India's start-ups generate $28bn worth of 'excitement' for global investors

The investment inflow into the country in 2019 was almost 10 times the amount invested by domestic companies

A vendor weighs vegetable next to an advertisement of Paytm, a digital payments firm, hanging amidst his vegetables at a roadside market in Mumbai, India, April 2, 2019. REUTERS/Francis Mascarenhas
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Sanjay Bhatia is upbeat about the future of his business despite a slowdown in the Indian economy and his digital logistics company in Mumbai, Freightwalla, is pushing full steam ahead with expansion.

The start-up, which allows businesses to book international cargo shipments online, is growing its team and operations after it managed to raise $4 million (Dh14.7m) in funding from investors this month. The financing round was led by global venture capital companies Amplo, FJ Labs and Rogue One Capital, all of which are based in the US.

“There is a lot of excitement about India,” says Mr Bhatia, the co-founder and chief executive of Freightwalla. “The interest level from foreign guys has also increased as India matures as an economy and genuine innovation begins in the country.”

Overseas venture capital and private equity companies invested a total of $27.8 billion into companies in India this year, up from $25.1bn last year, according to figures from Venture Intelligence, a research company in Chennai, which provides data and analysis. The investment inflow was almost 10 times the amount invested by domestic companies in India, which totalled $2.8bn this year, down from $6.3bn a year earlier , the data reveals.

"While raising funds domestically might be challenging in the short run, trends indicate considerable interest from global investment funds that value quality over quantity," says Maulik Doshi, executive director, transaction advisory services, at Nexdigm (SKP), a professional services company in India.

"The Indian market is of utmost importance for PE and VCs, considering the captive consumer market and future business potential."

This comes despite a sharp slowdown in Asia's third-largest economy. Official data showed that India's gross domestic product (GDP) growth sputtered to a six-year-low of 4.5 per cent in the quarter ending September, compared with 7 per cent in the same period a year earlier. Moody's Investors Service this month slashed its growth forecast for India for the current financial year, which runs to the end of March, to 4.9 per cent from 5.8 per cent. It cited weak household consumption and a credit crunch in the non-banking financial sector as factors that are impeding economic growth.

Tighter processes in the banking sector, which has been grappling with high levels of bad debt, are also taking a toll on liquidity flows in the financial system.

While all this may be weighing down the growth prospects of domestic funding for companies in India, foreign investors are continuing to pour money into the country.

NiYO, a financial technology company that helps workers access company benefits and other financial services, is another example of foreign interest in Indian companies. The Bangalore start-up raised $35m in funding from Hong Kong's Horizons Ventures, China's Tencent Holdings and Israel's JS Capital in July.

“It is a win-win situation for both FinTechs like us and global venture capital firms, as they are interested to be part of the India growth opportunity,” says Vinay Bagri, the co-founder and chief executive of NiYO. “When trying to raise funds from overseas institutional investors, we are keen to partner with the ones who have deep expertise and experience of either investing in or operating large-scale and successful FinTech ventures.”

But Mr Bagri says foreign investment is being allocated more carefully these days, especially given the weaker economic backdrop in India and globally.

“The valuations at which funds are being raised have rationalised to an extent,” he says. “Some of the exuberance from the boom era of 2015 to 2016” is vanishing now, he says.

FinTech companies are among the biggest beneficiaries of funds that are flowing into India, as they target the country's burgeoning number of smartphone and internet users.

“We’re now keen to get investments from strategic global players who will help us scale globally,” says Mandar Agashe, the founder and vice chairman of Sarvatra Technologies, which provides digital banking solutions for banks and financial institutions in rural India.

“With the advent of smartphones, low internet costs, social media and increasing digital literacy across the country, India is currently ripe for a booming FinTech sector,” he says. “The Indian youth prefers the convenience of mobile payments, and FinTechs are facilitating that in a big way. Global players are looking at investing in Indian start-ups due to the surging demands of the large Indian population.”

He says these companies can be scaled globally, especially in developing countries, with the help of funding from abroad.

Viram Shah, the co-founder and chief executive of Vested Finance, a Mumbai and California-based FinTech platform, which helps Indians to invest in US stocks, says his company has raised investment from early stage funds such as Ovo in the US and Hustle Fund from Singapore.

“Based on our conversations with investors in the US, India is still a hot market that VCs are looking to invest into,” says Mr Shah. “Even with slow growth this year, investors are generally bullish on the long term opportunity that India presents.”

They are seeking out markets with strong upward potential to park their investments. With a population of more than 1.3 billion, an expanding middle class, and a surge in internet use, India offers enormous potential for investors, analysts say.

“The robust investment flow to India was driven by strong interest from yield-hungry global pools of capital, mostly from pension funds and sovereign wealth funds,” says Rahul Agarwal, the director of Wealth Discovery, a financial services company based in New Delhi.

The size of the market and growth opportunities in the country are the prime reasons why foreign venture capitalists and private equity companies are aggressively investing here, Mr Agarwal says. "India is fast emerging as the next start-up and innovation hub in the world."

He points out that India has traditionally relied on venture capital and private equity money from abroad and that has been critical to the growth of India’s start-up scene.

“Domestic investors are still not a significant lot when it comes to investing in new companies compared to other countries like China, Japan, or Australia,” says Mr Agarwal. “Raising funds domestically has always been a challenge for companies seeking venture capital as the domestic Indian VC landscape is not culturally aligned to the global VC funds, which have higher risk-taking abilities.”

Japan's Softbank, which is among the biggest investors in Indian start-ups, including into some of the country's major successes – such as digital payments company PayTM and hotel group Oyo – is planning to inject more money, as it sees opportunities arising in the wake of the country's intensifying credit crisis.

"We are looking at insurance and lending businesses," Rajeev Misra, the chief executive of SoftBank Investment Advisers, which oversees the company's Vision Fund, told The National earlier this month.

Online lending company ePayLater has seen strong interest from foreign funds.

The Indian digital platform offers a “buy now, pay later” model through which customers can get access to instant credit to make faster purchases.

In January, the start-up raised an undisclosed amount of funding in a round led by GMO Global Fintech Fund – an investment vehicle of the Japanese internet conglomerate, GMO Internet Group, and its venture capital partner GMO VenturePartners – and India’s ICICI Bank, along with family offices and investors from the UK.

It has experienced rapid growth since its launch in 2015 and “with India being on the path of an e-commerce revolution, this was the perfect time to build a ‘pay later’ model for India and give the much-needed credit boost and convenience to people”, says Akshat Saxena, the co-founder of ePayLater.

The company is optimistic that investment will keep flowing into India and it plans to tap the opportunity to raise more funding from abroad to expand its business.

“We do plan on raising more investment and there is significant interest from foreign based funds,” says Mr Saxena.