We’ve seen founders clash with founders and even their investors, but last week brought a new experience as Bhavish Aggarwal took on a comedian on X (formerly Twitter) over the allegedly poor quality of Ola Electric’s scooters and company’s customer service.

The social media skirmish took place on Sunday and appeared to simmer down by Monday evening. Yet, as the dust settled, the situation for Ola Electric only worsened. News reports dug out thousands of customer complaints against Ola Electric in the recent past, and even central government ministries were suddenly interested.

However, the problem for Ola Electric is deep because the company’s numbers are also slipping. With Q2 results on the horizon, the pressure is real on Bhavish Aggarwal and Ola Electric — as it is for Ola Consumer as it looks to go for an IPO.

Before we see why, here’s a look at the top stories from our newsroom this week: 

• Decoding Ather’s Edge: Ather Energy is coming from a vastly different trajectory to join Ola Electric in the public markets. What fate awaits Ather after Ola Electric’s less than pleasant beginning?
• The Deeptech Problem: India’s venture capital firms and fund managers often talk about innovation, but in the age of generative AI and deeptech, such talks seem shallow. So the question is: where are the deeptech investors?
• Swiggy’s Big Ask: The Swiggy IPO raises two major concerns — a high valuation and hefty losses on the books. Besides, the platform is now set to increase its IPO size as well. Will this come back to bite the food delivery giant?

Where Ola Electric Is Slipping

The scrutiny intensified when news broke that the Ministry of Heavy Industries (MHI) has asked the Automotive Research Association of India (ARAI) to verify if Ola Electric is honouring warranties and maintaining the requisite service centres.

This is a critical condition related to the company’s production-linked incentives which not only stipulate production levels but also standards in quality and safety. So there is some element of taxpayer money involved here.

This investigation comes at a time when the company’s sales have been declining. Ola Electric’s market share fell from over 30% in August to 27% in September—a signal that its grasp on the electric two-wheeler market may be weakening.

As Ola Electric grapples with this turmoil, competitors are gaining ground. Bajaj Auto’s sales surged in September, with 166% year-on-year growth, and market share growing from 19% to over 21%,

In contrast, Ola Electric’s registrations slipped 11% month-on-month, its lowest sales figures since October last year.

Legacy automakers, such as Bajaj and TVS Motor, have years of experience and have handled product or part recalls in the past. Ola Electric, being relatively new to the game, is yet to face such an issue, but its current service woes suggest that it could be heading down a spiral if it doesn’t follow the established playbook for product quality and customer service.

Meanwhile, others are also rising quickly. Ather Energy saw a 15% bump in September, and its market share has grown to 14% from 12% in August.

The fluctuations in the electric two-wheeler market this year have been influenced by changes in government subsidies under the FAME scheme. However, the recently approved ‘PM E-DRIVE Scheme,’ with an initial budget of INR 10,900 Cr over two years, aims to provide fresh momentum to EV adoption.

This new initiative targets the production of 24.79 Lakh electric two-wheelers, building on the previous FAME-II scheme, which supported the development of 10 Lakh vehicles.

This dip in sales for Ola Electric is particularly concerning given these widespread concerns about product quality. The Central Consumer Protection Authority (CCPA) issued a show cause notice asking Ola Electric to explain accusations of misleading advertising and unfair trade practices.

This emphasis on service and after-sales support should be the next focus area for electric two-wheeler makers, said Deloitte partner Rajat Mahajan.

Deloitte projects that by 2030, electric two-wheelers could account for as much as 50-55% of the total market, so naturally there’s a lot of room for all kinds of OEMs. Mahajan highlighted the distinct advantage that traditional OEMs have with extensive dealer networks and said they are better equipped to handle service and sales growth in conjunction.

“They don’t sell in districts where their customers cannot get service. Ola Electric and Ather are looking at it like a D2C model, but Ola Electric has taken it to an extreme. You cannot sell in one district and hope that the local mechanic will know how to fix the bike. Ather’s service is said to be much better and more streamlined, but they have their own set of challenges,” a Delhi NCR-based angel investor told Inc42 about why the traditional model is better for OEM services.

As these startups scale up, they may need to adopt hybrid models that combine D2C channels with dealership-based service centres to meet rising customer demands.

The Stock In Free Fall 

It’s no surprise that Ola Electric’s stock has been on a rollercoaster. On October 10, shares plunged 5.8% during intraday trading on the Bombay Stock Exchange (BSE), before closing down 5.19% at INR 90.81.

Reports around Ola’s poor service standards and the government involvement seems to have rattled investors. Since hitting a post-listing high of INR 157 in August, Ola’s shares have plummeted by 42.1%.

Earlier this week, the company launched its ‘HyperService’ initiative, promising “one-day resolution” for service issues in an attempt to stem the tide of customer complaints that have been widely circulated on social media.

While the market remains cautious, brokerages like Goldman Sachs and BofA Securities are still bullish, with Goldman Sachs assigning a price target of INR 160 per share.

Brokerage firm Bernstein, for example, maintains that Ola Electric is on track to achieve EBITDA profitability, with the highest gross margins among its competitors.

On the financial front,  Ola Electric’s consolidated net loss rose 30% YoY to INR 347 Cr in Q1 FY25, even though it fell on a quarterly basis. The Q2 FY25 numbers expected in early November will make things clear as to how the sales decline impacts Ola Electric.

In the past, Aggarwal had claimed that Ola Electric will rely on the premium category products for profitable growth. “Our premium portfolio is growing, and the launch of the mass segment has resulted in further 77% YoY growth in deliveries,” he said after the Q1 results. 

Are EVs Terrible For Customer Service?

So can Ola Electric learn from its competitors or is service an ecosystem-wide problem?

One Ather Energy executive claimed that some companies did not approach after-sales service with a clear strategy like they might have done on the distribution side. According to this senior executive, service is a natural extension of sales in the automobiles space. “When we open a new store, it’s mandatory for the dealer to also open a service centre,” the executive claimed.

Ather ensures that its service capacity matches its sales network, prioritising both technical training and soft skills for its technicians. This past week we examined how Ather’s premium positioning means it has to invest in customer service meaningfully, unlike Ola Electric which has gone for the affordable end of the spectrum. And service is a big part of the premium experience.

After accusations of poor customer service this past week, Ola said that it will look to take feedback and improve its services. Aggarwal said that the company heavily invests in training programmes, and will build a team of skilled EV technicians.

On Ather’s part, our sources said the company conducts skilling and refresher courses every six months, to ensure that its dealers and technicians can meet the high standards customers expect.

The shift to electric vehicles is also changing the dynamics of after-sales services. Traditional two-wheeler dealerships typically generate around 40% of their revenue from after-sales services. But this is not the case with EVs that have fewer mechanical parts. However, the complexity of EV technology and proprietary nature of some scooters means that authorised service centres are critical for scale.

Despite the noise about product quality and service issues, Deloitte’s Mahajan remains confident in his projection that by 2030, electric two-wheelers will dominate the market, provided subsidies and government support remain in place. And this is why the results of the government’s scrutiny into Ola Electric potentially dishonouring warranty claims is important.

Ola Electric, despite its strong product lineup, must address its service issues if it hopes to maintain its leadership position. The company’s current struggles echo those faced by smartphone makers like Xiaomi when they entered the Indian market in the early 2010s. Back then, Xiaomi was criticised for inadequate after-sales support.

This time, people are also more gravely concerned because vehicle safety issues are a lot more dangerous than a dysfunctional smartphone. “Like Xiaomi, Ola Electric will need to build a robust service network if it wants to stay on top. Otherwise, it risks losing customers and market share during this crucial growth period,” the angel investor quoted above added.

The timing of this controversy, coming during the festive season, is particularly concerning for Ola Electric, as poor service or product quality can quickly erode consumer trust. If not addressed, these issues could drive potential buyers toward competitors that have wider service networks and better recent reviews.

For Bhavish Aggarwal and Ola Electric, the road ahead also requires introspection. The company claims to be building an EV for India, but it seems to have forgotten that the quintessentially Indian maxim of ‘sasta aur tikaau’ has two parts that are equally important for the consumer.

Sunday Roundup: Tech Stocks, Startup Funding & More

• Indian startups raised $114 Mn via 22 deals during October 7-12, up 32% from $86.4 Mn, but much lower than the past few weeks. Is a cold October on the cards for Indian startups?
• Bengaluru-based B2B marketplace startup Zetwerk has joined the growing list of Indian startups eyeing an initial public offering, and is in talks with investment bank JP Morgan
• In another move to diversify beyond the grocery segment, Zomato-owned Blinkit is now preparing to roll out a cafe feature to deliver snacks and beverages to match Zepto and Swiggy Instamart

• Caratlane founder Mithun Sacheti and brother Siddhartha Sacheti, CEO of Jaipur Gems, have set up an investment firm Finqube Capital looking to institutionalise their angel investments
• Ahead of the IPO, Swiggy founder and CEO Sriharsha Majety and some of the company’s investors sold shares worth INR 670 Cr, with the CEO pocketing INR 23 Cr

The post Ola Electric Needs Servicing appeared first on Inc42 Media.

India’s venture capital firms and fund managers often talk about innovation, but in the age of generative AI and deeptech, such talks seem shallow.

That’s because when we look at the startups that have raised the most funds in India over the past two years, or the ones that have given exits, the innovation is only seen in the business models and commercial models, rather than technology itself.

For instance, when it comes to AI and deeptech, Indian startups have largely benefitted from the IP creation and technology created in Silicon Valley and Europe, but only a few claim to have created such an IP. And so comes the perennial question — when Indians are the ones building products and platforms for Google, Microsoft, Amazon, Meta and other giants, why have no such companies emerged from India in the past decade?

The answer, among Indian VCs at least, is the lack of the patient and domestic capital base that was needed to create those giants in the west. And as the first wave of startups mature, it’s unlikely that such large outcomes will ever be seen in India.

But large outcomes is something that VCs should be chasing. And what can be larger than creating the next Nvidia or OpenAI in India, as foolhardy as it may seem right now?

As OpenAI’s Sam Altman said in 2023 Indian startups cannot hope to build something like a large language model (LLM) for $10 Mn or even $100 Mn. Microsoft poured in billions and so did other investors, leading to  the stage where OpenAI stands today.

Even so, it’s a loss-making company — the latest projections show a staggering loss of $14 Bn even in 2026. Yet, no one can argue that OpenAI has created the groundswell for generative AI and machine learning that will have a lasting impact.

Despite the ongoing funding challenges, the sector has continuously grown in the last three years. In 2023, deeptech startups raised $496 Mn compared to $397 Mn in 2022, according to Inc42’s latest “Indian Tech Startup Funding Report 2023”.

Overall, between 2014 and 2023, deeptech startups in India secured over $1.5 Bn in funding across 343+ deals, but many of these companies are much smaller in scale versus the traditional tech giants. So what will it take for India to grow its deeptech expertise?

Deeptech Is Just Beginning

It’s perhaps not surprising to some investors that Indian companies cannot come close to behemoths such as OpenAI or Google. The DNA of tech in India is quite different from that in the West, according to a Bengaluru-based early-stage fund’s founder.

As he said, in the West, the idea in the early 1980s and 1990s was always to build something for the world to use, and export technology because the US market was limited at that time. “India began late, and therefore, we will be late on many things. When we decided to leverage tech, there was the realisation that no one is catering to Indian problems and consumers. Tech startups could only build on top of existing IP, and this also suited us because we were focussing inwards rather than outwards,” the founding partner added.

That’s something other marquee funds are also claiming. Peak XV’s Rajan Anandan told Inc42 last year that deeptech playbooks are now being written in India, and typically, Indian startups move from application to the tech side because that’s the go-to-market strategy that has worked so far. As Anandan put it, AI startups have been around for decades, and investors have backed them for years, but what India needs now is the infrastructure

And this is also why viewing AI as the primary deeptech segment is perhaps facetious and myopic. “We are seeing what’s happening beyond AI and that’s very critical for the Indian tech economy to mature beyond where we are. [At Peak XV] we have two semiconductor companies. Mindgrove is making systems on chip. InCore is building a fabless semiconductor startup, while Newtrace is working to improve India’s green hydrogen production,” Anandan added, indicating the beginning of VCs backing startups creating tech IPs in India.

The True Depth Of Deeptech

Developing a global generative AI success story from India means dealing with the reality of how expensive it is currently, even though deeptech itself allows so many varied business models, according to All In Capital founder Kushal Bhagia.

We are talking about robotics, industry 5.0, machine learning, generative AI, semiconductors, AI computing capacity and of course data refinement and enrichment. All of these are open for disruption, Bhagia said.

Most early stage investors do not have the appetite and today, startups cannot build tech IP with 10s of millions of dollars, like it was possible in the 1980s. The investor quoted above added, “The age of the garage startups is well and truly over. Today, the technology that is defining the world is being made in shiny buildings. Do you really expect Indian companies to build the same from the garage?”

What many investors are asking for is not just domestic capital, but domestic capital that is patient. To extend the analogy, Indian startups are building with a garage mindset and competing with giants. While it’s commendable, this cannot be done on a small pool of capital that demands an exit in six to seven years.

But at the same time, there is a bit of a chicken and egg problem. As one fund manager who has backed companies like LLM maker Sarvam AI, semiconductor IP company InCore and other startups in the deeptech space told us, “Till there is a big outcome from India, all deeptech bets will seem small. Just like till Flipkart, Indian ecommerce was just an India story.”

What about VCs that are very bullish and long on deeptech. The likes of pi Ventures, Bharat Innovation Fund, Exfinity Ventures, Speciale Invest, Bharat Innovation Fund among a host of other funds are specifically looking at deeptech sectors. BIF’s Ashwin Raguraman is one of the most optimistic investors when it comes to deeptech in India.

He told Inc42 that startups are more than capable of resolving some of the most pressing problems in India — from access to healthcare to agriculture to education to social welfare and governance. So far they have not been given the foundation that is needed. With the introduction of the India AI Mission, which promises compute capacity, besides access to data and network, some of the foundation is being taken care of.

“As civilisations evolve, things are bound to become complex. The more complex the problem, the deeper the technology you need to resolve them. I’m certain that the deeptech built by talent from India is going to play a big role in solving complex global problems,” Raguraman, one of the founders of the $100 Mn deeptech focussed fund, said.

Patient Capital In The Age Of Exits

This group of investors, which has put the wagon behind deeptech, surprisingly believe that deeptech investments will outlast and outperform consumer-facing sectors in the long run. These are the models that are creating foundations — both hardware and software — for the future.

“When a deeptech startup goes past the initial stage of product creation and achieves product market fit, follow-on generalist investors are willing to come in because there’s tech acting as a differentiator, thereby offering strong moats and better opportunities to scale,” BIF’s founding partner added.

But he also acknowledges that getting there is not for every deeptech startup. Finding the product-market fit is hard in the deeptech space because these companies are creating the very technology that is rapidly evolving all the time. So deeptech is not for investors without the tenacity to last this course.

Unfortunately, the current attention of most of the VC ecosystem is on outcomes such as public offerings and exits through secondary. Over the past two months, we have written about this movement, which has been necessitated by the upcoming fund closure deadlines of some of the most prominent funds in India.

Exits through IPOs are also being heralded for multibagger returns and vindication of investment. Zomato is one example, but ask any deeptech VC and they will tell you the opportunity is larger on the IP and tech innovation side than what most investors even understand.

The narratives around exits and IPOs will not be seen in deeptech for at least a decade. Do investors have the patience to endure another decade of limited outcomes, just as they are reaping the fruits of the past decade?

The post India’s Deeptech Problem: Where Are The VCs Backing Startups Creating IP, Innovation? appeared first on Inc42 Media.

One often gets asked: where are the profitable startups? Three recent examples come to mind, all coincidentally in the same segment and from Bengaluru. We are talking about Zerodha, Groww and Dhan.

In fact, the ‘success rate’ in investment tech for profitability is rather high compared to other segments in the broader fintech sector — even Upstox reached profitability in FY23. And this is perhaps why many fear that SEBI’s changes this year might disrupt this profitability in some measure.

This past week, Zerodha revealed that SEBI’s new derivatives framework will definitely have an impact on futures and options (F&O) volumes. For SEBI, these rules are critical to protect investors from becoming too enthralled by the F&O frenzy, but will the changes set Zerodha, Groww, Dhan, Angel One and other discount brokers back in terms of profitability as many fear?

Let’s try to answer that after a look at these top stories from our newsroom this week:

• End Of BharatPe-Ashneer Grover Saga? After two years of bad blood, mudslinging and court battles, BharatPe and Ashneer Grover have come to a settlement, but its timing has raised quite a few questions. Was it a settlement or a compromise?
• The Valuation Game: Prominent investors are now saying that the age of high valuations and unicorns is over for the Indian startup ecosystem and now the focus is shifting to value over valuation. What explains this shift?
• The Festive Season Battle: Quick commerce has the edge when it comes to online grocery, but are the likes of Blinkit, Zepto and others close to disrupting Amazon India, Flipkart and Meesho’s festive season expectations? Here’s a breakdown

Regulatory Hit For Zerodha, Groww & Co

Since July this year, discount brokers and investment tech platforms have had quite a few things to worry about, with more major changes on the way

It started when SEBI decided to bar market infrastructure institutions from offering discounts based on trading volumes of members, effectively hitting the business model of discount broking platforms such as Zerodha, Groww, Upstox, among others. The move was largely seen as a way to curb the F&O trading frenzy.

The second setback came via the Union Budget, which hiked capital gains tax and securities transaction tax. Common sense dictates that retail investors are more likely to think twice about how much they now want to invest.

The most recent disruption has come from SEBI’s new derivatives framework, which will come into effect from November. These changes include weekly expiry of only one index derivative per exchange, upfront collection of option premiums from buyers, increasing the minimum contract size for index derivatives to INR 15 Lakh, among others.

Together, these changes have made it slightly more difficult for platforms to predict investor and trader activity, made it more complicated for them to bring in new users and have forced them to look at other revenue streams to make up for any potential dip in profits.

Zerodha, Groww and other investment tech platforms that have scaled up massively on the back of the F&O boom of the past 18 months will feel the heat.

Into The F&O Frenzy

As per SEBI data as of May 2024, equity derivatives and F&O volumes on BSE and NSE saw a whopping 71% YoY growth to INR 9,504 Lakh Cr.

Further, according to data by global trade monitor FIA, more than 36.8 Bn equity index options were traded on these two exchanges between April and June 2024. This is 100% YoY growth and represents two-thirds of all F&O trades on every exchange around the world. In other words, India is quite mad about F&O.

This growth has coincided with investors flocking to discount broking platforms. Groww now boasts over 11 Mn active investors as of May 2024, with Zerodha trailing at 7.8 Mn as of August 2024. However, these leading platforms see the impact from SEBI’s new rules differently.

For instance, in the past week, Zerodha CEO Kamath said that the platform will not change its zero brokerage model in structure even as most industry observers expected the opposite. And then a few days later, Zerodha put on a brave face in the light of yet another potential complication with SEBI’s new derivatives framework, saying it would affect 30% of its futures and options (F&O) orders.

To put this in context, Zerodha reported INR 8,320 Cr or about $1 Bn in revenue for FY24. This is undoubtedly a major milestone for the company, but now other industry observers believe revenue for the current year (FY25) will drop by 30%-50% for Zerodha.

Groww on the other hand has distanced itself from F&O as a category. In the past, the company has said that its growth and revenue generation is not heavily dependent on F&O trading. In a recent interaction at a media conference, cofounder and CEO Lalit Keshre also said that Groww has a different outlook on investment tech.

“Groww is not an F&O company, but a financial services company. Hardly 15% of our customers do trading. Trading is a zero-sum game. Investing is a win-win game. We encourage responsible trading,” Keshre was quoted as saying.

Kamath also claimed that the real impact of SEBI’s changes in the F&O framework will only become clear after November this year when the rules come into effect. And that could be a big blow to the profitability streak for Groww, Zerodha and others.

