Venture Money Floods Into Indian Startups
Global investors turn to India in search for a successor to China’s Alibaba
By Shefali Anand And Dhanya Ann Thoppil
Wall Street Journal
March 30, 2015 4:46 p.m. ET
Venture capitalists sank $4 billion into India last year. The rush of interest has boosted the value of many fledgling tech firms, including Indian online marketplace Snapdeal.com. Photo: Reuters
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GURGAON, India—Vikram Chopra spent the past three years building an online furniture-shopping site for Indian consumers that was funded mainly by annual capital injections from a German technology incubator.
But during the past few months, investor interest in the site, FabFurnish.com, has soared, said the 32-year-old entrepreneur, who is based in the New Delhi suburb of Gurgaon. Several global venture-capital firms and hedge funds have said they are interested in investing, and Mr. Chopra is now considering another round of funding that would exceed the $20 million raised so far—even though he doesn’t expect FabFurnish to be profitable for another two years and doesn’t yet need the cash.
“A few years ago, everybody wanted to see profitability upfront,” said Mr. Chopra. “Today, it is more like how much money you need to curb the competition [and] kill everyone else.”
Global money is flooding into Indian startups as investors search for a successor to Alibaba Group Holding Ltd., the Chinese e-commerce company that raised a record $25 billion in its initial public offering last year.
Venture capitalists sank $4 billion into India last year in some 300 deals—almost twice as much money as they invested in 2013 and 14 times the level of a decade ago, according to Indian data tracker Venture Intelligence.
The roster of recent entrants includes Moscow-based investment firm DST Global and New York-based hedge fund Falcon Capital Edge LP. Silicon Valley-based Accel Partners, which manages around $9 billion globally, last week announced a $305 million fund for early-stage Indian technology companies. Japan’s SoftBank Corp., one of Alibaba’s earliest backers, last year pumped more than $800 million into online marketplace Snapdeal.com and another Indian startup.
The rush of interest has boosted the value of many fledgling tech firms—some say to frothy levels—with Indian e-commerce company Flipkart Internet Pvt. now worth $11 billion, more than Dropbox in the U.S., following a December investment of $700 million from U.S. investment firm Tiger Global Management and Singaporean sovereign-wealth fund GIC. Snapdeal.com is valued at $2 billion; Web-based taxi-booking service Ola—dubbed India’s Uber—is valued at $1 billion. None have turned a profit.
Mehul Agrawal, left, and Vikram Chopra, right, co-founders of Indian online furniture and home décor shop FabFurnish.com. Photo: FabFurnish
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Fueling the influx of money is a surge in venture funding that has pushed startup valuations into the stratosphere globally—as well as rising interest in Asian technology companies in the wake of Alibaba’s successful IPO.
Investors say they are also attracted by the huge potential of India, whose population of 1.2 billion is nearly the same size as China’s, yet lags behind it in everything from Internet penetration to online consumption. In 2013, only 17% of Indians were online, versus more than 45% in China and Brazil; annual e-commerce sales in India were around $3 billion, versus $314 billion in China and $255 billion in the U.S. according to a February Morgan Stanley report.
Venture investing in India has seen many booms and busts during the past decade, hitting $3.9 billion in 2011 then falling by more than a third the following year, according to Venture Intelligence. Skeptics point to India’s poor telecommunications infrastructure as a barrier to Internet growth and its potholed roads, slow postal-delivery systems, and largely cash-based economy as a challenge for e-commerce firms like Flipkart, Snapdeal and Mr. Chopra’s FabFurnish.
A surge in the number of startups vying for India’s still-modest number of online consumers has led to fierce competition. Discounting led Indian online retail companies to record around 10 billion rupees ($160 million) in losses for the quarter ended September 2014, according to an estimate by PricewaterhouseCoopers India.
“The big risk in these businesses is that they keep requiring a lot of funding,” said Rahul Bhasin, managing partner at Baring Private Equity Partners India which is investing in health care and other brick-and-mortar companies in India. “What happens when that money train dries up?” he asked.
But some veterans like Shailendra Singh, a managing director of Sequoia Capital in India who has been at the firm nine years, said there are signs that Internet-user growth is real this time, such as the explosion in cheap smartphone sales that is bringing millions of Indians online for the first time. The pace of growth is quickening: Some 302 million Indians were using the Internet at the end of 2014, 42% more than the year before and 2½ times more than in 2011, the Internet and Mobile Association of India said.
“While there is froth, there are genuine companies raising capital and demonstrating growth,” said Tarun Davda, director at Indian venture firm Matrix Partners India, and an investor in Ola. Mr. Davda said the number of rides Ola offers has been growing more than 50% each month for the past few months.
India’s securities regulator is trying to encourage startup growth as well, saying Monday it plans to relax a restriction that requires companies to have three years of profits before they can apply to list.
Mr. Chopra, who quit business school to cofound FabFurnish with seed money from Berlin-based Rocket Internet AG in 2012, said the company logged 2.2 billion rupees ($35 million) in revenue for the year ended March, and expects to triple that in the current year.
On a recent day, FabFurnish’s site was offering vouchers of up to 11,000 rupees just for registering, and had a sale of up to 60% on sofas. The website offered to bring trial sofas to buyers’ houses in Delhi, Mumbai and Bangalore so they could “touch and feel” the goods. Some customers are being offered interest-free loans for high-end furniture.
Mr. Chopra said he typically makes between 40% and 45% profit margins on furniture, allowing him to profit even after discounts.
FabFurnish rivals Pepperfry.com and UrbanLadder.com have been busy raising funds, too. Pepperfry in May raised $15 million in a second round of funding. Like FabFurnish, it offers a 10,000-rupee voucher for registering with the site.
Write to Shefali Anand at shefali.anand@wsj.com and Dhanya Ann Thoppil at dhanya.thoppil@wsj.com
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