Deal volumes similar to 2014, half of 2015, and thrice the deal volume in 2016 and 2018
Hedge funds, which led the start-up funding boom in 2015, are making a comeback, after taking a pause for a few years. And, it is not just Tiger Global, which has invested in 15 start-ups this year. Many other hedge funds, such as Falcon Edge Capital, Steadview Capital, Hillhouse Capital and Altimeter Capital, have resumed investing in India.
Steadview Capital has already invested $200 million in India this year, investing in start-ups such as Unacademy, Ninjakart, and Dream11. Falcon Edge Capital has backed start-ups such as Stanza Living, WickedRide, Mswipe, Locus and Credit Vidya, helping these companies raise around $220 million with other investors.
US-based hedge funds Hillhouse Capital and Altimeter Capital are leading a $500-million fundraising by Udaan, an online marketplace for small businesses. Altimeter Capital has backed companies such as Practo and Pine Labs, while Hillhouse Capital has invested in Swiggy, Car Dekho and PaperBoat.
What’s bringing them back?
“Apart from the fact that we have become a bigger and better tech ecosystem, this time the investments are across both B2B as well as B2C spaces as against a lion’s share of investments going into e-commerce business last time around. That’s a big positive,’’ says Ashish Fafadia, partner, Blume Ventures, an early-stage venture capital firm.
Some B2B companies, such as Locus, are trying to solve large market problems with high-quality engineering-led IP plays, which is encouraging hedge funds to invest in them.
“I believe the major contributor is the confidence in the Indian economy in general, and the fact that the Indian consumer internet market has truly opened up in last few years,” says the founder of a leading start-up. These are large investors who cut large cheques. Without having significant confidence on the future of the internet economy in India and with limited visibility in the market, it was difficult for them to take such bets in the past, he says.
Hedge funds have invested in 25 start-ups in 2019 till July-end, helping these start-ups raise $400 million (cumulative value of the funding rounds, including other investors), according to data from Tracxn. This is close to the 26 deals ($800 mn) closed by hedge funds in 2014 and 49 deals ($700 mn) in 2015, at the peak of the funding boom. A majority of these deals were cut by Tiger Global, which backed 18 start-ups in 2014 and 35 in 2015.
Deal volumes this year is almost thrice of the low levels seen in 2016 and 2017, when hedge funds just did nine deals in each year. The activity picked up in 2018, which saw 18 deals by hedge funds. All start-up investors, not just hedge funds, started slowing down in 2016 and 2017 as there was a feeling that valuations had run ahead of fundamentals.
‘They made a bunch of investments, took a pause to see how these shape up. Things were a bit slow and the fact that unit economics of large number of companies was still being questioned at that time,’’ adds another investor, who didn’t wish to be quoted. Traditionally, hedge funds invested in unlisted companies with a view to get quick exits through IPOs. With excess liquidity, companies are staying private longer and investors are making money by selling to strategic investors or through secondary deals/sales.
Economic uncertainty due to demonetisation, GST and other liquidity issues also would have played a role. “Larger players will always look to time the market and not necessarily will be open to take very long exposures. That’s fine, as it takes all types of players to make the market,’’ adds an investor.