Speaking of profits, as we reported this week, Groww is likely to see a 4X YoY jump in its net profit to INR 297.8 Cr in FY24. Among startups, Groww is the closest to Zerodha, which had a sizable lead over the former with INR 4,700 Cr ($562 Mn) in profit for FY24. This is despite Groww having significantly more active investors.

As for the other profitable players, Angel One, the discount broking arm of full service firm Angel Broking, reported a net profit of INR 1,126 Cr, while Dhan finished FY24 with a healthy profit of INR 177 Cr after just about three years of operations.

Dhan expects the gross revenue impact from SEBI’s changes to be around the 25%-30% mark, according to a report by The Arc, which would certainly eat into those profits.

Diversification Is The Game

It’s no surprise then that most players are looking to diversify their revenue streams. The most clear example is of Groww, which has seen its lending business grow steadily in the past year.

The Bengaluru-based unicorn has also added UPI payments and an asset management company to make the most of its lead in terms of active investors.

Groww’s NBFC arm Groww Creditserv’s loan book stood at INR 965.44 Cr as on June 30, 2024, growing 32% from INR 731.1 Cr in the previous quarter. Personal loans accounted for 98% of the total loan book, and consumer durable loans accounted for the rest. However, Groww Creditserv is not yet a profitable entity. It posted a loss of INR 24.1 Cr in FY24, almost 10X higher than its loss in FY23.

Some such as Upstox are leveraging scale to launch insurance distribution, but this is not exactly a high margin play.

Then there’s margin trade funding or MTF – where brokers lend money to traders to earn interest income while keeping the financed shares as collateral. This is usually an area where banks have had a strong presence. However, Groww has made an entry into this space and Zerodha is also contemplating a launch, as per sources.

Among discount brokers, Mirae Asset-backed Mstock has cracked the MTF formula to some extent and has built a loan book of around INR 2,000 Cr, as per ET, while Angel One also has a significant interest in MTF.

Industry insiders believe that MTF can be a lucrative vertical for discount brokers because the primary target audience is high-net-worth individuals, which naturally have larger propensity to invest. It could be a way for Groww, Zerodha and others to nullify the revenue impact from SEBI’s strict new framework for F&O.

Despite the upside, making the most of these new verticals will be a distraction for Zerodha, Groww, and others, who have become used to consistent revenue generation and profitability.

But it’s also an opportunity for Groww to turn the tables on Zerodha in terms of revenue, or for other players to emerge as strong rivals. As always, India’s regulators have added a fresh new twist to the fintech game.

Sunday Roundup: Tech Stocks, Startup Funding & More

• After a drought of almost two years, the Indian startup ecosystem is showing signs of recovery, with startup funding growing by 2X YoY to $3.4 Bn in Q3 2024
• VC giant Peak XV Partners has pared the size of its $2.85 Bn fund by 16% or $465 Mn, and restructured the carried interest and management fees for its LPs across various stages
• Ahmedabad-based coworking space provider DevX is looking to tap the IPO boom and has filed its DRHP for a fresh-issue-only public offering

• Bullish about its IPO, Swiggy will now look to raise a total of $1.4 Bn through the public issue, up from previously planned $1.25 Bn, after getting the shareholder nod for the increase
• Ola Electric slipped below the INR 100 mark in the week, as concerns of profitability and drop in EV market share linger on the stock

The post Zerodha, Groww’s Revenue Conundrum appeared first on Inc42 Media.

With one quarter to go in 2024, we are beginning to another inflection point in the Indian startup ecosystem, with VC funds and investors, in particular, displaying a lot more optimism than just one year ago. And in particular, we are seeing a shift from valuations to value.

Much of this bullishness was on display at MoneyX by Inc42 last week, but even outside the spotlight of the stage, conversations revolved around true valuations, monetisation and profits, the IPO frenzy and exits. When just last year, perhaps the mood was a bit more sombre.

Indeed, over the past two months, we have delved into the factors that have given Indian venture capital firms this brighter view of things — including the improving outlook for exits through IPOs and the secondary market for startups.

But what’s often unspoken in these conversations is the rationalisation in startup valuations. The discussion around valuations is usually restricted to the public markets where we have seen debates on Zomato’s staggering rise to $30 Bn and beyond, and on the flipside, Paytm currently trading at over 70% lower than its listing price.

These fluctuations in valuations are pretty much expected in the world of publicly listed companies, but for startups, the conversation has pretty much always been about rising valuations, or when things go pear-shaped and there’s a big erosion — think, BYJU’S or Pharmeasy.

That’s until now. In 2024, there is a more measured and rational view on valuations and the fact that many startups are now coming closer to their true value than before. In particular, the fact that even smaller IPOs are gaining a lot of traction and interest is also a great sign for startup investors, and another factor behind the shift from vanity valuation to real value.

From Vanity Valuation To Real Value

Several noted investors told Inc42 last week that if the past decade was about backing the potential of Indian startups, the next few years will be about backing the value that has been created from this potential. And for many VCs, the age of unicorns is over, or perhaps the metric by which a unicorn is defined has changed.

Until FY23, only a handful of unicorns were profitable. But this tide seems to be turning in FY24 as companies have figured out ‘comfortable’ monetisation models. Zomato, Honasa, OYO have shown that companies can scale up and yet remain profitable.

It’s no longer the choice between profits and revenue that it used to be, and valuations, therefore, are not the metric by which to judge the startups that need to be celebrated.

Peak XV Partners’ managing director Mohit Bhatnagar admitted to having a problem with the term unicorn, because as an investor, it gives the wrong signal. He believes that valuation only truly matters at the time of an exit, and to get this valuation, investors have to back value.

“It’s time we look at redefining what it means to be a unicorn. While surely, it cannot always be about profits, we have to judge companies on how much revenue they are generating and are they closing the gap when it comes to going breakeven. This is the real metric and the days of chasing these vanity valuations are over,” he added.

In a similar vein, early-stage and angel investor Rajesh Sawhney believes that the wave of smaller IPOs, which have also delivered the returns to pre-IPO investors, shows that valuation was never the right north star for founders.

“Of course, valuations are important when you exit, but that cannot be the reason you invest in startups. Founders bargaining for a higher valuation is a red flag in most cases, and only in a fraction of investments does this pay off. But why take that risk at all? Venture investing is already risky,” Sawhney told Inc42.

Why Valuations Don’t Matter For Some VCs

Others such as Hiro Mashita, founder and director of Singapore-based m&s Partners, had a different take on valuations. Mashita said that as early investors, the potential upside can be so big that valuation at the time of investing is often immaterial.

Mashita pointed to his experience of investing in Razorpay’s seed round in 2015, when the company had just started out and was not making much revenue to its current valuation of over $7.5 Bn. He claimed his investment has grown by over 700X since the seed round. So for him, it was not about the valuation but the value that Razorpay could unlock.

Interestingly, Mashita also cited the example of Y Combinator founder Paul Graham, who once said, “Valuation matters far, far less than the decision of whether to invest or not. The spread between bargain and outrageous startup valuations can’t be more than 5X, in a world where the best investments can return 1,000X.”

Incidentally, Y Combinator also invested in Razorpay’s seed round, and the company is now looking to list in India by FY26 or next year.

IPOs & Indian Startup Valuations

Speaking of IPOs — many VCs have seen the writing on the wall for a number of years, and have held onto the belief that private valuations are just a number on a paper that does not matter for many years.

The fact is that many VCs feel vindicated about their thoughts on valuations today, than a few years ago, because of the fact that today startups are at the stage where they can grow into their valuations more easily.

The ripe market for IPOs is a big part of this vindication. Relatively small size of some new-age tech public listings this year and the spate of SME IPOs (even accounting for the potential bubble there) have also justified their patience.

When criticism around bloated valuations first came up in 2021 during the ZIRP investing bubble, Blume Ventures’ partner Sajith Pai wrote, “VCs found that the techniques that public market investors used couldn’t hold for younger, fast-growing companies with unpredictable revenue. Through long years of iteration, they came with the practice or protocol of playing long-term multiparty staging games to take the company from idea to IPO.”

At the time, Pai claimed the VC valuation process has been honed and has evolved over the years, and can at times lead to situations where certain startups seem to have ‘absurd’ valuation for their particular stages. But also he warned that comparing these valuations with public markets misses a big point.

“Over time, these ‘derived valuations’ correct themselves out, and in the long run, as the startups move to an IPO, the values converge with those of their public market counterparts,” Pai wrote in 2021

This seems to have presaged what we are seeing in 2024. A lot of the private market valuations are either sobering to meet public market benchmarks and when private companies go public, their valuations reach more rational levels seemingly automatically.

In many ways, this too is a sign of maturity of the market, of a necessary step in the evolution of Indian startups. Even the most absurd valuations tend to get corrected in the long run. And when they do, as they have now, the real value comes to the fore.

The post From Valuation To Value: Indian VCs Shift The Gears appeared first on Inc42 Media.

Earlier today, fintech unicorn BharatPe claimed to have settled its two-year long legal dispute with former MD and cofounder Ashneer Grover. The company said Grover will no longer be associated with the company, and also added that Grover will not hold any shareholding in the company.

But there are a number of questions that have come up despite these claims by the company.

Before we get to those, it’s worth noting that shares belonging to Grover shall be partly transferred to the Resilient Growth Trust operated by the company, and partly to Grover’s family trust.

In response to the settlement, Grover released a media statement, and said, “I repose my faith in the management and board, who are doing great work in taking BharatPe forward in the right direction. I continue to remain aligned with the company’s growth and success.”

So, after two years of bad blood, public mudslinging, court battles and other dramatic claims, Grover and BharatPe seem to have come to a settlement at a curious time. For anyone who has followed the BharatPe and Grover saga from early 2022, these statements are not only surprising, but raise plenty of questions.

As for the family trust that will take charge of certain shares held by Ashneer Grover, this will be in the names of the Ashneer and Madhuri’s children and will not involve the duo.

The trust will be managed by a mutually-decided independent advisor, sources told Inc42. We do not know exactly how much equity will reside with this family trust.

But why exactly has this settlement come now? And when we consider the volley of allegations and accusations over the past two years, this settlement raises more questions than it answers.

BharatPe Vs Ashneer Grover: A Short Timeline

Before we delve deeper, here’s a timeline of the various cases involving BharatPe and Ashneer Grover:

• In January 2023, BharatPe filed a civil suit at the Delhi High Court against Ashneer Grover and his family members for alleged embezzlement of funds, and sought up to INR 88.67 Cr in damages.
• Then in May 2023,  the Economic Offences Wing (EOW) of the Delhi Police registered an FIR in a criminal cases alleging fraud to the tune of INR 81 Cr
• In addition, Ashneer Grover is facing lawsuits from BharatPe cofounders Bhavik Koladiya and Shashvat Nakrani, both of whom are looking to retrieve their shares in the company, that are said to be held by Grover

These are three separate matters and the settlement announced by BharatPe only pertains to the civil case mentioned above, at least for now. But that could soon change.

While the civil suit is now formally settled, incidentally, the EOW investigation has progressed significantly in recent weeks with two arrests.

The most recent arrest was Deepak Gupta, a relative of Ashneer and his wife Madhuri Jain Grover, who has been in custody for nearly two weeks and was supposed to appear in court on Monday, September 30 for a hearing.

Sources close to BharatPe claim that the agency was close to arresting Madhuri Jain Grover, who is the prime accused in the EOW case. But now that there is a settlement in the civil suit, it’s very likely that the criminal matter will also be resolved without any more arrests, sources added.

One might ask why a settlement in a civil case is material for the criminal case, but there are provisions in the Code of Criminal Procedure of the Indian Penal Code to allow such settlements even in criminal cases.

In legal speak, an out-of-court settlement in criminal cases is called compounding of offence, and such compounding can occur without permission of the courts in certain cases. However, the court’s permission is needed for compounding of offences under Sections 406, 408, 409, 420, 467, 120B and 201 of the Indian Penal Code.

These are the sections pertaining to criminal breach of trust, cheating and forgery, and the primary sections in the chargesheet filed by the EOW in the alleged fraud case filed by BharatPe against Madhuri Jain Grover, Ashneer and others in their family.

One must also understand the reasoning of the law. Compounding of criminal cases is only allowed when there is an individual victim involved and there is no harm to the public at large.

We do not yet know what view the court will take on the compounding. However, sources close to the company told Inc42 that if the Grovers appeal to the court to quash the EOW FIR, BharatPe will not object. Essentially, this means that the Grovers could soon be completely free of all issues related to BharatPe.

Will The EOW Case Be Dropped? 

Inc42 contacted Ashneer Grover, BharatPe and Rajnish Kumar for their comments on the matter. BharatPe pointed to its statement on the settlement and did not offer any further clarification on why this settlement was reached at this point in time.

Rajnish Kumar did not respond to Inc42’s phone calls or text messages about the allegations raised by Ashneer Grover and why the board decided to settle the matter.

In response to a series of questions on the settlement, Ashneer Grover said, “Sir – I have nothing to share with you. Other that [sic] I am in London with my wife for a week and will be attending Diljit’s concert (yay ! Got the passes). All of us are bound by confidentiality.”

Grover and his wife Madhuri Jain Grover were allowed to travel to the UK by the Delhi High Court on the condition that the duo submit original share certificates and original title deeds of their properties. The permit is from September 28 – October 7, 2024, so the Grovers will likely be back in India next week.

In the meanwhile, what remains to be seen is how the EOW criminal case will play out. The final verdict in this matter is very likely to come next week, when the Grovers return to India after their court-mandated deadline.

Another Corporate Governance Lapse? 

The settlement is good news for BharatPe, which was stuck in an untenable position in light of multiple legal battles and was carrying the baggage of the former cofounder’s alleged actions for the past two years.

As the company stated, its focus now is on going towards profitability. BharatPe launched a B2C fintech super app recently, and it will undoubtedly look to acquire new users en masse now that it has seemingly moved on from the Ashneer Grover saga.

But there are quite a few concerns raised by others in the startup ecosystem. Many are asking, for example, whether a founder can simply defraud a company as BharatPe had alleged, and in return relinquish their equity to settle the matter.

“Ashneer has given up his equity here so the company does benefit from this to a certain extent, but there is an on-paper cash loss of INR 80 Cr-odd and reputation damage that cannot be fixed with a settlement. If anything, this raises even more questions about whether BharatPe did the right thing by settling this issue,” according to a Delhi-based corporate law practitioner.

How much equity did Ashneer Grover let go of? According to those close to the company, Grover held 8.5% stake in the company, whereas his family trust will now only have 4% stake.

This could further reduce if Grover settles his case with Bhavik Koladiya, another cofounder of BharatPe, who has claimed that his shares were being held by Grover but have not been transferred back.

All in all, given BharatPe’s valuation of $2.7 Bn, the company managed to claw back close to $108 Mn in equity value, which is significantly more than the INR 82 Cr ($10 Mn) loss caused by the alleged fraud. Sources claim that even if the company’s valuation falls in the future, the company has more than recouped its losses.

However, the lawyer quoted above questioned whether the board is doing the right thing for BharatPe in the long run. “This affects the reputation of those on the board and it’s not just about recouping losses. The likes of Rajnish Kumar and others on the BharatPe board were accused by Ashneer Grover of conducting business improperly. So we have to ask whether the board has something to hide by letting this go?”

Incidentally, Ashneer Grover had made allegations against BharatPe chairman and former SBI chairman Rajnish Kumar in a letter addressed to the Reserve Bank of India (RBI) earlier this year. Grover claimed Kumar allocated equity shares worth hundreds of crores to himself after joining the board.

He also alleged that Kumar drew a salary of INR 1.5 Cr per year, 3X higher than the amount he was being paid when he joined the BharatPe board in October 2021.

So what happens to all these allegations? Do they simply vanish with the settlement, many are asking.  “This means I can simply relinquish my shares and repay a company with equity after committing fraud and embezzling money. Not sure this is what we want founders to learn from the BharatPe case, especially after two years of course correction on the corporate governance front,” says a veteran investor.

The end of BharatPe’s fight with Ashneer Grover shows that corporate governance is a tricky subject to navigate for startups and their boards.

Two years ago, the company was blamed for lapses not only in relation to onboarding of non-existing vendors but also allowing key personnel to operate without enough checks and balances. And now, corporate governance questions are being raised around BharatPe arguably setting the wrong example for startups dealing with cases of fraud. So the question we are left with is: was this a settlement or a compromise?

The post BharatPe Vs Ashneer Grover: A Settlement Or Compromise? appeared first on Inc42 Media.

A few weeks ago, we asked whether Zomato overpaid for Paytm Insider and the ticketing business in the INR 2,048 Cr deal. Since then, we may have seen the first signs of why the acquisition was such a big deal, and why Zomato is looking to take on BookMyShow.

First, Zomato was in the spotlight for Diljit Dosanjh’s ‘Dil-luminati Tour – India’, which was sold out in a matter of minutes, resulting in the tickets being resold on scalping websites. This was followed by Zomato’s only major rival in the ticketing space now, BookMyShow coming under fire for a similar incident involving ‘Coldplay: Music Of The Spheres World Tour’.

Thanks to these incidents, the online ticketing space is getting unprecedented attention from all corners. Many blame BookMyShow and Zomato for not conducting sales in a more transparent manner, and now there’s a legal mess that both companies have to wade through.

Is this a new dawn in the Indian live events space? Let’s find out, but first, a look at the top stories from our newsroom this month.

• Swiggy On The IPO Trail: As the food delivery and quick commerce giant lines up for its massive IPO, here’s a look at who holds the cards and the equity to get big returns come the public listing
• The End Of WazirX: WazirX’s $234 Mn crypto heist has unveiled serious security flaws and mismanagement, with several burning questions over founder Nischal Shetty’s role and the platform’s future. Here’s our deep-dive into how the hack happened and what it means
• The Domestic Capital Push: As Indian startups stand at the cusp of another pivotal moment after the past decade of growth, domestic capital will have a big role to play in the next phase. Here’s why India needs more domestic funds
• Quick Fashion: Blinkit, Zepto and Instamart have changed grocery ecommerce in India forever, and now Bengaluru-based Slikk believes it can bring the same magic to the fashion category with a quick commerce platform. Will this new model take off?

Gold Rush For BookMyShow, Zomato

It’s important to understand the sequence of events before we look at how Zomato and BookMyShow could tackle the rush for live events going forward.

On September 24, two days after tickets for the Coldplay concerts went live on BookMyShow, the platform filed a police complaint about unauthorised resale of tickets or scalping for its exclusive concert. Reliance-backed BookMyShow clarified that it had no affiliations with ticket reselling platforms such as Viagogo, Gigsberg, or any other third-party individuals involved in the unauthorised sale of Coldplay concert tickets.

The Mumbai-based company was looking to dodge allegations of fixing the sale of tickets such that scalpers would benefit. However, those in the industry believe this is a far-fetched notion. “No one benefits from scalping. Not the government nor the platforms nor the actual buyer. This is only great for those who are looking to make a quick buck and this is thoroughly banned in India, unlike in the US, where scalping is allowed with certain limits,” according to one of our sources in the industry.

For instance, in the US, many venues enforce private property rules to clamp down on scalping in the vicinity of the concert, but nothing stops anyone from reselling online.

On its part, BookMyShow condemned scalping and emphasised that such activities are punishable under Indian law, and it also pledged to cooperate with authorities in any investigation related to scalping of the Coldplay tickets.

For many of those who were in the waitlist for the Coldplay concerts, it was a double blow. Just a few days before BookMyShow, a similar rush was seen on Zomato. Tickets for the Dil-Luminati tour had sold out in a short time but were later spotted on secondary platforms at inflated prices.

Originally, the tickets were priced from INR 12,999; however, they were listed on Viagogo for as much as INR 53,000 or 4X the original price. In some cases, tickets for both these shows were being sold for over INR 3 Lakh.

Zomato issued a formal notice to Viagogo for selling tickets without authorisation, and the company filed multiple cyber crime complaints against other scalping or secondary sales sites, as per sources.

