Friday, April 24, 2015

Alert: Venture Capital Tsunami in South Asia

Last 12 months have been nothing short of a Tsunami for Venture Capital industry in South Asia ( India + ASEAN). Unprecedented capital inflows and interest have completely shaken the local ecosystems. 

Strategic investors such as Softbank, Rakuten, Alibaba, Naspers, etc. are throwing money as if there is no tomorrow. Sovereign Wealth Funds such as GIC, Temasek, QIA and Khazanah want their share of the pie. Even Private Equity firms do not want to be left behind. 

Lets look at some mind numbing data first to feel the intensity of this tsunami:
  • Flipkart raised 3 massive rounds from Series F ($210M), G ($1B), H ($700M) in a 7 month span between May and Dec 2014.
  • Ola raised Series C ($41.5M), D ($210M) and E ($400M) in 10 months between Jul 2014 to Apr 2015.
  • Snapdeal raised more than $727M between May and Oct 2014.
  • Grabtaxi raised 4 rounds of funding from Series A, B ($15M), C ($65M) & D ($250M) in a 9 month period between Apr and Dec 2014.
  • Tokopedia raised $100M in Oct 2014.
  • raised $18M, $19M and $100M between Apr and Nov 2014.
  • PayTM parent One97 raised $635M from Alibaba and SAIF partners in Jan 2015.
Remember Webvan?? Webvan raised Series A ($125M ) and Series B ($275M) from Softbank and Sequoia within a short span between 1998 and 1999. Looks like the same story is being replayed here in South Asia all over again.

I can never comprehend how a startup moves from Series A to Series D in 9 months. Such sudden influx obviously causes ripple effects. Early stage valuations are going through the roof. Series A rounds look like erstwhile Series C rounds. The race is now on to  reach a billion dollar valuation in the shortest amount of time. Hate to say this but to a certain extent these funding rounds now decide who is going to be the winner. Taxiforsure lost its battle against Ola not because their product or team were not great. But because, they did not raise such quantums at the right time. 

Until recently, we never had to worry about a Startup raising too much money. Risk capital was scarce and hence, the default advice was never to worry about dilution, valuation, etc and to raise as much as they can. More money allows for mistakes thereby empowering founders to experiment. A huge funding round also keeps competition at bay. 

However, it is time to be cautious. 

1. Impatient capital will have unrealistic expectations. They would want to achieve leadership position by throwing money to solve the problem. However, if fast growth is achieved only due to capital by providing unsustainable discounting and similar loss leading tactics, then there will be a continuous need for capital. Any reversal in investor sentiment can cause failure.

2. Too much money too soon is fundamentally bad for startups. It forces aggressive execution even for startups who are still discovering their most optimal business models. They just get pressured to enter the rat race. 

3. Growth is not always directly proportional to the money you burn.  

I am not advising against raising big rounds of capital. I am cautioning against over capitalisation. Know how much you need and when ( and also from whom... if you get the choice).

1 comment:

  1. Finance knowledge is much needed to start a startup.Good points regarding precaution to be taken.Visit Venture capital Australia to find the venture capitalist.