside for investing in Indian startups. At the same time, SoftBank announced plans to funnel $10 billion into India. In fact, a group of investors led by SoftBank recently announced they are in talks to purchase a 20 percent stake in Micromax Informatics, an Indian handset maker, for as much as $1 billion. That investment would send Micromax's value up to as much as $5 billion. Even Japan has jumped onboard by injecting funding into Snapdeal, an e-commerce firm.

Google's move to establish an actual office in India might be revolutionary, but it is not the first time that Google Capital has expressed interest in the country. The firm has already provided funding for CommonFloor, a real estate portal, as well as Freshdesk, a joint U.S.-Indian firm. 

To date, there has been a tremendous amount of investor interest across the board in India. While the billions of dollars flowing into the booming startup sector in India is good news in many regards, there are also some concerns. An increasing number of investors are beginning to worry that rising valuations of startups could result in limited options and damaged market listings in terms of exit strategies. Investors are specifically concerned about the potential end result for initial public offerings (IPO) in light of the rapidly rising prices for stakes sold privately. Late stage investors have expressed concerns that the public market might not have the same optimistic view as the private market. (See: An Introduction To The Indian Stock Market.)

There are also concerns that India's startups might not be able to sustain their valuations in light of the rate at which they must burn cash in order to attract new customers. Some estimates indicate that online startups in India spend as much as $27 to bring in each new customer

Although valuations have remained high, late-stage investors often have unique concerns that might not be an issue for early stage investors. In such instances, both the exit risks and the potential return risks are much greater. (See: Financial Concepts: The Risk/Return Tradeoff.)

Despite these fears, investors continue to be all too willing to inject funding into this Asian country. In just a little over a year, investors have funneled  $4.5 billion into e-commerce in India. Many investors may be afraid of missing out on a limited-time opportunity. That factor alone could at least partially be responsible for the rapidly rising valuations.

The Bottom Line

Whether India will be able to sustain the level of investor interest that has been expressed to date in its expanding startup sector remains to be seen. Currently, the prospects certainly do seem favorable for investors who are interested in looking outside the box to find what could be the next startup hub. (For related reading, see article: Asia's Tech Start-Ups Are The Next Big Thing.)

 

 

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