In both cases, the sudden rush for tickets seemingly overwhelmed the platforms, causing them to crash temporarily, leading to more public outcry, as even those ahead in the waitlist could not get the tickets.

In wake of the controversy, the Economic Offences Wing (EOW) of the Mumbai Police has summoned BookMyShow’s parent entity Big Tree Entertainment’s CEO Ashish Hemrajani and the company’s technical head for questioning.

The summons was issued after a complaint was filed by lawyer Amit Vyas, who alleged that BookMyShow enabled scalping and secondary sale of tickets, while deceiving the public.

What makes this worse is that reports indicate that tickets began appearing on third-party sites even before the official sale had gone live, which not only shows a lapse in the distribution process but also gives credence to the possibility that many of these scalpers were running scams. In fact, BookMyShow clearly warned users of scams being run in the name of tickets for the Coldplay show. 

Scalpers Make Bank

“Some artists definitely generate this kind of frenzy. If you remember, Coldplay’s previous concert in Mumbai in 2016 also faced similar issues, where tickets, originally priced between INR 5,000 to INR 20,000, were resold at exorbitant rates, Scalpers are getting smarter and deploying bots to buy large batches of tickets in seconds,” said an industry insider and former CXO of an events and movie ticketing platform.

Whether it is Ed Sheeran’s Divide Tour or Justin Bieber or other electronic dance music (EDM) artists, this is a consistent trend in India. A large reason for this is that India does not have any permanent venues for concerts. In India, cricket stadiums are typically repurposed for concerts and that makes it much harder to get a proper idea of the demand.

In many cases, organisers have multiple plans ready to accommodate the demand. “They can reduce the size of the venue for the audience and put more focus on the stage, or they can reduce the stage and add more people into the venue. It would be better managed and there would be better visibility for the demand if we had permanent concert venues,” the former CXO added.

There could be other tech-led solutions to stop scalping. For instance, one could monitor IP addresses and restrict sales if there is a big spike from a cluster of related IP addresses, but this is a technical problem in India where most ISPs route traffic through hubs such as Pune or Gurugram.

Another option is linking sales to mobile numbers and permitting only those with the right ID card to enter the venue. But this is a logistical nightmare given just how difficult it would be to manage thousands of ID checks at the gate.

Having non-transferable tickets is also not an ideal solution. One source close to the Zomato Live operations told us, “How do you ensure that those buying tickets actually show up to the concert? We don’t want a situation where tickets cannot be transferred and very few people show up for the concert.”

Can BookMyShow, Zomato Fight Back?

So what can platforms do? For one, Paytm Insider let users transfer their ticket to another individual free of charge. But this does not completely stop scalping.

Zomato is trying something similar with its ‘Book Now, Sell Anytime’ feature, which lets users list their tickets on the app for sale for a price lower or higher than their original purchase price. The platform is set to go live on its app from September 30, starting with the ‘Zomato Feeding India Concert’ featuring Dua Lipa.

Incidentally, Lipa’s concert was also criticised for not being an open process, providing early access to some credit card holders. Do such deals make it seem like platforms are acting out of bad faith?

“We cannot completely stop tie-ups with financial partners because they are making it easier for many users to actually attend these concerts. One of the secular trends driving the rise of live events is the easier access to short-term credit through BNPL and similar options,” added the Zomato Live insider quoted above.

The other major trend is that live events and experiences have roared back after the pandemic which has certainly given BookMyShow and now Zomato a major boost. Similar to the travel sector, Indians are willing to go the extra mile to get a taste of these experiences that were out of reach for three to four years.

Plus, it’s no longer enough for people to aspire to attend a Coldplay show, but the fact is that a lot of online ‘clout’ is built around being seen at these concerts and events. Social media credentials and conversations are built around these experiences and younger Indians are certainly not going to miss out on the opportunity.

Both BookMyShow and Zomato indicated that they were exploring solutions to stop scalping, but this may not be easy as we have highlighted above. “We implemented a queueing system to manage the overwhelming demand and addressed issues caused by suspicious and malicious traffic within minutes, causing a brief delay, but ensuring minimal disruption for genuine fans. Due to the unprecedented demand, a third Mumbai show was added shortly thereafter, which also received a fantastic response,” a BMS spokesperson told Inc42.

India Shows Its Appetite

But a cursory search for scalping and TicketMaster (US-based ticketing giant) would make it plain as day — this problem has not been solved even by those who have experienced it for decades. BookMyShow added a third Coldplay show in India to appease fans, but tickets for those too were sold out in a matter of minutes.

Speaking of Coldplay’s third concert, another industry insider, said this is a game-changing moment for Indian events. We talk about premiumisation as a trend in the D2C category, and that’s pretty much true for live events too.  “I can’t remember the last international artist who did more than one show here. Covid has been an insane trigger, and the numbers have exploded. This is why we are seeing this frenzy today. It’s not about the concert, it’s about status signalling, it’s about the aspirational nature of the Indian consumer.”

And there’s also a silver lining here. Those in the industry say this gold rush pretty much puts India on the global live events map, if that wasn’t the case before. So for those who didn’t grab that Diljit or Coldplay ticket, there’s a lot more to come.

The Best Of MoneyX By Inc42

• What compelled Sanjeev Bikhchandani to take a big bet on Zomato. The Info Edge founder spills the beans
• Can the Indian EV revolution catch up to China’s hot pace? Not for at least 20 years, believe some of the key investors in the EV space
• Peak XV’s Mohit Bhatnagar believes it’s time to retire the current valuation-centric definition of unicorn. Here’s what he wants instead
• The quick commerce boom will fuel new models built around granular customer and brand data, believes All In Capital’s Aditya Singh. Here’s how
• As family offices become a prominent feature of the Indian investor ecosystem, there’s a need to rethink how they are managed, says Jai Rupani of the Dinesh Hinduja Family Office. Here’s how

Sunday Roundup: Tech Stocks, Startup Funding & More

• Startup Funding Is Back: Indian startup funding is showing signs of a major recovery with the total funding raised this year now crossing $9 Bn, thanks to this week’s tally of $432 Mn
• The BYJU’S Mess: In a fresh blow to BYJU’S, the SC told the insolvency resolution professional to hold off on further meetings with the committee of creditors amid fresh challenges by US lenders
• Zoho’s India Focus: US was a key pillar of growth for Zoho thus far, but the SaaS giant is now keenly focussed on boosting its India revenue through investments in R&D, says CEO Sridhar Vembu

• EMT’s New Deal: Easemytrip CEO Nishant Pitti offloaded half of his stake in the company this past week, just before the company signed a deal with PhonePe to list hotels on the fintech super app
• DotPe’s Faux Pas: Gurugram-based payments and commerce platform DotPe found itself in choppy waters over lax cybersecurity guardrails that led to leaks related to restaurants and user data

The post BookMyShow, Zomato And India’s Concert Mania appeared first on Inc42 Media.

India’s startup ecosystem has seen over $150 Bn in funding in the past decade. That is a phenomenal number by itself, and it’s something a lot of the ecosystem stakeholders seem to forget when talking about why India is such a major destination for tech investors.

But it perhaps might not surprise anyone to know that almost 90% of this funding has come from overseas investors — sovereign wealth funds, large private equity players, crossover funds and venture capital giants that began their journey in Silicon Valley.

As the Indian market matured and evolved, an infrastructural substrate was formed that has become the bedrock for the Indian startup story. So far, the story has been about finding the customers and the consumers. Over the past 10 years, startups have gone from novelty to must-haves in many cases. And that has led to this moment in time — where the maturity and the patience of the past decade are translating into profits, consistent revenue growth, clarity on monetisation and exits.

In fact, the experience of the past two years has also put to rest some of the grave concerns around FOMO investing, spray-and-pray approach and governance lapses. The value erosion seen in the past year is being called a blessing in disguise.

So naturally, many VCs and investors believe that now is the time for domestic wealth to capitalise on this maturity. It’s by no means a new call-to-action.

Domestic Funds Stepping Up

When we launched MoneyX last year, this was a trend just about to start bubbling. But now, 14 months later, as we sit on the cusp of another edition of MoneyX, there’s little doubt that many Indian HNIs, family offices and institutional funds are finally alive to the startup opportunity.

The Department for Promotion of Industry and Internal Trade (DPIIT) currently houses more than 1.5 lakh startups, up from a few thousand startups just a decade ago, which also highlights the pipeline of entrepreneurial activity in the country. And many of these entrepreneurs are now turning to solve problems that are closer to Indian investors than global funds.

These founders — from Tier 2 and 3 towns — are turning to HNIs and family offices led by small and large industrialists and entrepreneurs for funds.

This trend has already played out in other geographies, where startups have dominated the tech discourse. When we look at the United States or China, tech giants in these countries built their foundations on a strong base of domestic capital.

“Take Apple, for instance, where Sequoia Capital was an early backer. The very same Sequoia came into India in the mid-2000s and created a massive portfolio of Indian startups. But now the times are changing, which is why they are sharper on the India thesis and have created an India-specific identity with Peak XV,” a general partner at SEBI-registered alternative investment fund told Inc42.

The GP added that there is a clear need for a domestic base of investors because we are no longer in the moment where Indian startups need the deep pockets of foreign funds for customer acquisition. Many of these playbooks that have been fuelled by foreign capital are now mature enough to be used without the need for that massive capital infusion.

“Of course, there are unicorns like Zepto or Rapido which have courted US-based funds in 2024, but by and large, the needs of the early-stage and growth-stage market are being funded by domestic investors. Even large pre-IPO rounds such as Swiggy’s are seeing a lot of Indian HNIs which will have a halo effect on the market,” the same partner added.

Startup IPO Boom Attracts Domestic Investors

Indeed, one cannot understate the significance of IPOs and the public markets in swaying the domestic LPs and investor base towards the startup ecosystem. In particular, the massive gains for stocks such as Zomato, TBO Tek, Policybazaar, Honasa, RateGain, Awfis, Zaggle and others highlight the variety in the size and scale of companies that have listed and made gains.

It also shows that it’s not just about the large brand names but also smaller IPOs which are showing promise. No surprise then that there is a queue of celebrities and HNIs backing Swiggy in its pre-IPO rounds at the moment.

For domestic HNIs and family office investors, who are more habituated to the dynamics of public markets, IPO-led exits and the promise of large IPOs mark a significant turnaround point. Exits create a virtuous cycle where each wave of successful listing brings in gains that help fund emerging startups.

A new wave of domestic investors is great, but a revival in overall startup funding will truly crown this moment. According to WaterBridge Ventures founder and managing partner Manish Kheterpal, Despite the rise in funding raised by India-focussed funds over the last few years, domestic capital accounts for around 15% of all funding for Indian startups.

He added that today, family offices and their investment managers have plenty of options and they can diversify their investments based on their liquidity needs. “From a point of view of financial risk diversification, family offices have access to experienced fund managers that have a good track record in India. On the other hand, those with higher risk appetite can go for direct investing and more granularly control their exposure,” Kheterpal said.

Government policy has looked to encourage more domestic investments in the venture capital and startup ecosystem. The INR 10K Cr SIDBI Fund of Funds is the biggest signal. Launched in 2016, the FoF was aimed at providing a boost to the Indian startup ecosystem and increasing capital inflows into the space.

As of November 2023, it has facilitated investments worth INR 17,534 Cr in 938 startups, according to a CRISIL report. And in recent years, there has been an effort to focus on particular sectors to back this holistic fund.

For instance, following the privatisation of the space sector in 2020, and after introducing 100% foreign direct investments (FDI) for spacetech in February this year, the Indian government announced an INR 1,000 Cr state-backed venture fund for the space economy.

This underlines an ambition on the part of the government that needs backing from domestic investors. The 2024 union budget also included a key reform to reduce the long-term capital gains (LTCG) tax on unlisted equities, bringing the tax rate down from 20% to 12.5%, which is another major boost that domestic investors have waited for.

These developments are a great way to encourage more domestic investors to participate in the startup ecosystem. Mobilising more domestic resources is key to helping startups grow without the pressure that usually comes with such large foreign investors.

It’s going to be many years before foreign capital becomes less relevant for startups. The globalised nature of many emerging sectors such as semiconductors or AI means that foreign capital will continue to dictate the course of startups.

These are areas where Indian startups are competing in a high-pressure environment.

In contrast, Indian investors and family offices tend to have a more patient approach to exits and growth targets since they realise how challenging it is to scale businesses up in the Indian context. This understanding of the constraints on Indian founders is another key advantage of domestic capital and will play a role in the growth of consumer tech, fintech and other areas that address uniquely Indian problems.

Having said that, the Indian ecosystem needs a better balance of both overseas investors and a domestic pool. It would be folly to overlook the role of foreign investors in the Indian startup story, but perhaps, the next few chapters need Indian investors as the lead authors.

The post Why Indian Startups Need More Domestic LPs, Funds appeared first on Inc42 Media.

Ecommerce is not what it used to be before 2020. But Amazon India is stuck in the slow lane, in a pre-pandemic world, which has put the company on a backfoot, even though it is Amazon we are talking about with all the resources of the world at its disposal.

So why has Amazon not done what Flipkart is doing now, what BigBasket is betting big on, what JioMart wants to do and what Blinkit, Zepto and Instamart seem to be so sure about? Why is Amazon not in the quick commerce game, and even if it does jump in now, will it be too little too late?

We try to answer these questions, but after a look at these deep-dive into three Indian giants from the past week:

• Into Swiggy’s Core: Alongside cofounders Nandan Reddy and Phani Kishan, cofounder and CEO Sriharsha Majety has built a team that sees quite a few experienced professionals from the world of ecommerce, consultancy and technology products. Here are the people taking the food delivery giant to the IPO pole 
• Myntra’s GenZ Mantra: With a sharp focus on India’s growing Generation Z base, fashion giant Myntra has not only added new features to its platform but is also looking at exclusive brand partnerships specifically for a younger audience. Will this help Myntra win over GenZ loyalty?
• Who’s Navigating Shiprocket? The Zomato-backed unicorn has gone from a third-party logistics tech player to a one-stop ecommerce enabler with a range of services for merchants and large FMCG companies. But who are the people steering the company beyond the INR 1,000 Cr+ revenue milestone? Here’s a look

Amazon India’s Quick Commerce Miss 

No one would have batted an eye at Amazon not having a quick commerce service if it wasn’t for the past year. Zepto claims its revenue has grown over five-fold to over INR 10,000 Cr in FY24 from about INR 2,000 Cr in FY23, while Blinkit’s revenue for FY24 was over INR 2,300 Cr as against INR 730 Cr in FY23.

These gains have not gone unnoticed, even though there is an acknowledgement that the YoY growth is only this explosive because of the relatively small size of the market thus far, and the fact that only a few players were offering the quick commerce service till FY24.

With competition increasing, we expect the growth rate to slow down for the primary players — i.e Swiggy Instamart, Zepto and Blinkit — even as others catch up on market share.

In fact, most analysts believe that the 2024 festive season will be the first real test of whether quick commerce is ready for the big transition. We already know that platforms have expanded to Tier II and smaller cities in a bid to find new customers for the festive season.

Given this, Amazon’s absence from the quick commerce market could be a major strategic failure.

But Flipkart Sees The Merit

Complicating matters is that Flipkart is bullish on Minutes, which has gone from a pilot to a nationwide launch rather soon. Tata-owned BigBasket is also moving to a quick commerce-only format, and will transition from slotted deliveries to the on-demand model soon.

The significance of quick commerce is clear from the fact that Flipkart wants to start off operations with 100 stores. That kind of commitment underlines the fact that quick commerce has gone from the product-market fit stage to the scale-up stage.

India’s ecommerce market grew 18-20% by value in the first six months of this year, with grocery sales surging over 38%, driven largely by a sharp uptick in quick commerce, according to data sourced by 1Lattice and Datum Intelligence.

In a research note published in August, brokerage firm UBS said Flipkart has an advantage of supply chain when it comes to Minutes and this is why the company is banking on the strategy of lower pricing as a market entry plan.

As per 1Lattice, almost 40% of online grocery sales now come from quick commerce, which again underscores why Amazon needs to focus on quick commerce for the existing Amazon Fresh vertical, which is stuck on two-hour delivery.

Plus, now quick commerce platforms have the right scale and leverage to sign up deals with D2C and new-age brands, which puts Amazon further on the backfoot.

D2C brand Drools CEO Shashank Sinha said at Inc42’s D2C Summit last month that Flipkart Minutes will outdo other quick commerce players in smaller towns and cities given the brand recall for Flipkart. Similarly, Swiss Beauty cofounder Mohit Goyal highlighted that quick commerce has become the preferred mode for emergency beauty purchases, a category that was never being catered to before 10-minute deliveries.

So some might say Amazon has already missed the bus.

Quick Commerce On The Ascendancy

According to UBS, Blinkit leads the India market with 40%-45% market share as of July 2024, followed by Swiggy Instamart (20-25%), Zepto (15-20%) and BigBasket (10-15%). Flipkart, with its massive user base and huge marketing machinery, will certainly enjoy an advantage when it comes to acquiring users for quick commerce.

So, how much room will Amazon have, even if it makes a belated entry, as was reported in late August.

And to make matters worse, Amazon is also losing out in terms of revenue from non-grocery categories. For quick commerce startups, categories such as household and kitchen equipment, electronics, smartphones (iPhone 16, for example) are the biggest focus areas.

They want the consumer to only order from quick commerce platforms for all their online shopping needs. This festive season, most QC platforms are expected to offer more than 20,000 SKUs. And with this expansion into new categories, quick commerce players are eating Amazon’s lunch.

That was the case with Flipkart as well, before the company decided to invest in Minutes. Amazon needs to read the room, and perhaps it’s starting to do so.

This week, Amit Agarwal, Amazon’s SVP for emerging markets, announced that Amazon veteran Samir Kumar will take on the responsibility to lead India as the country manager, replacing Manish Tiwary, who stepped down in August and will transition out of the company in October.

The new country head, who has been with Amazon since 1999, was an integral part of the team that launched Amazon India in 2013, and now Kumar has to take the reins at a critical juncture. He will oversee Amazon India’s other key executives — Saurabh Srivastava (categories), Harsh Goyal (everyday essentials), Amit Nanda (marketplace), and Aastha Jain (growth initiatives).

These executives have the tough job of ensuring that Amazon’s ecommerce investments in India are not in vain.

What could really hurt Amazon is that quick commerce companies dominate in the metros, where Amazon has a lead over Flipkart. Losing ground here is not just damaging for Amazon in the short term but also erodes its moat over its long-time rival.

In the past few years, Amazon has focussed on AWS as a revenue channel for the Indian market, particularly as startups grew in scale and stature. But for most Indians, Amazon is the online shopping destination first, and then a video streaming service, and most might not even know what AWS is.

Any slip on the ecommerce front will be very damaging for Amazon as a brand in India. It will also hurt its Prime Video business which many users get bundled with Amazon Prime subscriptions.

For Amazon India, this festive season is going to be an unprecedented experience. It’s no longer about competing with Flipkart, like it was till 2023. Yes, Meesho entered the picture in 2023, but the 2024 festive season will be the first time that Amazon will have to compete with about half-a-dozen well-capitalised and scaled-up companies for market share.

Can Amazon India and its new leadership tackle this cohort? It’s certainly going to end in fireworks — one way or the other.

Join Us For MoneyX This Week 

The second edition of MoneyX by Inc42 is just around the corner and we are hosting a one-of-a-kind gathering with 300+ leading investors under one roof to decode the future of startup investments in India.

With prominent investors such as Info Edge’s Sanjeev Bikhchandani, Accel’s Prashanth Prakash, Peak XV’s Mohit Bhatnagar, Stellaris Venture Partners’ Ritesh Banglani, Artha Venture Fund’s Anirudh A. Damani  and a host of other LPs, GPs and family offices

Find out more about our stellar lineup of speakers, and grab your pass for MoneyX here.

