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Online startup boom: What made the year 2014 special Samidha Sharma, TNN | Dec 30, 2014, 12.15PM IST

Online startup boom: What made the year 2014 special

Consumer internet companies raised over $4bn this year amid an unprecedented global appetite for India's digital pie. Over 1,250 new ventures sprouted, with the number of mobile-first startups growing fastest.
The Indian entrepreneurship eco system got its biggest fillip in 2014 as the year saw an unprecedented number of new businesses spring up, aided by an exuberant investor sentiment around startups. As more Indians took to their smartphones to access the internet, in many cases for the first time, numerous consumer technology ventures were built to cater to this growing population.

But what vastly differentiated 2014 from the previous years was the never-seen-before amount of capital that was funnelled into these digital companies across all stages.

It wasn't only the bigger online commerce players which received gobs of money , thanks to the trickle-down effect even the early-stage startups were flush with funds. The entrepreneurial zeal was palpable across food technology, online travel, grocery delivery, offline-to-online services, all of which were the preferred sectors for starting up as a total of 1,259 new ventures sprouted through the year.

Sample this: in the food tech space, for instance, out of 145 companies that operate in the country , 66 were created in 2014; almost half of the 83 local and home services ventures that exist today were built this year, according to data provided by Tracxn, which curates information about Indian startups and private companies.

Catch 'em young
"Just in the last six months, I have seen a massive uptick in the number of startups looking for funding at all stages. What makes this even more exciting is that the quality of startups continues to rise with the numbers going up," says Pankaj Jain, venture partner at 500 Startups, a Silicon Valley seed fund & accelerator.

As many as 270 early-stage investments were made in startups this year, with venture capital funds starting to make seed investments and further strengthening the domestic startup story. The VCs' intent was to catch these entrepreneurs early on at lower valuations, triggering the fight for who gets in first.

"More of the very early stage startups with little or no revenues received angel and VC backing. Driving this were new entrepreneurs starting businesses based on proven models in the US; we saw things like food tech and financial tech become buzzwords.Investors came into these companies very early ," says Rehan Yar Khan, an angel investor who raised Rs 300 crore in September to start an India-domiciled venture capital fund Orios Venture Partners.

Traditionally, VCs would leave it for angel funds and individual investors to plough in riskier, seed capital, but not anymore. "We saw a tectonic shift happening in the Indian entrepreneurship ecosystem with a once-in-a-lifetime confluence of unique factors of ever younger, driven and fearless entrepreneurs in a deepened, growing and well-funded market," says Avnish Bajaj, MD at Matrix Partners India, which made six seed-stage investments like Limetray and GrownOut, this year.

Big theme: mobile internet
Even as early-stage investments gained traction, the big winners as far as attracting disproportionate amounts of investor money were the later-stage ventures in the consumer tech startup space -in particular the online commerce biggies.
An eye-popping 46 funding rounds later, Indian e-commerce raised $3 billion this year, according to Tracxn -- the funding was largely split between Flipkart and Snapdeal. The China comparisons grew louder for Indian e-tailers after the much-ballyhooed IPO of Jack Ma's Alibaba earlier this year.

The next five years of India (internet and mobile) would be equivalent to the last seven years of the Chinese market, projections by Matrix Partners, based on a recent Nomura Research, say . This is largely due to the heightened growth of mobile internet. "Consumer tech companies exploded, up four times from four years ago as investment rounds grew five-fold to 300 plus this year compared to 60 in 2010," says Abhishek Goyal, co-founder of Tracxn.

Food tech, which was one of the hottest sec tors being tracked by VCs, saw startups like TinyOwl and Hola Chef begin operations this year. A spiffy-looking location-based food ordering app, TinyOwl went live in March.

Founded by five IIT-Bombay batchmates, it got on board Sequoia Capital and Nexus Venture Partners just a few months after the launch, raising $3 million. Says Harshvardhan Mandad, co-founder of TinyOwl, "As many of our seniors (from IIT) who have done startups are becoming big like Flipkart, Snapdeal, Ola, Housing, it gives us confidence. VCs are also aggressively looking to fund Indian startups as we are in a growth stage. We're lucky to be starting at this time."

New investors chase tech startups
While money came easy , some blamed the frothy tech valuations on the advent of hedgies into the Indian startup ecosystem this year, who put in $525 million till October across internet companies, according to Venture Intelligence data.While Tiger Global, the largest shareholder in Flipkart and a top dog among foreign investors in the domestic internet story, established a beachhead here in 2007 when it bet on Just Dial, newbies like Falcon Edge, Steadview Capital, among others, started their innings in 2014.
Hedge funds weren't the only ones to join in.Other heavyweight tech investors like Russian tycoon Yuri Milner personally backed Olacabs and while his investment firm DST Global pumped millions into Flipkart. Japan's SoftBank made its big-bang entry (keeping aside its earlier investment in mobile ad network InMobi) as it poured almost a billion dollars across Snapdeal, Olacabs and Housing in one stroke.

"Unprecedented global appetite for getting a piece of India's digital consumption story fuelled some audacious bets across many sectors. Entrepreneurs were rewarded with big checks and high valuations if they executed well on aggressive, hyper growth strategies," says Prashanth Prakash, Partner, Accel Partners.

Soaring valuations, staying private
The worry then is whether this foreign capital will dry up once the investor exuberance fizzles out. "I believe that markets often get the macro trend right but get over-optimistic about the micro trends. There'll be a day of reckoning, where investors will start demanding results and start re-pricing these companies. There'll be a shaking out of the sector and the wheat will be separated from the chaff," says Aswath Damodaran, professor of finance at the Stern School of Business at New York University.

In this cycle, there has been a structural change in the nature of capital markets with a shift of dollars from public to private investing as tech companies globally opt for private money instead of going for an IPO. "We haven't seen these kinds of private market valuations before as they'd have been in the public markets then. It's nowhere near what we had in 1999-2000, whether it's the number of IPOs, maturity of companies when going public or valuation metrics. It's markedly different, this does not feel like a bubble. However, at some point, we will get to a bubble," Scott Kupor, managing partner at Andreessen Horowitz, told TOI in an earlier interview.

The likes of Uber, Dropbox, Airbnb and closer home Flipkart and Snapdeal continue to attract investors, bolstering the new tech economy.

"This should not be confused with a bubble as we have a strong core where a high quality entrepreneurial ecosystem is constantly working towards what technology can do to create efficiencies and value for consumers," says Abhay Pandey , MD, Sequoia Capital. It's still early days to expect large exits.

But, more consolidation may be in the offing through M&As, especially in spaces where clear leaders have emerged.

Online startup boom: What made the year 2014 special Samidha Sharma, TNN | Dec 30, 2014, 12.15PM IST Reviewed by sambasivan srinivasan on 5:51:00 PM Rating: 5

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