Sunday Roundup: Tech Stocks, Startup Funding & More

• Startup funding saw a major uptick this past week, with a total of $447.5 Mn invested across 22 deals, thanks to Physics Wallah’s mega round
• OYO has expanded its footprint in the US with the acquisition of G6 Hospitality, the parent entity of Motel 6 and Studio 6 brands, from Blackstone Real Estate for $525 Mn
• Listed gaming giant Nazara plans to raise another INR 900 Cr from SBI Mutual Fund, CaratLane founder Mithun Sacheti and others to fuel strategic acquisitions an business expansion

• Looking to add to its pile of acquisitions, edtech unicorn Physics Wallah has raised $210 Mn (about INR 1,756.7 Cr) in its Series B round, led by Hornbill Capital, at a post-money valuation of $2.8 Bn
• Delhi Police’s Economic Offences Wing (EOW) has made another arrest in the investigation related to the INR 82 Cr fraud at BharatPe, taking custody of Ashneer Grover’s relative Deepak Gupta
• India Lifestyle Network, which runs MensXP, iDiva, and Hypp, is looking to separate from parent company Mensa Brands, two years after Mensa acquired the three content platforms

The post Amazon India Caught In Slow Lane appeared first on Inc42 Media.

Festive season sales are right around the corner, and it’s not just ecommerce marketplaces offering discounts. In fact, many of the startups running these sales are also being put on the market at steep discounts, thanks to the spate of secondary deals involving prominent Indian startups.

The wave of secondary deals in the first half of the year saw more than a dozen such deals, which gave early investors exits from the likes of Capillary, ixigo, Urban Company, Porter, and Pocket FM, among other startups.

Many of these deals came at a discount. Other similar deals such as Meesho are reported to be in the works as well which would see the ecommerce unicorn raise funds at a 20% valuation cut, while giving an exit to some of its existing shareholders.

And there are dedicated secondary funds being floated to accommodate this wave of secondary rounds. For instance, former Peak XV Partners managing director Piyush Gupta set up a secondary-focussed fund, which intends to work closely with Peak XV to facilitate secondary transactions involving the latter’s portfolio companies.

Similarly, asset management company 360 ONE Asset launched the INR 4,000 Cr Special Opportunities Fund-12 to invest in late-stage startups. The company claimed that this is India’s first alternative investment fund (AIF) dedicated to the private equity secondary market.

And many of these funds are coming into the picture for startups at a critical stage, closer to the exit point than early investors. This has given a lot of comfort to LPs that have been stung by the long-horizon primary investment route at the early stage.

Plus, the entry of new micro VC firms with tighter entry and exit points is also attracting attention from LPs, who are looking at returns through secondary deals in a couple of years, or even smaller IPOs on the SME board of the Bombay Stock Exchange.

The secondary market has several dimensions, with angel investors in the mix, as well as early-stage institutional funds, incubator-style funds (for example, Y Combinator), and family offices. And when we talk about VC firms or funds, it goes without saying that limited partners (LPs) are just as keen on getting the right secondary structure.

Incidentally, many of the angel investors that have found exits through secondaries in 2021 are also LPs in funds that executed these secondaries. In these cases, their investments as angels could very well have netted them a better return in 2021 than the capital they invested through a fund after that.

Exits are more readily available for angels since these investors enter very early in the company’s life cycle. Even some seed and growth funds might want to clean up cap tables during subsequent transactions. Angels are typically the first to get exits if the company is performing well. This is the key factor:

“That doesn’t change in any market or any stage. That, obviously, is a precondition or a given. But three years ago, the market had a fairly heady period post-Covid. Most of the funds are sitting on huge amounts of dry powder and have slowed down deployment. This has repressed some of the value that would have gotten unlocked with more consistent funding,” according to an angel investor, who runs a pan-India real estate company.

So today, these clean-ups are happening at a discount.

Raining Discounts For Secondary Investors

To put it plainly, secondaries are beneficial for outgoing investors in a good market. But with even primary capital slowing down, the current secondary market is heavily skewed in favour of buyers. Even in the case of strong assets, investors often face discounts, which is difficult for many to accept.

Today, the question isn’t whether there will be a discount, but how steep it will be. In late-stage deals, incoming investors are almost guaranteed a significant discount.

“Older funds want to exit, and they know they have an overvalued asset, so a small discount is palatable. But it’s not one or two companies that have gotten tremendously high valuation — pretty much every company did during the 2021 capital rush. Now many of these without a successful product-market fit have that money in the bank. The company’s valuation doesn’t get challenged because the company doesn’t come to the market for funds. If you’re not in the market, your valuation is not relevant. But as soon as you go to market, your valuation is shredded,” a general partner at a consumer-centric fund claimed.

We’re not yet past this phase. Over the next 6 to 12 months, more companies will likely seek funding, which will challenge their valuations. Some companies have realised that it’s better to manage valuations proactively by talking to current investors to create an exit path, even if it requires some sacrifices.

There are multiple instances of funds cutting valuations and companies raising secondaries during down rounds. We will see some of this continue to play out over the next 12-14 months. Many of these startups raised large amounts of capital in the 2020-2021 period. For them, secondaries are not very easy to come by.

“Many of these companies are going at a discount compared to their on-paper valuation, and this is not the liquidity discount that one typically sees in a good market. Whereas in a bull market, the discount ranges from 10%-20%, nowadays companies are being put on the secondary market for as high as a 50% discount,” a principal at a Mumbai-based growth and early fund told Inc42.

As one investor puts it, this is more of an “erosion” than a discount, but this is the reality for many venture capital firms looking to close the books on existing funds under SEBI guidelines.

Valuation Correction Or Erosion?

Many investors played their cards well during the liquidity boom of 2021, but by 2024, those same investors are struggling to exit their overvalued assets.

“We got a very good exit and with very good founders. There was a startup, which wanted to clean up the cap table. They wanted all the angels gone. So there are times when the incoming investor wants to clean up the cap table, especially the non-institutional players that have been around since the pre-seed days,” the principal quoted above added.

In many instances, angels would have preferred to remain on the cap table, but contesting larger investors could lead to greater value erosion. In the past, early investors may have fought against forced secondaries, but today, few are contesting them. Most companies pursuing secondary rounds are backed by funds nearing the end of their term.

“VC firms are sitting on dry powder, and if they are investing primary capital into the company, they like taking a little bit of a bite from the secondary as well. From that perspective, it helps them get a slightly better blended valuation. Here we are seeing lower discounts so even the outgoing investor is happier. It helps the new shareholders manage the valuation a little bit better,” said a Mumbai-based angel investor who has backed more than four unicorns at the seed stage.

The Tricky Secondary Market For Startup VCs

However, from an LP perspective, the outlook is less optimistic. Secondary deals are trickier for funds, as few companies can maintain their peak 2021 valuations. With many funds approaching the end of their lifecycle, they’re listing their best-performing companies for secondary sales.

“But the reality is that they have to sell off at least a large chunk of their portfolio, if not the entire portfolio. That’s where we are seeing some of the funds are either trying to create a continuity fund or buy out their own assets. But these are getting different kinds of responses from LPs,” added a Kolkata-based entrepreneur, who runs a family office that invests in funds and consumer brands.

As is often the case, some deals succeed, while others don’t. Opportunistic entities are stepping in, with LPs supporting secondary funds that buy the most attractive portions of existing portfolios. But this is easier said than done. Many companies with potential lack a clear exit path for large institutional investors.

The situation may improve over the next year or two. Even in a market ripe for secondaries, more capital is still going into primary investments. “No incoming institution will consider giving exit to outgoing investors as a primary objective. They will first look at the underlying investment, which means they want to allocate their resources to the company rather than the earlier investor,” noted a multifamily office manager in Delhi NCR.

This presents a significant challenge in the current market. SEBI has also increased pressure on funds regarding extensions, performance, and liquidation timelines. While the secondary market is becoming more significant for startup investors, many older funds will struggle to reach favourable resolutions.

The post Equity On Discount: How The Startup Secondary Market Is Shaping Up For VCs, LPs appeared first on Inc42 Media.

Our investor survey for H1 2024 showed Swiggy is the most hotly anticipated IPO of the year. But if OYO had been an option, many investors might have chosen the hospitality giant over Swiggy.

However, Ritesh Agarwal postponed OYO’s IPO plans earlier this year, and since then the focus has shifted to why OYO took this step. Unlike 2021, this was not about market conditions, but rather about going for an IPO in a much better financial state than ever before in OYO’s lifetime.

There is a lot of buzz around OYO these days and with good reason. With a profitable FY24 and a strong start to FY25 with a fresh infusion, OYO seems to be ready for the next chapter in its life. If the first few years were about standardisation, the past two years for OYO were about premiumisation.

This swing has proved vital for Agarwal’s plans to take OYO public sometime next year. So this Sunday, we are looking at how this transition has set OYO apart from the rest of the hospitality startups in India, but after a look at the top stories from our newsroom this week:

• The People Driving Ola Electric: Ola Electric is looking to create a vertically integrated EV stack and the company has brought on some key experts to lead the charge across the various arms. Here’s a look at Bhavish Aggarwal’s inner circle 
• Ather’s IPO Ride: Despite having a first-mover advantage, Ather Energy has fallen behind Ola Electric due to the latter’s speed in expanding market reach and scaling up infrastructure and sales. Here’s our analysis
• VCs Asked To Spill The Beans: Markets regulator SEBI is said to be looking into matters related to side letters or contribution agreements, that govern preferential terms for some LPs in a venture fund which have led to an uneven playing field. We dive into this matter

The New OYO 

As reported this week, FY24 has proven to be the turnaround year for OYO. It reported a profit of INR 229.57 Cr, a huge change from the loss of INR 1,286.51 Cr in FY23. We cannot remember many startups in India that have shown such a major swing from loss to profits. Agarwal said OYO is looking to triple its profit after tax to INR 700 Cr in FY25.

To get there, OYO raised INR 1,457 Cr (around $175 Mn) led by Agarwal floated Singapore-based entity Patient Capital, along with J&A Partners and ASK Financial Holdings. The round also included INR 417 Cr investment from Incred announced in July.

The latest funding saw OYO’s valuation fall to $2.37 Bn from $10 Bn at its peak in 2019. And this is the valuation that OYO is likely to take to the IPO next year.

As per sources in the company, the plan for the year is to focus on international travel to cater to large events. The acquisition of Paris-based premium rental company Checkmyguest for roughly $28 Mn is a part of this push.

In recent years, OYO has looked to bolster its presence in Europe and the US, where the company earns higher revenue due to larger ticket sizes. The idea was to focus on markets that were actually bringing in money and pull back from China where the company was struggling to compete with local players.

Where The India Biz Is Heading

In India as well, the focus has changed from budget hotels to the premium category. In April 2024, OYO teamed up with SoftBank to launch a luxury hotel chain called ‘SUNDAY’, targeting top-tier cities. The company also expanded their Palette chain of premium hotels and resorts.

Last month, OYO partnered real estate firm M3M India to introduce a premium hotel under the ‘SUNDAY’ brand in Gurugram. Starting with Gurugram, considered a significant hub for social events, domestic tourists, and long-stay international guests, SUNDAY will expand to other cities by next year.

The SUNDAY brand of hotels was launched in May 2023 with properties in Jaipur, Vadodara, and Chandigarh, as well as international locations in London and Dubai.

If the OYO of the past was all about budget hotels and small properties, the new OYO is closer to a large hotel chain, distinguishing itself from startup ecosystem players such as FabHotels and other budget hotels and hostels.

One employee close to the CEO added that this has been a conscious effort by OYO as the brand itself can be leveraged to tap the premium category. “Particularly, when you look at business travellers, OYO is now playing against the likes of Ginger Hotels or Lemon Tree Hotels. The days of cheap OYO Rooms are over because the company wants to prioritise revenue, even though it has a presence in the budget segment,” the employee added.

For instance, in the budget category, OYO has increasingly focussed on sports-related travel where it has not only looked to grow its footprint in cities that host cricket stadiums but also for sports at the grassroots level. Case in point is the recent tie-up with ‘India Khelo Football’.

The startup said it has catered to the requirements of more than 40,000 sports officials and players at various athletics and sports events, and the next step will be to more than 100 cities and villages across India. “These athletes usually live in bad conditions when travelling, and OYO has the experience of standardising budget hotels. So, they are taking this to categories that desperately need the budget options,” one of our sources said.

As per a report by The Arc, OYO said its overall take rate is 33%, whereas rivals such as Treebo and MakeMyTrip charge under 30% at the higher end. At the moment, most of OYO’s hotels fall in the budget category, a fact that the company is actively trying to change. On average, customers in the budget category pay Rs 1,500 per night, which can go up to INR 2,000 for mid-range hotels and up to INR 2,500 for premium hotels.

This is how OYO has continued to cater to the masses, while the international business and a sprinkling of premium hotels bring in the revenue.

Getting Back To The IPO Table

From our in-depth look at the people that have led this turnaround, it’s clear that Agarwal has revived the company by balancing the business model changes with a core team of leaders. The core group of executives or CXOs at OYO have stuck around for years, and many have seen the company go through unprecedented crises such as the pandemic.

Now, as it prepares for the IPO, the profitability combined with the healthy leadership layer makes OYO a prime candidate for public markets success.

In fact, when you compare OYO to Swiggy from purely an IPO perspective, OYO has better fundamentals, whereas Swiggy has attracted attention due to the booming quick commerce business which is key strength today over and above food delivery.

Plus, OYO has the market on its side now. A profitable company with a big brand name and a high-profile investor base will naturally attract a lot of attention from public markets investors. Plus, travel as a category has grown very robustly in the past two years.

All in all, the stage is set for Ritesh Agarwal to take his startup public. One of the most celebrated founders in the Indian ecosystem, Agarwal will follow the likes of Deepinder Goyal, Vijay Shekhar Sharma, Bhavish Aggarwal and hundreds of other entrepreneurs to the public market.

For many years, OYO was criticised for not having the ambition to grow beyond the budget category. Now that it has done that and also shown profits, the only thing left is the IPO.

Sunday Roundup: Tech Stocks, Startup Funding & More

• Funding across the Indian startup ecosystem entered the slow lane as startups cumulatively raised $227 Mn across 22 deals, marking a 34% decline from the previous week
• It’s convenience over catalogue this festive season as the quick commerce segment is expected to see a growth of 70%-80% this quarter as per experts
• Following Zepto’s path, IPO-bound Swiggy has launched ‘Cafe’ to deliver snacks and beverages in 15 minutes in Bengaluru

• Listed major Delhivery claims rival Ecom Express used incorrect information about Delhivery multiple times in its DRHP filed with SEBI
• Gaming giant Nazara will acquire a 47.7% stake in online poker platform Pokerbaazi for INR 831.5 Cr in what is its biggest deal so far
• CCI has alleged Samsung, Xiaomi and other smartphone makers of colluding with Amazon and Flipkart to exclusively roll out their products on these ecommerce platforms in breach of antitrust laws

The post OYO’s Big Swing appeared first on Inc42 Media.

India’s private equity (PE) and venture capital (VC) landscape is already bracing itself for a slew of changes — from skill-based certification for key personnel at AIFs to more transparency in how their funds are being liquidated. Many of these, of course, don’t affect Indian VC firms run by professional fund managers, but the latest demand by SEBI is likely to change that.

According to an ET report, SEBI recently asked AIFs or Indian VC firms to reveal which of their investors or limited partners (LPs) have entered into deals with preferential terms or a bigger say in the deal making process. Of course, this has opened up concerns about whether VC funds are being fair and equal in courting the interest of HNIs, family offices, corporate funds and institutional investors alike.

As per SEBI data, India is home to over 1,200 AIFs and many of these have launched multiple schemes or funds over the years, and much of the investment in Indian startups happens through these AIFs, which raise capital through LPs across classes as mentioned above.

Sources in the industry tell us that SEBI has received complaints from some influential LPs about preferential treatment to other limited partners. The practice in question is called a side letter or a contribution agreement, and in many cases, it governs terms for preferential returns timelines as well as exposure of the LP to certain kinds of assets.

In some cases, limited partners want to pay lower fees, which could be the case for corporate LPs or institutional funds, whereas HNIs and family offices might be asked to pay more. Fund managers claim this is typical practice because the former class of LPs contributes more to a corpus, whereas the latter are more in number.

So consider the example of some Indian VC firms which have existed for well over a decade. In these cases, the corpus size typically grows significantly from one fund to another. In these cases, the increase in the corpus is more likely to come from institutional or corporate LPs rather than several dozens of HNIs.

“It’s not surprising that SEBI is asking now about LPs and the private placement memorandum (PPM). PPM should be standard for everyone, but we all know that’s not the case. In fact, even those LPs that may be complaining now knew about it,“ says a Bengaluru-based early stage fund manager.

The Question Of Side Letters

It’s very possible that such side letters were allowed by SEBI when startup investments and AIFs were not everywhere. But that’s not the case anymore. The biggest example is Shark Tank India, which will soon go into production for its fourth season.

The show was well-timed, coming at the tail end of 2021, when the pandemic had turned many Indian startups such as into household brands. And it garnered plenty of attention due to bombastic angel investors or sharks.

And this is just my opinion — since then Shark Tank India has matured and it’s no longer a shouty reality show. Its third season actually merited some praise for how it dealt with critical aspects of building a brand or startup. But that’s just one example.

We have also seen a proliferation of micro VC firms — a trend we covered a couple of weeks ago — and family offices looking to diversify. It’s only right that some of these family offices backed by traditional and legacy businesses might have some concerns about how AIFs and VC funds invest their money.

One multi-family office fund manager told Inc42 that typically large institutional LPs get a 25% discount on management fees, 1.5% vs the 2% that other LPs pay. To compensate for those LPs that backed a fund during its first close, investors in subsequent round closes are charged an equalisation premium.

Larger conglomerates such as Reliance and Tata are also LPs in funds, and such large corporate venture funds tend to get favourable terms in the market from funds, especially those run by pedigreed fund managers.

 “Having a large CVC as a corporate LP means your portfolio gets direct exposure to the LP’s network, which then allows them to scale up and grow faster. It’s a win-win for the fund manager and the other LPs. But it’s a problem when large corporate giants become acquisitive and acquire companies in the fund’s portfolio in distress situations.”

This leaves other LPs holding the bag of losses. Such a case gained prominence in 2021 when Reliance invested in Kalaari Capital on the heels of acquiring four companies in Kalaari’s portfolio, with Urban Ladder acquired at a 75% discount to its last valuation.

How SEBI’s Ask Impacts Indian VCs 

“Asking for more transparency from the entities it regulates is SEBI’s prerogative. But as an investor I also want to have the right kind of diversification in my portfolio, so now it will become tricky for me to invest in pooled funds if SEBI bars side letters,” according to a principal at a Mumbai-based private equity firm.

This is where side letters are used as leverage by fund managers to bring on large LPs. These LPs may have investment policies that forbid investments in certain business sectors, so fund managers have to accommodate their requests if they want their capital.

All the capital raised ends up in a blind pool, but with side letters in play, the pool is not so blind. It means fund managers have enough visibility of the pool to know which LPs to draw down or basically call in the commitment.

So when the fund is investing in an EV startup but the large automobile OEM that is a major LP does not want that exposure, the fund is forced to ask for a bigger drawdown from its other LPs to fulfil the round. The argument can be extended to any disruptive startup that is seeking capital from funds that have incumbents as LPs.

If SEBI bars side letters, many of these rounds might indeed fall through the cracks as the fund will be unable to meet the commitment.

The Push For Standards

In recent times it has become clear that SEBI has looked to standardise AIFs and startup investments. Side letters and special deals run contrary to this direction.

Since side letters govern terms related to management fees at times, many LPs feel short changed when there is disparity in these terms. It can lead to friction between LPs and this could lead to reputational damage to the VC firm and the fund manager.

More importantly SEBI’s rules are likely to be harder on existing large funds since they have a longer track record and have the potential to have the same LPs over multiple funds and therefore a higher likelihood of side letters.

While AIFs might find it easier to manage all LPs with one agreement, it does make it harder to raise large corpuses.

Will SEBI bar side letters? That’s unlikely to happen, according to some of the fund managers that we spoke to, because that will severely impact fundraising. “SEBI will probably want more transparency. It has asked for performance reporting to some degree so now next it wants LP reports. Some clauses may be targetted but it’s not likely that the practice will be disallowed,” the PE investor quoted above added.

But SEBI has a track record of doing that with public markets, even though these were not really side letters. Before July this year, stock exchanges offered brokers discounts on fees based on their trading volume. Simply put, higher trade volumes for a broker meant lower fee costs and more profits. But SEBI introduced uniform charges in July, to effectively end volume-based discounts.

That is quite different from standardising the PE and VC world, since their structures are so different and they cater to investors with longer horizons.

A crackdown on side letters means large institutional investors — particularly those that want to avoid exposure to particular sectors — might park their money elsewhere. And that doesn’t help Indian VC funds or startups.

The post Indian VCs Asked To Spill The Beans On Deals With LPs  appeared first on Inc42 Media.

Zomato’s food delivery platform is profitable, thanks to platform fees, and Zepto is on a tear on the quick commerce side after raising $1 Bn this year — but both need to thank Swiggy with at least a hat tip for showing the way.

Swiggy was the first to introduce platform fees in July 2023, and Swiggy Instamart started the quick commerce revolution at the end of 2020. The Bengaluru-based company can take the credit for these two major developments in the Indian consumer internet story.

But now, with its IPO on the horizon, Swiggy not only has to prove its own worth against Zomato but also against Blinkit, Zepto, BigBasket, Flipkart, Jio and others in the quick commerce segment. And this is even before we take a look at the dining out vertical, where Zomato has big plans.

Some clues about Swiggy’s strategy can be seen in this week’s reports about its FY24 numbers. Over the past month or so, it has also launched several new revenue streams. Swiggy is going full throttle ahead of the IPO, but will this be enough to make a bull run in the public markets?

Let’s find out, after these top stories from our newsroom.

• A Messy Split: In the WestBridge vs. Anupam Mittal case, the fate of Shaadi.com hangs in the balance with multiple lawsuits across India and Singapore, and the final resolution could very well shape the future conflicts between investors and founders
• Liquidation Blues: Many noted Indian VC funds will be close to their fund expiry dates in the next 18 months, and SEBI’s updated rules for liquidation with mandatory performance reporting has put these expiring funds under the spotlight. Read to know why
• Did Zomato Overpay? After the high-profile acquisition of Paytm Insider, many industry analysts have questioned whether the INR 2,048 Cr deal price tag was justified or is Zomato stretching itself too much in the hope of building the going-out business

Swiggy Vs Zomato In 2024

It’s all about the IPO. Swiggy’s upcoming IPO is the most anticipated public listing for investors, as highlighted in Inc42’s recent investor survey after H1 2024.

Swiggy, which was last valued at $10.7 Bn, is said to be targeting a valuation of $15 Bn for the IPO where it will look to raise anywhere between $1 Bn and $1.2 Bn. VC and PE giants such as Prosus, Accel, SoftBank and Invesco among others will be looking to cash in on the IPO, which follows a very critical year for Swiggy in terms of proving its revenue scale as well as a path to profitability.

We reported in early 2024 that Swiggy could report over INR 10,000 Cr in revenue for FY24, but it turned out to be much higher than that. According to details from its annual report, the company saw its revenue grow by 36% to INR 11,247 Cr from INR 8,265 Cr in FY23.

More importantly, Swiggy also slashed its net loss by 44% to INR 2,350 Cr during the year under review from INR 4,179 Cr in FY23. Without a look at the audited financials, one can only assume that a lot of the expenses have been incurred as the company expanded its quick commerce network in 2023 and 2024.

The big surge in Instamart quick commerce orders, introduction of platform fees midway through FY24, and growing traction for its ads and dining out business are the platforms that Swiggy is using to attract investors ahead of its IPO.

The company even got a round of minor infusions this past month, with Amitabh Bachchan’s family office, Hindustan Composites, Motilal Oswal Financial Services’ chairman Raamdeo Agrawal joining the cap table recently.

With $1.4 Bn in revenue in FY24, Swiggy’s potential price of $15 Bn in the IPO seems to be justified to a certain extent.

Swiggy investor 360 One, formerly known as IIFL, recently pegged the company’s valuation at $11.5 Bn, with a revenue of $1.4 Bn. In this regard, Swiggy has a lower revenue multiple of just over 10X compared to Zomato’s (close to 20X), thanks to a market cap of $30 Bn. Zomato’s FY24 revenue stood at INR 13,545 Cr or roughly $1.6 Bn.

The biggest factor for Zomato has been it turning profitable on this revenue base. Swiggy is yet to prove that, though it does look like the Bengaluru-based company might turn the corner soon.

What’s Happening With Food Delivery?

For most comparisons, it would be a folly to put Swiggy and Zomato against Zepto directly, as the latter is wholly focussed on quick commerce. For Swiggy and Zomato, food delivery is bread and butter, or it should be, but the rise of quick commerce has come at the expense of slower growth in food delivery volume, at least for Zomato.

Will this also be the case with Swiggy?

By the time Swiggy goes to the public markets, the revenue figure could well be over $2 Bn, especially because the company has structured its main verticals to maximise revenue collection. On the food delivery front, Swiggy has looked to expand revenue streams from both ends.

For consumers, there’s the platform fees as well as Swiggy One subscriptions. It has also looked to make itself indispensable for restaurants.

Within a matter of days in July, the company launched marketing tool ‘Smart Links’ to help restaurants widen online reach and boost orders, as well as a data analytics tool for restaurant partners to gauge their marketing performance against peers. It also rolled out a SaaS suite for partner restaurants to leverage influencer and social media marketing. Then there’s ‘Staffing Support’, an initiative to assist its restaurant partners with staff recruitment.

Most recently, Swiggy launched a large order delivery fleet in metros to compete with a similar offering by Zomato. This fleet is meant to be a way for Swiggy to cater to festive season demand more efficiently.

Sources in the company told Inc42 that for long it has been believed that food delivery is underpenetrated, and if that’s the case, the only way to maximise revenues and profits is to extract more revenue per user. Platform fee has been hiked to INR 6 per order in its key markets, including Delhi and Bengaluru, and this could go even further up depending on how Swiggy sees food delivery growing.

We expect Swiggy to add more premium features for users and restaurants going forward because this is where it is catering to habituated users and app-dependent kitchens. For consumers, using Swiggy can be a discounts-related alternative for Zomato at certain points in time, so offsetting the occasional discounts with per-order platform fee makes sense.

On the restaurant side, Swiggy is looking at cloud kitchens and large restaurants as a growth category. These are the partners who have the most to lose if Swiggy were to suddenly shut its food delivery business. Large restaurants are double-sided partners too, featuring on the Dineout side of the Swiggy revenue menu as well, while cloud kitchens would simply not exist without apps.

And Then There’s Quick Commerce

There is a lot of business rationale in pushing food delivery towards the revenue side and keeping quick commerce towards the growth side. The scope for experimentation is higher on quick commerce right now as the competition is also higher.

With a duopoly on the food delivery side, Swiggy can rest easy in the knowledge that it can’t be blind-sided by a third player. The revenue potential is also way higher for quick commerce in comparison to food delivery, since the former has a higher order frequency per user.

“Quick commerce is the key for long term profitability. Blinkit has already outpaced Zomato’s food delivery business. A Goldman Sachs report this week said that Blinkit’s contribution to Zomato’s market value has surpassed the core food delivery business. So Instamart will be extremely critical for Swiggy,” Rahul Jain, vice president of brokerage firm Dolat Capital, told Inc42 earlier this year. 

But Swiggy is also said to be losing ground to Zepto and Blinkit in the quick commerce business. Zepto, which has raised over $1 Bn this year, is gearing up for expansion and is likely to launch 100s of new dark stores across the country this year.

To boost average order value for quick commerce, Swiggy expanded the non-grocery category for footwear, appliances, fashion, beauty and electronics within Instamart. Other players have done the same, and the entry of Flipkart and JioMart is quickly blurring the line between quick commerce and ecommerce.

This will be critical as Zepto claims to be on pace to achieve $1.2 Bn in annual sales in FY24, which will undoubtedly be helped by the recent introduction of Zepto Pass loyalty programme and a per-order platform fee, as well its plans to launch a BNPL-like Zepto Postpaid product.

Zepto is not sitting back when it comes to big plans either, and is reported to be in talks with bankers for an August 2025 date for a public listing.

Even though it remains the second largest quick commerce player in India after Blinklit, Swiggy has seemingly lost its first mover advantage in this category. How deeply will this hurt the Bengaluru-based giant?

What complicates this further is the big push for quick commerce from the likes of Tata-owned BigBasket, which has the category expertise and the scale to compete with Blinkit, Zepto and Swiggy. In fact, BigBasket is merging quick commerce into its main app, which will immediately widen its customer base.

It’s interesting that despite Zomato hitting the public markets before Swiggy, it was not a moment for quick commerce. Swiggy’s IPO will be the first real litmus test of how the public markets embrace the quick commerce model and its revenue trajectory. It’s arguably why the Swiggy IPO is being watched so closely by everyone in the startup ecosystem.

Sunday Roundup: Tech Stocks, Startup Funding & More

• Mega Rounds This Week: Rapido and Drip Capital led the way with mega rounds as Indian startups collectively mopped up close to $348 Mn in funding across 19 deals this past week
• 30 Startups To Watch:  Thousands of early stage Indian startups have featured in our monthly 30 Startups list and this month, we are reaching a new milestone with the 50th edition of our flagship series. Take a peek now
• Rapido’s Unicorn Round: The ride-hailing startup has raised $200 Mn (INR 1,660 Cr) in a Series E funding that catapulted the company into the unicorn club

• EMT’s New Vision: Easemytrip is looking to become a commercial vehicle OEM and incorporated a wholly owned subsidiary Easy Green Mobility to enter electric bus manufacturing
• Another Setback For BYJU’S: The embattled edtech major has seen a second auditor resignation in under a year as BDO stepped down after raising concerns over financial and governance issues
• Ecom Express’s IPO Playbook: After Delhivery’s muted debut in 2022, logistics tech rival Ecom Express is hoping for a different tune as it prepares for its public listing

The post Swiggy’s Litmus Test appeared first on Inc42 Media.

When we looked at the state of exits for venture capital funds in India last week, several fund managers — former and active — texted me about how many of these funds on the exit path are acting out of desperation. To add context, my sources pointed to SEBI’s changes released in April around the one-year extension for funds to begin their liquidation process.

The extension itself is not a new development, as funds have typically received a 1+1 year extension for some time now. However, SEBI also changed its rules related to liquidation in April this year after several limited partners approached the regulator about funds delaying fund closures beyond these extensions.

Before we get to these rules, it’s important to understand that all AIF schemes in India or venture capital funds in common parlance have a fixed tenure. This depends on the fund itself and what kind of exit horizon it has set for its limited partners i.e. the investors that infuse the capital which is eventually invested in startups.

Some LPs want to invest in short horizon funds that commit to returning the capital and a profit in five to six years, but on average AIF schemes have a tenure of seven years. Over and above this, there is an extension from SEBI to close the fund. So a fund or AIF scheme that was announced in 2015 is more or less nearing its expiration in 2024 and 2025.

In recent times, SEBI has stepped up its scrutiny of AIFs that are seeking to extend tenures, because in many cases these funds were simply buying time and did not have a plan to liquidate their funds. Given the explosion of startups in the years following 2015, we can surmise that plenty of AIFs are currently either in their liquidation period or have already exhausted the extension from SEBI.

Many of these funds are some of the oldest in the country and were set up between 2015 and 2017, at a time when startups were just emerging as an asset class. This vintage of AIFs has seen plenty of upheaval too with the global economic slowdown in 2018 as well as the pandemic in 2020 and 2021. But through these cycles, the likes of Orios VP, IndiaQuotient, Kalaari Capital, Chiratae (formerly IDG), Blume and other VCs have closed funds and returned capital to investors.

These and other noted VCs from the Indian ecosystem will be close to their fund expiry dates in 2025 and 2026 as well. And as such SEBI’s rules for liquidation are most applicable for these funds, as well as their LPs and portfolio companies.

Why AIF Liquidation Rules Matter

In this context, the liquidation period refers to the one-year period following the completion of an AIF’s tenure, during which the fund manager has to liquidate all the fund’s unliquidated assets and distribute the proceeds to limited partners.

This is followed by a dissolution period and this can be opted by funds to deal with unliquidated investments, as long as there is LP consent.

This is undoubtedly one of the most challenging positions for a VC fund, where it has to look for buyers for assets that may not be all that attractive for the market even at a discount.

In the past, SEBI had allowed funds the flexibility to roll over unliquidated assets to a new scheme or fund, but this was not a route that limited partners were happy about. LPs would not only have to bear the risk of the asset remaining unattractive even under a separate AIF scheme, but also would have to bear tax expenses out-of-pocket with no other recourse under tax and foreign exchange laws. This option has been rescinded because of the tax implications for LPs and the fact that AIFs can exploit this loophole to keep limited partners on the hook for their returns.

The other option, i.e. pro-rata distribution of the asset to limited partners, was also a no-go as this would put private companies in a tricky position regulation wise.

Pro-rata distribution also known as in-kind distribution means LPs will get equivalent securities to avoid capital gains tax on liquidated holdings. LPs will have access to all information on the available bids prior to choosing between an in-kind distribution or a dissolution period, during which the assets will be opened for bids to the open market.

As per the Companies Act, 2013, a private unlisted company cannot have more than 200 shareholders and the number of LPs in any fund can go as high as 150. If each fund allocated shares from unliquidated assets to individual LPs, then the company would have to convert into a public limited company, which is simply not possible for most of the startups.

Given these challenges, SEBI brought in the new rules earlier this year, which give AIFs some leeway and flexibility in terms of closing their funds and giving returns to LPs.

Is SEBI Simplifying Fund Liquidation?

As we were told by a number of fund managers, closing a fund at one time was a major headache, but the new rules do make it simpler for VCs to manage this process if not get the best outcomes.

Under this, AIFs can avail a dissolution period with the consent of 75% of its LPs by the value of their investment in the scheme being liquidated. Such consent has to be sought only during the AIF’s liquidation period and cannot be secured ahead of time.

This consent procedure mandates that AIF managers obtain bids, on a consolidated basis for all unliquidated assets of the AIF, from the market and offer proportionate exits to investors who do not wish to continue under the dissolution period.

If an AIF manager is unable to obtain bids from the market but has obtained the 75% consent of its LPs, then the dissolution period can still go ahead. But as a penalty, such fund managers are required to report their performance to benchmarking agencies, with unliquidated assets to be reported at a value equivalent to INR 1, regardless of finally realised value.

This move by itself does not devalue the asset but is seen as a benchmarking exercise that can be used to certify and rate fund managers in the future. This is a crucial exercise to be seen along with the NISM certification requirement, which we wrote about last month.

With these two barometers — the certification to operate a fund and the benchmarking to map its performance — SEBI is making it extremely clear that it will not accept fly-by-night AIF operations or funds that are falling foul of their responsibility in terms of due diligence and portfolio governance. That’s been one of the key concerns raised by limited partners in the past two years.

Besides clarifying some of the rules pertaining to liquidation and dissolution of funds, SEBI has sought information reporting from AIFs that want to avail of the year-long extension to initiate liquidation.

AIF managers need to submit details of the AIF, the unliquidated portfolio and its value, and pending investor complaints. Those AIFs entering into a dissolution period after the liquidation period are required to file an information memorandum with SEBI, accompanied by a due diligence certificate from a merchant banker.

Are VC Funds Relieved? 

SEBI’s requirements do increase the potential compliance burden for VC funds, but fund managers have welcomed these rules, especially given the reputational damage to some VCs in light of the value erosion in their portfolios.

However, in practice, most AIFs in India have not yet adopted the new regulations since they are so new, and as per experienced fund managers that we spoke to, there’s still a lot of uncertainty about how this might play out in the long run.

“Nobody knows whether the new regulations are better for funds because they are new to everyone. Even experienced fund managers don’t yet know whether the new regulations are better since the adoption is ongoing,” according to a veteran fund manager who has invested in startups through AIFs since 2013.

The fund manager quoted above closed their first fund in 2021-22 after availing the 1+1 year extension offered by SEBI. That particular fund delivered 5X-6X returns for LPs, an outcome that funds today might welcome with open arms.

On the flip side, some startup founders might find themselves at the wrong end of secondary deal structures as funds push to get bids for unliquidated assets.

As per one Bengaluru-based early stage and growth stage AIF founder, even in good times and at the peak of market liquidity during the pandemic, the discount for secondaries was 10% on average.

In the run-up to 2021, for instance, we saw several secondary deals led by PE funds as half a dozen startups lined up for IPOs, including the likes of Paytm and Zomato. It’s possible that many of these institutional funds were nearing end of life in 2021.

Plus, in July 2021, Tiger Global, Matrix Partners (now known as Z47) and others sold some of their stake in Ola Cabs parent ANI Technologies to Temasek and Warburg Pincus for $500 Mn. This is one of the biggest secondary deals in the Indian startup ecosystem, which also gave an exit to some investors who had backed startups acquired by Ola such as TaxiForSure.

For the above Ola example, Matrix launched its ‘Matrix Partners India II’ fund in 2011, and it invested in the likes of Ola and OfBusiness through this second fund. According to Pitchbook, the fund has been closed, and it was very likely up for liquidation by 2022. Besides Ola, Matrix saw a partial exit from OfBusiness via a secondary sale to Alpha Wave and Tiger Global in 2022.

Some of those secondaries in 2021 came at a discount even though the market had high liquidity, and now, with the future uncertain, those in the market for secondaries in 2024 enjoy the advantage of getting an even bigger discount. “In the VC world, this discount is called the liquidity discount. Even in good times when the market is pretty good, it is generally considered to be 10%. If the asset does not have super demand, the secondary buyer will always get a discount and this depends on the asset.”

Prominent examples of discounted secondaries in 2024 include the likes of SoftBank-backed Eruditus, Insight Partners-backed Postman, and SaaS startup MoEngage, among others. Bengaluru-based ecommerce unicorn Meesho is also reportedly in talks for a primary infusion and secondary deal at a discount of 20%.

But for every unicorn and scaled up startup, there are assets that have seen deep value erosion. Offloading these assets or finding bids for them in the open market might become a steep uphill battle for inexperienced fund managers and even some experienced ones.

Buyer’s Market For VC Assets AKA ‘Caveat Venditor’

Like 2021, and to some extent 2022, this is a great year for secondaries but largely for buyers. For VCs, there is a feeling of being resigned to heavy discounting.

“There is no doubt that this is a buyer’s market. Many VCs are desperate to exit their funds and show some positive track record in terms of LP returns. For many of the professional fund managers, this is a litmus test and therefore some of them might pressurise founders to execute deals quickly,” the VC firm founder quoted above added.

Fund managers are more than happy to enter secondaries as it creates a positive track record as far as their performance is concerned.

SEBI’s streamlined process penalises the AIF managers for failing to liquidate an AIF’s investments within its original or extended tenure, given the mandate on performance reporting. As a result, many fund managers are likely to be in the midst of discussions for secondary transactions and structures are being planned in light of some of these deals happening in IPO-bound companies.

On the founder side, there are concerns about increased due diligence burden as well as potential mismatch in terms of the expectations of the incoming investors and the business trajectory. But these points of friction are part of building a startup with VC money.

“Founders have to accept that if there was a time for primary rounds and capital infusion, it will be followed by a time for secondaries and exits. This is part and parcel of venture investing, and there is no doubt that some founders may feel shortchanged, but that’s the reality they have to accept,” said a third Bengaluru-based fund manager.

In fact, according to this individual, founders who pose hurdles to their shareholders in terms of secondaries are doing a disservice to the ecosystem and risk being blacklisted by VCs in the future. There’s undoubtedly bound to be some friction though.

Despite SEBI’s regulations and clarity on the liquidation path, there are practical challenges in going through this process. Plus, the introduction of performance reporting for AIF managers at the end of a fund’s lifecycle means for the first time many VCs and their track record will be out in the open.

VC industry insiders believe this had to happen because SEBI is looking at private market investments through the same lens as it does public markets. The regulator’s focus has clearly been on cleaning up the fluff from the frothy AIF market, but these regulations have second and third-order impacts.

Founders might soon find themselves with investors that don’t fit their vision, while funds might have to settle for discounts even for assets that might grow into their promise in the years to come. And for VC fund managers dealing with the liquidation process, it’s not just returns at stake but also reputation.

The post End Of Life Blues For India’s VC Pioneers appeared first on Inc42 Media.

It’s been nearly 10 months since we first peeked into BharatPe’s plans for the consumer fintech space. Those were the initial days of the fintech convergence, where every app was looking to become a super app.

In fact, with the troubles for Paytm in 2024, this industry-wide move towards super app or fintech platform strategy almost seems prescient. The platform play is evident when we see the product launches from the houses of PhonePe, CRED, Groww, Google Play, Jio Financial Services (JFS) and now, even Flipkart.

Many of these are built around UPI, with the exception of Groww, but BharatPe was already different from many of these apps. It’s always been a merchant-first platform, and so when the leadership told us last November about how it planned to take on the consumer super apps, our scepticism was not unwarranted.

The competition was not exactly light weight here. And that was last November; since then they have bulked up. So when BharatPe finally showed its super app cards this week, we couldn’t help but wonder: is it too little, too late?

Let’s look to answer that, after this short detour into the top stories from our newsroom this week:

• CRED’s Super App Revenue Stack: Speaking of super apps in India, the Kunal Shah-led fintech giant has added more pieces to its platform play this year. We dive into how CRED has changed its outlook towards monetisation in the past two years
• A Game Of Returns: Big exits with large returns have always been a sore topic for Indian VCs. But this situation may be changing with more and more exit events being seen in 2024 thanks to IPOs and secondary deals. Here’s a look at the state of VC exits in India
• The Empire That Was: The odds are stacked against BYJU’s founders Byju Raveendran and Divya Gokulnath, and it all seems to be going awfully wrong for the edtech giant that once was a poster child for Indian tech. We look back at how the BYJU’S empire failed

A Page Out Of Paytm

In some ways, BharatPe has built its super app platform using Paytm as an ideal. In this comparison, we are talking about Paytm from around September last year, when the company was on the verge of turning profitable.

Leveraging Paytm Payments Bank, the company was firing on all cylinders — particularly lending — to get out of the red. But that was not meant to be. In the past year, not only has Paytm lost its key competitive advantage of the payments bank but also some of the trust that had been created among other lending partners.

Now BharatPe is looking to fill that void of an app that has a bank as its competitive moat. The Unity Small Finance Bank, in which BharatPe has 49% ownership, is one of the key cogs of the startup’s plans to launch a super app.

Having rebranded its postpe BNPL app to BharatPe, the company is making it a one-stop shop for all services. UPI accounts on BharatPe will have the @bpunity handle, and these can be used for payments for bills, utilities, merchants and other users. Pretty much like any other UPI app. In fact, the company says as much on the Play Store: “BharatPe UPI – Another UPI but the only UPI Made for Bharat”. 

It’s clear that BharatPe is promoting itself as an UPI app for the masses. And as such, it will have to build a significant user base to capitalise on the Unity Small Finance Bank (SFB) support. But a super app cannot be about payments alone — it requires a universe of interlinked products. Does BharatPe have that?

Caught In The UPI Paradox

At this point in time, we can safely say that UPI usage is heavily influenced by discounts and cashbacks offered to users. The user experience is more or less the same, so users are more prone to using the apps that are offering the highest discount on every transaction through cashbacks or other means.

BharatPe says its USP is that it will have one of the most secure payments platforms, thanks to the Unity SFB which is an RBI-regulated entity. However, one can safely assume that BharatPe cannot just rely on the bank as a way to attract and acquire users.

For the average end user, the security of a UPI transaction is not as big an attraction as getting a few rupees back for every transaction.

We have written about the UPI paradox in the past, which is a paradox that all super apps have to deal with. By itself, the payments network is not a profitable revenue stream, but without UPI, most super apps do not have a cheap entryway for users to enter their walled garden.

CRED faced this conundrum when it made a belated entry into UPI payments. While the company’s market share in UPI has grown, we cannot say for certain that it has been a profitable route since we don’t know the company’s FY24 numbers.

The goal of course is to keep users coming back to the app and intelligently sell other services. It’s not possible to build a super app with just UPI.

What does BharatPe have in that regard?

Pieces Of The BharatPe Super App

We signed up for the new BharatPe experience and the app itself has a new look and feel that does add to the experience.

Besides UPI payments, bill payments and credit card repayments — bringing in revenue through commissions and fees —  BharatPe has added an ecommerce section where it’s currently selling vouchers for Amazon, HealthifyMe, ixigo, Nykaa, Zomato as well as several modern retail and D2C brands.

This is arguably the foundation for a larger marketplace that BharatPe may launch in the future. The startup certainly has ecommerce ambitions because the revamped super app also has an ONDC-powered food delivery service.

With the new app, BharatPe is also offering unsecured personal loans up to INR 15 Lakh via NBFC partners such as L&T Finance, CASHe, and True Credit.

Besides this, BharatPe has the 12% Club, which is an investment platform for peer-to-peer lending and investments, as well as Zillion, a rewards and loyalty program which involves virtual coins a la CRED Coins.

What’s Missing?

What’s lacking is a major payment aggregator licence for which BharatPe has received an in-principle approval, but it cannot yet operate as a PA and therefore it cannot yet become a middle-man between customers and merchants for online payments.

The Delhi NCR-based unicorn also lacks a payments gateway product, which is increasingly being seen as a way for fintech companies to become a part of in-app payments.

Just this week, PhonePe launched PG Bolt, its in-house solution for merchants to integrate a PhonePe payments gateway into their apps and online stores.

BharatPe’s go-to-market strategy of merchants first and then consumers means that it will now have to match some of the upfront investments by the likes of PhonePe, CRED, Google Pay and others to acquire users.

In the eyes of many, acquiring consumers is tougher as consumers easily jump from one UPI app to another.

Acquiring merchants is also costly, but it involves lock-ins and subscriptions that can pay off over the period of usage. Pretty much every major consumer payments app has made inroads towards the merchant side with a view to building a double-sided network of consumers and merchants that can be leveraged to cross-sell other services.

Super Apps Are Expensive

BharatPe is joining this wave from the other side, with Nalin Negi as the full-time CEO now, who was appointed at the beginning of this financial year.

In April this year, the company claimed to have witnessed 182% increase in revenue from operations in FY23 and achieved its first EBITDA positive month in October 2023. In November last year, it also claimed that its “annualised revenue” crossed INR 1,500 Cr for FY24, a 31% increase from FY23. However, these figures were not audited at the time and haven’t been filed by the company officially.

So we don’t know whether BharatPe broke its loss-making streak in FY24. We suspect that the company will continue to be in losses given how much work was needed at the end of FY23. While the revenue breached the INR 1,000 Cr mark, BharatPe’s net loss was almost the same as the income at INR 926.9 Cr.

BharatPe had INR 508 Cr as cash and cash equivalent at the end of the fiscal year, which the company will look to leverage as it expands into new areas. The startup will need to spend on marketing, invest in brand-building exercises. acquire and retain users through discounts and cashbacks, and also bring partners on board for ecommerce, lending and other consumer verticals.

At the same time, it cannot afford to step off the accelerator for merchants either. Its most recent launch was the BharatPe One, an all-in-one PoS device for cards and UPI transactions. It plans to push the presence of this device to 450 cities by the end of the year.

What we know is that the super app strategy can have a real payoff for startups if they manage to get their products right and trigger cross-selling at the right junctures. PhonePe, for instance, claims that its revenue in FY24 grew to INR 5,064 Cr, largely due to the diversification of revenue streams and cross-selling.

So the upside is clearly there. We can see a similar boost for CRED and the likes when their individual products mature and add to the bottom line.

Now, let’s come to the question of whether BharatPe is late to the party. The popular argument is that India has plenty of depth for multiple large players in the same sector. The UPI transaction share cap is also a factor. Both are valid arguments, though we don’t yet know whether BharatPe has the right product mix to tap this depth.

Another significant challenge will be fighting off the more mature super apps who have more verticals to offer, more customers to bank on when fighting off the competition and are more firmly embedded as brands in the consumer’s mind. And that’s not even counting the might and reach of Reliance and Jio Financial Services, which is also going the super app way.

Finally, how much of a factor will Ashneer Grover continue to be for BharatPe? The former MD and cofounder of the company is still in the midst of a few legal battles with the company and there is the matter of the Economic Offences Wing probe. Will these ghosts of the past continue to haunt the new BharatPe?

BharatPe has taken its sweet time getting here. Is it too late to the super app party?

Sunday Roundup: Startup Funding, Tech Stocks & More

• Zepto’s $340 Mn round dominated the total funding tally for Indian startups this week, with $466 Mn raised across 22 deals
• Cash-strapped Dunzo has fired 150 employees in a fresh round of layoffs, leaving just 50 employees in the company for the supply chain and marketplace verticals
• With yet another acquisition, Dailyhunt parent VerSe Innovation is looking to boost digital advertising and marketing revenue. Will the plan work?

• Newly-listed Unicommerce saw its net profit zoom 31% YoY to INR 3.51 Cr in Q1 FY25, largely on the back of improved operational efficiency considering the relatively slow YoY revenue growth
• Firstcry pulled back its net loss by nearly a third to INR 75.68 Cr in Q1 FY25, its first quarterly results after the public listing last month
• Reliance Jio made a huge AI play, announcing multiple new products for its telecom subscribers as well as enterprise automation through Jio Brain

The post BharatPe Turns The Super App Switch On appeared first on Inc42 Media.

There’s a change in the tune when it comes to the narrative around the Indian startup ecosystem for venture capital funds and their limited partners. And this time around it’s not about new deals, but exits from old deals.

Big exits with large returns have always been a sore topic for Indian VCs. Over the past decade, we have seen only a handful of such events despite over 5K funding deals recorded since the beginning of 2020. Indeed, when one looks at the data around events such as mergers and acquisitions (M&A), we are in the midst of a slow year, as of H1 2024.

Let’s also consider that many of the M&As in the past year, including in the first half of 2024, were distress sales, where returns were not on the table. Investors were happy with just a piece of their capital invested.

While some mergers and acquisition deals do end up bringing returns, VCs are not really hot on M&As at the moment as much as they love the two other ways to get exits.

For one, there is an IPO revival with startups not just eyeing the main boards but also SME boards for public listings.

The latest is D2C meat delivery startup Zappfresh, which is filing for a listing on the SME platform of BSE. The startup counts the likes of SIDBI, Dabur Family Office, LetsVenture and Keiretsu among its investors.

Ecom Express and SmartWorks have also filed for IPOs in the past month, after the listings of ixigo, Ola Electric, Awfis, Go Digit, Unicommerce and FirstCry this year on the main boards of the stock exchange. In most of these cases, investors have made a hefty return.

VC funds and in turn their LPs would be hoping that the new-age tech IPO train keeps rolling on.

And then there is the wave of secondary deals in the first half of the year, where more than a dozen such deals were recorded and which gave early investors exits from the likes of Capillary, ixigo, Urban Company, Porter, and Pocket FM, among other startups.

These events have triggered a new narrative — perhaps exits aren’t as rare in India as previously thought by the likes of Tiger Global partner Scott Schleifer who said last year that  “returns on capital in India have sucked historically,” and how the market is struggling to live up to the trajectory of the US or China.

One could not blame Schleifer or any other VC firm or their LPs for harbouring this view at the time. Besides the massive Walmart-Flipkart deal, we have not seen plenty of large exits from India outside of IPOs. And in early 2023, the IPO class of 2021 was still struggling to prove its value to public shareholders.

But the past 12-18 months have shown that some Indian startups do have the tenacity to last through tough times, and these startups are being rewarded.

IPOs Become Real

Among the three main events, IPOs are clearly the most attractive for VC funds, given the potential for huge upsides there, as witnessed by the likes of Peak XV in the post-pandemic market.

Things have changed drastically since 2021, which was the first big wave of startup IPOs in India.

Most listed companies that went public back in 2021 have cracked profits, and some, such as Paytm, were on the very brink of getting there before a major crisis unfolded at the fintech giant. More and more companies find themselves with the right playbook for public listings because of the experience of Zomato, Paytm, Nykaa, Policybazaar and others that IPOed in 2021.

This has fuelled another wave in 2024. The IPO market is expected to see more action in the remaining months of 2024. The much-awaited public offering of food delivery and quick commerce major Swiggy is likely to open this year if the SEBI approval comes on time, while BlackBuck, Ecom Express, Zappfresh, MobiKwik, Smartworks, Avanse Financial Services, and Ullu are also awaiting the go-ahead.

Beyond this bunch, the biggest prizes for investors will come from PhonePe, Flipkart and OYO’s listings, which could happen in late 2025. Among these, PhonePe and OYO have taken major steps towards profits, so they are clearly on track to get a rousing welcome to the stock markets as and when they list.

EY’s Global IPO Trends report for Q2 2024 noted that India was at the forefront of global IPO activities in the first half of 2024, accounting for more than 27% of worldwide IPOs. While there was a decline in IPO activities in global regions, including Mainland China, there were 38 mainboard IPOs in India in H1 2024 compared to 11 during the same period in 2023. This excludes the 100-plus SME IPOs where startups are equally active.

“The entry barrier for an IPO is lower than believed. Companies like Tracxn and Unicommerce (listing at approx INR 1,000 Cr / $120 Mn) have shown that the public market has a huge appetite for profitable/close to profitable tech companies with even as little $10 to $20 Mn in revenue,” VC firm Blume’s Karthik Reddy said in a recent look at the state of exits in India.

VCs Sharpen Exit Thesis

The deal activity, especially on the IPO side, is booming, believes Vinay Singh, partner at Fireside Ventures, particularly given the listings for Bikaji, GoColors, FirstCry and ixigo this year. Fireside is a consumer-focussed VC and Singh is bullish on the IPO destination for consumer brands after the turnaround shown by Honasa and Nykaa in the past year.

“This run is causing a lot of comfort among LPs and their VCs about Indian startups as a viable liquid investment asset class. For a lot of international LPs, India comes under the Asia pool of capital, and we are measured along with China. But China has had its own troubles recently, and therefore there is a lot of comfort being taken from the fact that Indian startups are trending towards profits,” Singh told Inc42.

He added that there is more positivity about Indian startups providing liquidity and the large outcomes because of the behavioural change brought about by the funding winter. After the bruising experience of 2022-23, Indian startups and their boards, including founders, have become more cognisant of the fact that they need to show profits, and as soon as they are close to profits, now startups have the option of an IPO to deliver on the exit promise.

The IPO wave and the profitability potential shown by some startups has also had a trickle-down effect on M&As and secondary sales.

Secondary Deals In Focus

“More and more PE and VC investors are comfortable with secondary deals in startups that may list in a year or two. This provides them with an easier path to exit and a view of the IPO runway. LPs are also getting more used to backing funds that only enter secondary deals,” according to a Delhi NCR-based fund manager.

Earlier this year, former Peak XV Partners MD Piyush Gupta quit the firm to set up a secondary-focussed fund. As we reported at the time, Peak XV Partners intends to work closely with Gupta to facilitate transactions at its portfolio firms.

Similarly, asset management company 360 ONE Asset launched the INR 4,000 Cr Special Opportunities Fund-12 to invest in late-stage startups. The company claimed that this is India’s first alternative investment fund (AIF) dedicated to the private equity secondary market.

Of course, these are large funds, but the entry of new micro VC firms with tighter entry and exit points for their potential portfolio is also causing a lot of comfort among LPs. And there is a lot more confidence about exits for micro VCs through secondary deals and smaller IPOs.

It’s not the era of excess any more and LPs are only keen on backing those funds that have a clear path to exit. Even if that means not backing the global VC giants and focussing on the domestic class of fund managers.

About secondary deals, Blume’s Reddy wrote, “A 1% holding can yield $750,000 to $5 Mn in cash returns, making it a sweet spot for micro-VCs. However, it is usually unattractive for large funds as the returns are much smaller as a % of their fund size.”

Incidentally, while Blume is a large VC fund today with a corpus of roughly $290 Mn for its fourth fund, Reddy wrote that the firm’s exits from Mobstac, Purplle, Zopper through secondaries were “game-changing returns” for Blume’s $20M maiden fund, which he called a micro VC fund.

This potential to cash in on ‘game-changing returns’ is also why we are currently in the midst of a renaissance of micro VC funds, which offer an expedited exit option for some limited partners.

Of course, while exits are great at the moment and the market seems to be bullish, this also opens up the risk of another era of inflated expectations. “The long-term trajectory seems fine. A lot of right things are happening as well. But the real consideration should be how disciplined can VCs stay. If suddenly we start seeing domestic VCs launch larger and larger funds, they might not remain so tight and focussed on their entry and exit points, and then we would be back to the situation we were in in 2022,” added Fireside Ventures’ Singh.

The post A Game Of Returns: Is India Finally Living Up To Its Exit Potential For Startup VCs? appeared first on Inc42 Media.

Edtech has taught us all a lesson in the past four years. It’s arguably easier to do one thing than everything at once. But the painful experience of BYJU’S, Unacademy, Vedantu and others has not stopped the relatively fresher PhysicsWallah from following the older guard.

What started as a YouTube channel has morphed into an umbrella company for everything to do with edtech and learning. With each passing year, PhysicsWallah (PW) is becoming the rival it looked to dethrone.

In fact, we said something similar last year. But PW’s product universe has expanded further since then. The latest piece is the School Of Startups or SOS, where PhysicsWallah would be investing more than INR 100 Cr.

Is PW stretching itself too thin? Or is it looking to take advantage of the fact that it’s pretty much the only game in town for investors? But before we get there, here’s a look at the top stories from our newsroom this week:

• The OYO Top Brass: CEO Ritesh Agarwal seems to have assembled a 14-member leadership team that can take the company to an IPO and beyond, after turning things around and bringing the company to profits in FY24 from major losses. Here’s a peek at who’s running the show
• India’s Spacetech Future: As India celebrated the National Space Day this past week, Lightspeed partner Hemant Mohapatra said he believes spacetech is set to benefit from investor interest over the next few years not only because most other sectors are maturing faster but also because of the high innovation quotient. Read this special Q&A
• Into The District: Taking inspiration from Blinkit’s success story, Zomato plans to revitalise the going out business with a major acquisition from Paytm and cross-selling opportunities. Can District become the third weapon in Zomato’s armoury?

PW Turns Away From Profits 

Not often does a company raise funds on the back of a profitable year just to slip into losses two years later. That’s the case with PhysicsWallah, which became a unicorn with its first institutional round in June 2022.

When it raised that $100 Mn, the startup was just stepping out of FY22 and reported a profit of INR 98 Cr. But soon after that, PW went the way of any startup that had raised a large round.

For instance, PhysicsWallah acquired four companies in less than a year, made a significant investment in a fifth, and also signed a JV deal with Utkarsh Classes for offline learning.

Even before most people knew about PhysicsWallah or PW as it christened itself after the funding round, the company was looking to go toe-to-toe with BYJU’S and Unacademy, two of the most capitalised test prep players at the time.

As it usually happens, these investments led to a 91% dip in profit and revenue falling short of previous guidance given by cofounder Alakh Pandey. While earlier Pandey was optimistic about reaching INR 1,200 Cr in revenue in FY23, the company only managed to bring in INR 770 Cr in the year.

Even in terms of the FY24 numbers, there is a bit of a drop in what PW had expected before the year closed and what it ended on.

In an earlier interaction with Inc42, cofounder Prateek Maheshwari claimed the company was on track to hit INR 2,000 Cr in revenue in FY24, but reports now indicate, the startup may have raked in INR 1,800 Cr in revenue for the fiscal year. More importantly, PW slipped into losses for FY24, according to a report by The Captable.

So essentially, PW has lost the one thing that set it apart from the rest of the edtech players in the test prep and skilling segment. Despite this, there is speculation of the company raising a large round in 2024 to fuel its many products.

New Products, Big Promises?

To the company’s credit, it has admitted that it is investing in a bunch of products ahead of time, and creating the foundation for future growth. However, these investments do add up to a massive number.

In FY24 alone, PW invested $10 Mn in offline learning vertical Vidyapeeth, and launched 50 new centres for this business. It also said it would invest INR 100 Cr to scale up the UPSC test prep vertical, and another INR 120 Cr over three years for the tech skilling product.

Further, there was a $61 Mn (INR 490 Cr) deal for a 50% stake acquisition in Xylem as the company looked to make inroads into southern Indian states. In effect, PhysicsWallah allocated or spent close to INR 700 Cr for new products in FY24 alone. That’s just shy of the revenue it earned in FY23.

To add to this, it also launched a new school for elementary education in February 2024, and now the School of Startups in August.

Interestingly, with the latest product, PW is taking on startups such as Masters’ Union, where the average pricing is far higher than something like a test prep course, given that PW is targeting entrepreneurs with mentorship, fundraising and incubation opportunities with the School of Startups. In some ways, it is also competing with accelerators and incubators targeting early-stage entrepreneurs.

In addition, Physics Wallah will be overlapping with the likes of Stoa, which offer management courses with the PW Institute of Innovation, another product introduced in recent months.

Having multiple verticals is fine enough, if the revenue contribution is significant. School of Startups is clearly a revenue-led play, but growing this vertical and attracting entrepreneurs will not be easy given and PW has to show results consistently.

Speaking to Inc42 earlier, cofounder Maheshwari claimed that Utkarsh Classes, acquired in February 2023, was set to conclude FY24 with INR 150 Cr revenue. The UAE-based Knowledge Planet, acquired in March 2023, was to bring in around INR 30 Cr in revenue.

The other subsidiaries were expected to bring in INR 20 Cr revenue, according to the cofounder, but this was on an overall revenue guidance of INR 2,000 Cr, which itself has not been verified as PW is yet to file its financial statements for the year.

We know the company has scaled down some of its offline operations in Kota, and also laid off more than 150 employees in the past year to save costs.

Further, it also moved some teachers to new regions which were closer to profitability. This has led to some discontent among educators. Naturally, with so many products under its umbrella, PhysicsWallah would need to balance the student and educators side of the value chain if it wants these products to grow from experiments to revenue generating verticals.

PhysicsWallah Waiting To Refuel

Naturally, investing in new products without external funding means PW dipped into its revenue to expand into new verticals.

This approach does have its upsides as companies can more tightly control product development timelines as well as vertically integrate pieces. Most famously, the likes of Amazon are said to have carried losses for years due to their continuous investments in expansion and new product lines.

However, given how rapidly things are moving in India, startups cannot completely cut themselves off from funding. That’s perhaps why PW is said to be in talks with Lightspeed and existing investors Westbridge and GSV Ventures for a $150 Mn round.

PW has not raised an external round since 2022. In 2023, there was talk of a $250 Mn infusion at a $3.3 Bn valuation. That, however, did not materialise.

Now, sources in the company indicate that PhysicsWallah’s leadership and management have been in discussions with investors including Lightspeed for a new round.

Reports on this deal have been going around since March, and most recent speculation is that a term sheet has been given to PW by some investors. But sources close to Lightspeed and PW told Inc42 this week that the deal is not yet close to completion.

Sources in the edtech industry claim that valuation is a major bottleneck in discussions between founders and investors. This could explain why the deal which has been making the rounds for nearly six months is not close to done.

Talks over valuation have certainly been influenced by the value destruction at BYJU’S as well as the slow growth at Unacademy and Vedantu. While the latter two are unicorns, they are yet to grow into their valuation and both carried major losses into FY24.

Unacademy is said to be exploring deals for an acquisition, where once again, the discussions are centred over valuation and Unacademy’s revenue problem.

It’s in this climate that PW is looking to basically do what these companies have tried for years. What could work in PW’s favour is its big focus on offline learning, as opposed to online products.

Most of its investments in the past year have been for offline verticals, which indicates that the company is heading towards becoming a multi-discipline offline coaching giant, of course, backed by tech such as personalised learning, AI tools and automation.

While its rivals attempted building edtech around online learning for various verticals, the adoption was slow and product-market fit was weak. Will PhysicsWallah’s offline-first gambit deliver the right outcomes?

Our Founder Pay Tracker Is Back

Let’s face it: All startups have had to cut costs in some ways to tackle the lack of access to easy VC money. Some have had to take drastic measures like laying off thousands of employees to sake their skins, and others have trimmed down verticals.

But what about the founders? Has FY24 seen startups founders take a pay cut or has founder-CEO and founder-CXO pay surged?

Inc42 has analysed the salaries of 21 founders of 12 startups, to see where things stand. Overall, these individuals took home INR 168.1 Cr in cumulative salary for the year, but is this better or worse off than last year?

Find out in our Founder Salaries Tracker

Sunday Roundup: Tech Stocks, Startup Funding & More

• This past week, Indian startups raised $265 Mn across 16 deals, with jewellery giant BlueStone leading the charts thanks to its $107 Mn round
• Paytm finally decided to sell its entertainment ticketing business to Zomato in an INR 2,048 Cr all-cash deal, which is definitely one of the most eye-catching acquisitions in Indian startup history
• Zomato rival Swiggy, which was last valued at $10.7 Bn, is reportedly targeting a valuation of $15 Bn for its $1.2 Bn IPO, which is likely to be announced before the end of the year

• Peak XV and BEENEXT-backed Kenko Health has shut shop after failing to find a way out of the investor deadlock that kept it from an insurance licence
• The Open Network for Digital Commerce (ONDC) has launched digital lending services through third-party players along with other fintech products to move beyond ecommerce and mobility

The post PhysicsWallah’s Product Gamble Continues appeared first on Inc42 Media.

Is it a fad or the sign of the times in the Indian startup ecosystem? Whatever you may call it, we are in the midst of a micro venture capital (micro VC) renaissance in India, with dozens of firms being registered with SEBI, several more waiting in the wings, and even marquee VCs that ordinarily cut large tickets are acting like micro VC firms.

To be clear, this is not a new trend — in fact, Inc42 has tracked this for over two years now and things really started changing in late 2022, when the funding winter took root.

This past week:

• Gujarat-based Volt VC launched its maiden early-stage fund with a target corpus of INR 45 Cr
• Aviral Bhatnagar, former lead investor in SaaS, consumer, and AI sectors at Venture Highway, launched a new venture capital fund called AJVC

SEBI-registered Volt is a Category II alternative investment fund (AIF) and will focus on pre-seed investments in consumer businesses across sectors.

While AJVC will also be sector agnostic, according to Bhatnagar, it will solely focus on pre-seed bets, which is often the first institutional funding raised by startups.

These two funds represent just a drop in the micro VC ocean. Data shows that the number of new funds in India has seen an exponential growth over the past three years, and a lot of the activity is geared towards the early stage, where micro VC funds have become a distinct category similar to angel funds.

Typically speaking, micro VC funds are set apart by the fact that they have a special focus or a highly evolved thesis, thanks either to the fund manager’s expertise in a particular niche or whitespaces in the market.

For instance, in April this year, Mumbai-based Centre Court Capital rolled out an INR 350 Cr ($45 Mn) fund with a focus on sports and gaming space. Mustafa Ghouse, former CEO of JSW Sports and Asian Games bronze medalist in tennis for India, is the founder of the fund, and naturally, it has attracted limited partners from the sports and gaming industry.

A former athlete running a fund is quite unusual among larger global VCs, but such dynamism is quite commonplace in the world of micro VCs. And it’s also why most limited partners have taken to the allure of backing micro VC funds with differentiated thesis.

Micro VC Funds Punch Big 

India is a hotbed for new startup funds and there’s never a dearth of investors in the early stage, even at the peak of the funding winter. Out of the 126 funds launched in 2022, 62% were focused on early-stage startups, while last year, active Indian VCs launched 31 early stage funds with a total corpus of $1.8 Bn.

The likes of Better Capital, Java Capital, Sauce.VC, Neon VC, All In Capital, Eximius, Propell, Gemba Capital, Upekkha, Silverneedle Ventures, SenseAI among dozens of other firms have either launched new funds or announced additional funds in the past two years.

This year alone, more than two dozen new early-stage micro VC funds (under $60 Mn in corpus) have launched with a total corpus of well over half a billion dollars. While micro VC is a loosely defined category, typically, these funds have a small corpus and focus on early-stage investments.

When the term first began making the headlines in India in 2021, micro VC funds typically had very small corpuses in the range of $10 Mn – $12 Mn, and sometimes even half of that.

But in the past two years, the more attractive early-stage opportunity and the bleaker late-stage situation have pretty much forced micro VCs to launch larger funds. Such is the volume of interest from limited partners (LPs), that schemes for micro VC AIFs typically get oversubscribed.

This means, micro VC funds announced or raised this year have an average corpus of $30 Mn, a tally that excludes funds that have not announced the target corpus.

Sources in the industry indicate that dozens of firms are still awaiting SEBI clearance following which they would be launching their funds and adding to the early stage volume.

In our coverage last week, we spoke about how SEBI is tightening the rules for fund managers of new AIFs as it is currently processing thousands of applications from potentially new AIFs or existing AIFs with new funds and schemes. It is not unreasonable to assume that many micro VC funds might face some regulatory challenges in complying with these terms.

If we consider the fact that most micro VCs are not run by typical venture capitalists, then SEBI’s certification mandate seems particularly tailored for such firms.

That makes one wonder: if SEBI is not particularly keen on relaxing norms for new fund registrations, what is actually pushing more and more fund managers to launch new micro VC funds, even when these fund managers might not have the requisite skills and track record?

Are LPs Fuelling The Hype?

The answer lies in the source of VC funds, as it usually does when it comes to examining VC trends?

It’s no secret that LPs are chasing the early-stage bets and spreading capital among micro VCs with diversified thesis areas, which has made fundraising easier for early-stage funds. Moreover, this means micro VCs are occupying niches and sectors that have typically seen low investment activity, or are just emerging.

That’s also why larger VCs are spinning off smaller funds or accelerator programmes to capture some of the niche areas. Chiratae Ventures, Peak XV Partners, Accel and others have scaled up their accelerator programmes significantly in the past few years.

Chiratae’s Sonic programme has backed 20+ startups over two cohorts, while Peak XV’s Surge is close to announcing in its tenth cohort.

The number of new micro VC funds focussing on gaming, AI and deeptech is much higher given that these are the segments that investors believe have the highest upside. Moreover, there is a glut of micro VC funds that are fuelling the modern retail and D2C 2.0 wave, especially as this space has seen a post-pandemic revival and a move towards premiumisation.

“One of the things that has changed is that even limited partners are seeing that exit opportunities have grown considerably in India, from SME IPOs to M&As with established giants. They want VCs to focus on these categories that could reduce the exit horizons not only for the funds but also for LPs,” according to the founder of a prominent Mumbai-based micro VC fund, which has backed over 150 startups in the past four years.

If LPs are indeed chasing faster exits through micro VC bets, it’s a double-edged sword.

On the one hand, there is a frothy hype around startups that are developing next-gen applications in depth or AI, which could mean some of these early bets will die off sooner than expected.

Conversely and perhaps more positively, there is the fact that consumer brands that many investors are hoping will replicate the Mamaearth or Nykaa IPO trajectories.

As for the AI hype, Lighthouse Canton’s Nilesh Jasani believes that the tech industry has moved beyond the foundational elements of computing and large language models, where large investors had the bulk of the deals. Now AI’s potential is being tapped by applications that have real-world implications.

Jasani floated a GenAI-focused investment firm GenInnov Funds in April this year to tap early-stage deals. Besides GenInnov, the company runs other public and private market funds. “It’s in the downstream use cases — beyond chatbots, image editing and text formation — where the transformative power of AI is coming to life. Our fund is poised to capitalise on these advancements, aiming to surpass transient trends by investing in groundbreaking innovations that promise enduring impact and value,” Jasani told Inc42.

More New Fund Managers, More Micro VC Funds

There’s another undercurrent behind the surging wave of new smaller funds: a number of startup founders, fund managers and partners quit from their positions to float new funds. This is also why the micro VC ecosystem seems rather maverick compared to the straight-edged VC and PE class of investors.

Besides the example of Centre Court Capital, which we highlighted above, another instance is Bhatnagar and AJVC. The AJVC founding partner quit Venture Highway in April after it was acquired by General Catalyst.

Similarly, former CXOs at unicorns (BharatPe) have also floated funds in recent months that fall squarely in the micro VC category. These so-called operator-led funds fit the micro VC mould.

In a somewhat different vein, we have seen a wave of corporate-backed micro VC funds in the past two years as well, which are seen as acquisitive vehicles rather than a typical investment. FMCG majors Tata Consumer, Marico and Emami have created a playbook of investments that turn into profitable acquisitions, and others are latching on to this trend as well.

These corporate-run funds see startups not only as upside bets, but also from a strategic point of view. For instance, personal care major Lotus Herbals is close to launching a $50 Mn fund to invest in early stage beauty brands and startups.

AJVC’s Bhatnagar believes there is a significant gap in the pre-seed ecosystem, where many founders struggle to raise their first cheque, and have to court dozens of investors to secure enough capital to float new businesses.

“I want to solve this problem through a fast, approachable, pre-seed firm for Indian startups. The aim is to build a founder-friendly institution. AJVC’s first fund received SEBI approval last week. The fund is largely committed on launch day itself. I aim to bring the decade-long learnings as an investor supporting startups to build AJVC,” Bhatnagar said in a LinkedIn post.

There is some truth to the notion that promising startups and founders fail to find investors, but this is not due to the lack of investors. The fact is that seed investing has a huge upside only because it is so risky.

At the same time, we also know that VCs as a class are moving away from risk to safer bets. So it’s not unreasonable to have doubts about whether this recent influx of micro VC funds will make funding more accessible to founders.

But as many in the industry point out, the market often rewards brave bets. As larger VC firms eye low-risk bets, the next generation of innovation needs a new breed of investors.

Of course, not all micro VCs will see those returns despite assuming a lot of risk. But for now at least, we will not focus on how many of India’s micro VCs will actually raise a second or follow-on round and how many will just be a blip in time.

The post Making Sense Of India’s Micro VC Boom appeared first on Inc42 Media.

We have seen Bhavish Aggarwal take to the stage and say many things in the past. The week gone by was no different. Ola’s huge Independence Day event ‘Sankalp’ saw Aggarwal lay out the vision for newly-listed Ola Electric and his latest big bet Ola Krutrim. Curiously, not only was Ola Cabs shunted to the sidelines but also renamed to Ola Consumer.

However, it was hardly surprising. Ola’s transition from a ride-hailing company to a EV maker has been three years in the making, but Aggarwal has also positioned Ola as a future-focussed tech infrastructure company to compete against the AWSes and NVIDIAas of the world, as well as a consumer platform that could potentially become a digital commerce behemoth.

Those who admire Aggarwal have long called him the Elon Musk of India, but at the same time, Ola’s trajectory does hint at an Amazon-like platform that works as the backbone of the upcoming AI revolution and for digital commerce. So perhaps a comparison with Jeff Bezos is not unwarranted either.

But this is not a paean. What we are trying to say is that Ola is changing. It wants to be in the middle of everything that could change India in the future, and at the moment, that’s not ride-hailing. It’s EVs, AI and chips.

So, should we already be preparing our eulogies for Ola’s ride-hailing business? Not quite yet, but that time looks to be getting close.

Before we see why, here are some of the other top stories from our newsroom this week:

• The New Instamojo: Instamojo faced an existential crisis in October 2023 after the RBI barred it from operating as a payment aggregator, leading to a major pivot. Now the startup is a Shopify challenger looking to bring MSMEs to the ecommerce fold. Here’s how the company changed itself
• Dunzo Still In Doldrums: Reliance Retail could well save Dunzo, but other investors are still on the fence about the future of the startup that has barely survived through months of cash crunch. In fact, even if Reliance saves Dunzo, what future awaits the company?
• Exam Time For VCs: SEBI is making it mandatory for AIFs in India to have at least one certified decision maker in investment teams, and VC funds are scrambling to comply before the May 2025 deadline. What’s SEBI thinking and why do some believe it’s taking it easy on funds?

An Ola For India

Ola is just a copy of Uber for India. This low-hanging fruit naturally became the central criticism for Ola Cabs when it first launched in India.

In fact, Ola in those days meant a cab, and it’s only in 2023 that one had to really clarify they are talking about Ola Cabs and not Ola Electric. Even now, it’s really hard to speak about Ola Electric, without the ‘baggage’ of the other Ola.

But Aggarwal is hell-bent on changing that. Or at least that’s what we saw at Ola Sankalp. For simplicity’s sake, we are using Ola here very loosely to signify the group.

What was on display on August 15, 2024 at Ola Sankalp was unbridled ambition, some cherry-picked stats and a vision that had a grandeur seldom seen in Indian startups. At least not in the same unabashed manner.

The Ola Sankalp livestream ran for over three-and-a-half hours and rivalled the runtime of the LOTR trilogy. Its content was perhaps just as fantastical, as we said in our examination of some of Aggarwal’s and Ola’s claims.

But parsing all that PR speak and grandeur, we can see where Aggarwal is looking to take Ola. And that’s being everything that India needs or is seen as needing. In this context, the ‘excluding China’ disclaimers sprinkled throughout Ola’s Sankalp presentation, are about positioning India as the main China alternative for the manufacturing of semiconductors and electric vehicles.

Incidentally, that idea worked for smartphone manufacturing, with Apple making the biggest push. Can Ola Electric similarly catalyse chip and EV manufacturing, which are its biggest focus areas right now?

What Is Ola Today? 

Ola is a chip maker; it’s an EV maker; it will provide cloud services and power digital commerce, logistics and AI copilots through Ola Consumer. It seems mad, but there is a method.

These are unsurprisingly the areas that the Indian government wants to focus on for its economic growth targets. India sees itself becoming the semiconductor capital of the world over the next decade, with a huge outlay of government spending to propel the industry.

Aggarwal is painting Ola Krutrim as the poster child for this revolution, with the AI chips, which the company claims would outperform the current market leaders, when they launch sometime in 2026.

This is a claim that cannot be tested yet, and perhaps Ola can indeed pull it off if everything falls into place. But there are a lot of moving pieces, and even the semiconductor industry could see major changes in the next couple of years. For now, Ola is saying it will be the company to drive that change in India, whatever it may be.

A similar pattern can be seen in the Ola Electric vision. Besides new product launches, there were big numbers, market-beating expectations and claims that are hollow at-present, but could become true in the next three to four years.

Here too, Aggarwal latched on to the hot topic of self-reliance or ‘atmanirbharta’ as far as energy production is concerned, with his vision for the Gigafactory and cell manufacturing. Ola Electric could very well be a critical part of India’s aim to reduce imports of batteries. But at this point, it is a nice story that sells well in the right circles.

Curiously, these are targets that Ola Electric has not tried to sell in its IPO pitch. Undoubtedly though, it is great content for social media reels and highlights.

And finally, Aggarwal’s pitch for the Ola of the future was about Ola Consumer, a new platform that essentially crams in everything that Ola makes. This brings us to the end of Ola Cabs, formerly known as just Ola.

End Of The Ride For Ola Cabs?

Okay, perhaps the end of Ola Cabs is a little overstated, and hopefully, it did serve as a lure to get you this far. But here’s one thing we are having a hard time changing our mind on. Bhavish Aggarwal is perhaps not in love with ride-hailing any more.

In some ways, it would be hard even for Aggarwal to shed the Ola Cabs business, which explains the vociferous denials last year when reports of a Uber-Ola merger surfaced.

We don’t want to analogise too much about smoke and fire, but can you really deny that Ola has given up on cabs in recent years. The service quality has taken a nosedive, and perhaps the biggest indication is that rivals have caught up.

Rapido and BluSmart have made gains and both have the funds they desperately need to scale up. Rapido basically stepped into every gap that Ola left in the ride-hailing business, and sources in the industry believe it is poised to dethrone Ola as the second largest player in this segment.

Another newish rival is InDrive, which is gradually adding more drivers and expanding to smaller cities. Even Uber is turning a corner by utilising India as its tech hub for the global operations, as we uncovered in our look at the US giant’s India experience in recent years.

Ola had the first-mover advantage, which it squandered by not addressing weaknesses in the operations and service quality. For long, Ola Cabs rested on the fact that the advantages presented by an Uber-Ola duopoly could only be broken by something really massive.

In the past few years, that ‘something massive’ has happened. Ola Cabs is now a cab stuck in the mud, and rather than pull it out and try to spark the engine again, Aggarwal is building a big manor around it.

Within this manor that’s being built, cab-hailing will rarely be spoken about, but Aggarwal is keeping some of the Ola Cabs vestige alive with Ola Share or ride-sharing.

Other ride-sharing services have not fared very well in India, but we can see why Ola is adding ride-sharing for now as an option. Sharing is more popular in smaller cities and towns, which is the key user base of Ola Consumer as well as ONDC.

As Ola Consumer builds on the ONDC network, Ola will likely look to own the last-mile mobility needs in smaller cities, and scale that up. But here, it will have capitalised rivals like Namma Yatri and others as well. It’s challenging to scale up ride-sharing in markets that don’t offer a high volume of active users, and that’s only if you don’t discount rides.

Ola says on its website that Ola Share prices are always fixed and payment has to be done before the ride starts, but the service will be cheaper than typical Ola rides. Given this, Ola Share right now looks like a way for Ola to stay in the mobility game, and keep the Ola Cabs car running on low fuel.

It’s a ride that could end any time.

Sunday Roundup: Tech Stocks, Startup Funding & More

• A temporary blip or a start of a turnaround? With $395 Mn raised by startups this week, this is comfortably the highest weekly tally in recent months
• Does BYJU’S have any fuel left? The fallen giant is likely to shut nearly half of its 250 BYJU’S Tuition Centre to cut expenses further
• Blinkit across borders! The quick commerce giant is now allowing customers overseas to place orders for their siblings in India for Raksha Bandhan. How long before it becomes a permanent thing?

• FirstCry pops on debut! The ecommerce giant listed on the stock exchanges at a 35%-40% premium over the issue price, with M&M, SoftBank, TPG Growth making big returns from the IPO
• Unicommerce’s stellar listing! The B2B ecommerce company debuted at a premium of 117.59% over the issue price, which was expected by many thanks to the rampant oversubscription for the IPO

The post Ride Over For Ola Cabs?  appeared first on Inc42 Media.

Fund managers and key personnel managing venture capital funds could soon be taking notes from YouTube tutorials and mugging up rules and regulations related to operating alternative investment funds (AIFs) as SEBI’s May 2025 deadline for certification draws near.

In May this year, the regulator said it would need existing funds, new funds and schemes to get certification for at least one key personnel in the investments team. The certification criterion is applicable for registration of alternative investment funds, and launch of schemes by existing AIFs after May 10, 2024.

The rules have been a few years in the making, but this year, SEBI has made it clear that all AIFs in India have to go through the clearly established certification process.

In addition to passing the National Institute of Securities Market (NISM) Series-XIX-C: Alternative Investment Fund Managers Certification Examination, fund managers need to have a professional qualification in finance, economics, capital markets or banking from a university or an institution recognised by the central or state government or a foreign university, or a CFA charter from the CFA Institute.

The requirement for a certification was approved by the SEBI board in March 2023 to facilitate skill-based approvals of AIFs and to bring in a measure of objectivity in the registration process.

What’s SEBI Thinking?

Over the past year, the markets regulator has been inundated with registration requests of new funds and schemes of existing funds over the past year. Plus, the rush to register new funds is unlikely to subside in the near future as startups and private companies will remain a very attractive asset class.

And when combined with the spree of startups going for public listings, the tide of new funds is unlikely to ebb for the next few quarters. This has naturally made it more challenging for SEBI to ratify and approve applications for AIFs.

There’s also the matter of many founders quitting startups and launching new funds in 2023 and 2024. Many of these funds are awaiting registration, and several of them have warehoused deals in the meantime as they wait for SEBI’s nod.

As per sources in the Indian VC industry at the peak of the rush in 2022 and 2023, some 1,300 applications were waiting for SEBI’s clearance, and only about 300 have managed to get registered, with other bids either expired or rejected.

Amid this glut, the regulator is also looking to clamp down on inexperienced fund managers joining the hype and failing to operate within the guidelines set for AIFs.

Here’s what SEBI mandates for fund managers: at least one personnel has to take the National Institute of Securities Market (NISM) Series-XIX-C: Alternative Investment Fund Managers Certification Examination, which will test the candidates on the extensive rules and regulations pertaining to the AIF ecosystem.

Plus, candidates will also have to demonstrate their knowledge of fund structures, valuation techniques, exit strategies and more. Here’s a snapshot of what the NISM would test candidates on:

Now, let’s go deeper into the problem and what exactly SEBI is looking to clean up.

How Limited Partners Pushed SEBI

The rush for new funds was at its peak in 2021, when a number of new AIFs joined the market or launched new investment funds, and sprayed capital at the height of the zero interest rate regime in 2021 and 2022.

In 2024, this wanton infusion of funds is biting many VCs, with allegations of poor due diligence and weak fund performance.

Many limited partners have alerted SEBI about mismanagement of funds invested in funds, while the exit of key general partners and fund managers from many prominent funds has also become a problem for these limited partners.

It’s easy to ignore limited partners as a powerless class in the VC equation, until one considers that even some state-backed vehicles such as SIDBI have invested in funds.

For instance, in early 2023, the GoMechanic controversy broke out where one of the four cofounders of the startup publicly admitted to have misreported revenue and inflated sales.

Sources say this was a major breaking point for the regulators as SIDBI had backed multiple funds that cut large cheques for GoMechanic. The company was valued at close to $600 Mn at the time, and counted investors such as Orios Venture Partners, Chiratae Ventures and others that had SIDBI as a limited partner.

The subsequent value erosion for GoMechanic’s investors was a major concern for SIDBI at the time, and many general partners were questioned about why due diligence did not unearth the discrepancies that the GoMechanic founder admitted to.

Similarly, BYJU’S is an example where India’s reputation as a destination for foreign investments has been tarnished by the drastic value erosion of the once-heralded edtech giant.

Partner Exodus Hurts LP Sentiments

Besides these issues, in 2024, many LPs find themselves in a situation where they invested in a particular fund due to the partner operating the fund, but exits and departures have left LPs wondering whether they even know who is managing their money.

Inc42 has covered this issue of partners quitting funds extensively over the past two years, which has further destabilised the LP-VC relationship.

One could even say that the more prolific investment activity by family offices in the past year is an indication that HNIs want to wrest control of their investments rather than investing in funds. That of course doesn’t mean that VC funds are less relevant today, but there were quite a lot of glaring issues which were overlooked at the peak of the funding and investment activity.

As public markets crashed and new models of business emerged during the pandemic in 2020 and 2021, many HNIs reduced their portfolio’s exposure to public markets, and moved towards startups as an asset class.

Many of these HNIs and even large institutions backed venture capital giants, leading to record-breaking capital raised by VC funds in India. Venture capital funds worth more than $6.2 Bn were launched in India in 2021 alone, which grew to a staggering $18.3 Bn in 2022.

In the case of many funds, they suffered from a funding problem, just as some of the startups in their portfolio. Just imagine the place many funds found themselves soon after Covid broke out in 2020.

Suddenly everyone wanted to invest in startup-focussed funds with rampant oversubscription of schemes and new funds. And these funds had to find a destination, which often meant hype-led investments.

This is of course a gist of the past couple of years, and market dynamics are far more nuanced than this simplified summary. But consider the fate of some of the companies that raised massive capital in 2021.

Unicorns such as BYJU’S, Pharmeasy, Dealshare and others that raised huge rounds in 2021 are now struggling for various reasons. Others such as Unacademy are facing the reality of the market after burning the capital raised in 2021.

LPs had great expectations from their startup portfolio, but many blew up and others are mired in untenable situations.

Not all funds launched in 2022-23 had the pedigree to invest in the right manner. Many portfolios have crumbled in the funding winter since 2022; layoffs have decimated the most promising models and growth funding was hit hardest. Even if startups survive the course of the funding winter, they are under-capitalised and have half-baked models in many cases that cannot be scaled up without further funds,

In steps SEBI then, making it a bit more challenging for fund managers and funds, in the hope that this could relieve the VC ecosystem of some of its froth.

How does this change things for VC funds and fund managers?

VCs Scramble To Pass SEBI’s Test

Fund managers that we spoke to are of the belief that SEBI-mandated certification is long overdue, though some have pointed out glaring gaps even with these changes.

“SEBI brought in the certification criterion, as there was too much noise in the market. This is just like SEBI asking public market investment advisors (IAs) to get registered. It cracked down on many unauthorised IAs last year, and now AIFs are being brought on par with this requirement,” a former partner at a VC fund told Inc42.

With the May 2025 deadline just nine months away, funds are scrambling to train partners, principals and other investment analysts. Sources indicate that several funds are running training programmes for these roles who form their investment teams. Consultants are shopping their services to AIFs to help their personnel get the right training and certification.

One Delhi-based early-stage investor claimed that analysts are passing the NISM test, while Chief Information Officers are failing. It’s funny to think that fund managers have to think about questions and marks decades after their last exam in college.

“The test is not easy as far as we have been told. Even though it is a multiple choice question (MCQ) format, there is negative marking (-25%) for wrong answers, and the passing score for the examination is 60 marks,” the Bengaluru-based partner added.

Since SEBI has mandated that at least one personnel on the investment team needs the certificate, many funds are wondering whether they can get by with having one such certified professional and not changing much else. “There is a possibility that the system may be gamed. A fund can put in a figurehead and put them on all investment teams. But the final decision making will continue to rest with partners as it does right now,” the partner quoted above added.

What this means is that one person can be appointed by the AIF across its multiple funds and schemes as a token certified investment team member. This does not completely eliminate the problem of low-skilled or inexperienced fund managers, which has bugged some LPs.

Multiple investors in Bengaluru and Delhi claimed that individuals with NISM certification for AIFs have sensed the opportunity and are applying for open positions at VC funds. These individuals do not have the track record to run funds, but may become appointees in investment teams just to clear SEBI’s bar.

Given this loophole, many insist that SEBI needs to be more stringent.

Will SEBI Raise The Bar Further?

Another Delhi-based partner at a prominent VC fund told Inc42 the problem in the past two years is that LPs often engaged with partners who had the skill set to be a fund manager, but did not have high enough equity in the fund.

Consequently, when partners quit the firm due to internal issues, LPs are left holding a bag of loss-making investments. Now, while SEBI is ensuring that only those who have the skills and the knowledge are able to manage LP money, it is not addressing questions of responsibility and accountability.

“SEBI’s certification mandate does not completely eliminate the problem of only skilled and approved people running funds. The regulator needs to mandate that at least one partner, ideally the one with the highest equity in the partnership, needs to be certified by NISM,” the partner mentioned above added.

So on the one hand, SEBI has increased the skill barrier to entry to the VC ecosystem, but this is just the first step. Most investors we spoke to believe that SEBI needs to raise the bar further when it comes to new fund managers, as startups have become a significant asset class.

Finally, there is a risk that high compliance and certification requirements might exacerbate the elitism that is seen in the VC game. With more and more individuals joining the investor pool every year, there was talk about a democratisation moment in India’s venture capital space.

SEBI may want to clamp down on bad managers, but stopping the flow of new fund managers can be detrimental to the startup ecosystem in the medium and long term.

This is arguably why SEBI’s certification rules for AIF fund managers are currently not that stringent, and why AIFs and venture capital funds do have some leeway. Even if this may just be for the time being.

The post ⁠Indian VCs Face The Test, Literally! appeared first on Inc42 Media.

Every four years, with the Olympics, we get to see spirit and competition that tend to become stories and legends. Records are broken and new challengers emerge. The story is similar for quick commerce in India, with Flipkart Minutes joining the field.

And like any athlete that wants to challenge the leaders, Flipkart is fully geared up and is not shy about what it wants to do with quick commerce.

Coincidentally, quick commerce as a model gained traction four years ago, before the pandemic pushed the 2020 Olympics to 2021. Covid disrupted plans on the sporting side, and it certainly changed the game for ecommerce too.

This change is best evidenced by how Flipkart sees the category. While once instant delivery was about essentials, today it’s essentially everything.

While it’s early days for Flipkart Minutes, there are legitimate reasons why the incumbents – Blinkit, Zepto and Swiggy Instamart – need to be worried.

Before we find out why, a look at the top stories from our newsroom this week:

• Swish’s Bold Bet: In the era of 10-minute deliveries, Swish is looking to do what Zomato couldn’t by bringing quick commerce to the food delivery space. Will it manage to pull it off?
• Mygate’s Turnaround: After a dismal FY23, Mygate went back to the drawing board and proved that it can crack unit economics and find sustainable revenue growth in FY24. Here’s how the startup did it.

Learning Quick Commerce Tricks

Flipkart has already taken a couple of stabs at grocery delivery in 2015 and then in 2017. The first one was Flipkart Quick, which offered 30 to 90-minute deliveries in some cities, which was followed by Flipkart Supermart in 2017. Subsequently, Flipkart Quick was phased out in November 2022.

Supermart had the best chance to succeed, but instead of expanding dark stores to many corners of the country, Flipkart chose to go with fulfilment centres which have a wider inventory and typically a wider distribution radius.

The dark store model has more or less become the only way to do quick commerce today. Blinkit, Instamart, Zepto have chosen this route, while Tata’s BigBasket is also going this way.

This time around, Flipkart has gone for the dark store model and is competing in every category that Blinkit, Zepto and Instamart have added in the past year.

Flipkart Minutes currently offers free deliveries on all orders above INR 99 and is also levying a platform fee of INR 5 per order.

The vertical is being led by Hemant Badri, who is the vice senior vice president and group head of supply chain for Flipkart. His appointment indicates that Flipkart sees supply chain as a key component of the business.

Flipkart is said to be planning to open 100 dark stores across top cities. But Blinkit, in comparison, has over 639 dark stores as of now. The Zomato-owned company wants to have 2,000 dark stores by the end of 2026. So, in terms of scale, there’s a lot of catching up to do for Flipkart.

Sources say Zepto is on course to double its dark store count to more than 700 by March 2025. The company recently got a massive $665 Mn infusion to fuel this expansion.

Swiggy’s Instamart is also expanding its network ahead of the IPO in 6-12 months, and much of its focus in recent months has been on the quick commerce side, where it has seen a significant growth in revenue.

Flipkart’s Edge

What could work in Flipkart’s favour is its large existing user base, plus its strong brand recall in smaller towns, where Blinkit or Zepto might not yet have made inroads. Blinkit has done tremendously well in the past two years, but this has come largely from consumers in metros.

A majority or 80% of the new stores it opened last quarter were in the top eight cities, with Delhi NCR seeing the most investments. Delhi NCR is also the biggest contributor to Blinkit’s GOV and revenue, and well ahead of the other 25 cities that Blinkit currently has a presence in.

Earlier this week, Drools’ CEO Shashank Sinha predicted that Flipkart Minutes will outdo other quick commerce players in smaller towns and cities. Speaking at The D2C Summit by Inc42, Sinha said Drools came on board Flipkart Minutes because Flipkart can scale up quickly in these cities, even though the service is currently only live in Bengaluru.

In the past, Flipkart had rolled out the same-day delivery services for multiple products across 20 Indian cities, including Ahmedabad, Bengaluru, Bhubaneswar, Coimbatore, Chennai, Delhi, Guwahati, Hyderabad and Indore, among others. So, it does have the on-ground capability to fulfil the logistics needs for quick commerce in these cities, many of which would perhaps be getting a first taste of instant delivery.

The fact that Blinkit, Zepto and Instamart have yet to penetrate deeper into the country provides an opportunity for Flipkart. Earlier, Zepto cofounder and CEO Aadit Palicha said that India’s top 40 cities provide enough growth headroom for Zepto and other quick commerce platforms. “If we execute well, we can realistically take this business from INR 10,000+ Cr top line today to potentially to INR 2.5 Lakh Cr top line over the next 5-10 years,” Palicha said, even though Zepto currently has a presence in just 10 cities.

Flipkart’s entry into the quick commerce space ahead of the 2024 festive season sales is also significant, as this allows the company to get the right mix of volume and order value. In this regard, Flipkart’s debut with non-grocery categories is key.

Zomato, in its most recent shareholder letter, said that an increasing number of non-grocery ecommerce users are shifting to quick commerce. D2C founders also believe there is attrition of brands and customers from marketplaces to 10-minute delivery.

For instance, Swiss Beauty cofounder Mohit Goyal highlighted that quick commerce has become the preferred mode for emergency beauty purchases, a category that was never being catered to before 10-minute deliveries.

Where Flipkart Minutes Stands Out

And the quick commerce trend has also trickled down to fashion startups and food delivery. It’s only right then that Flipkart Minutes has chosen to go all-in with a host of electronic products and some items such as cameras and large printers that are not available on Blinkit currently.

The number of SKUs in each category on Flipkart Minutes might fool some into thinking Flipkart has turned its entire platform into quick commerce. Though to be fair this is currently restricted to some postal codes in Bengaluru only.

In the short term, the company will have to invest heavily to expand Flipkart Minutes. The $1 Bn funding round led by Walmart and with Google as a backer is certainly going to be useful in that regard. But it will also have to restructure its distribution for quick commerce, from fulfilment warehouses to smaller dark stores and limited SKUs.

While Instamart, Blinkit and Zepto have added thousands of SKUs to their grocery aisles as well as new categories recently, their customer base is skewed towards urban users. It is not yet clear whether Flipkart Minutes can unlock the same appetite for new brands and faster deliveries for high-value items in smaller cities.

Given this, it is very likely that some Flipkart Minutes facilities will double-up as warehouses for inter-city deliveries and dark stores for hyperlocal quick commerce. The exact model is yet to be determined.

Flipkart Minutes is a key part of the ecommerce giant’s super app model. It is also investing in growth areas like digital lending, insurance distribution, travel and fashion verticals. But none of them have the revenue potential that quick commerce offers.

Goldman Sachs estimates that Blinkit is already worth more than Zomato’s food delivery operations. Zomato’s quick commerce revenue jumped about 2.5X YoY to INR 942 Cr and adjusted EBITDA loss also improved to INR 3 Cr in Q1 FY25. The turnaround from an adjusted EBITDA loss of INR 133 Cr in Q1 FY24 has turned quite a few heads.

Blinkit is on the verge of profitability after a shift to quick commerce from its older hyperlocal model in 2022, with 78.8 Mn orders in the most recent quarter, and monthly transacting user base of 7.6 Mn. This is the benchmark for Flipkart Minutes and other quick commerce competition.

Speaking of competition, there is plenty of depth in the Indian market, but then we are also talking about huge companies like Zomato, Swiggy, Flipkart, Reliance Retail, BigBasket and Zepto.

They will all want to justify their investments in quick commerce, and there will be a situation where the market is divided between five or six players. It will be interesting to see which of these giants gets impatient first and looks to end the battle of attrition by acquiring rivals instead of playing the long and patient game.

Will Flipkart be on the right side of the market when this happens?

Sunday Roundup: Tech Stocks, Startup Funding & More

• The weekly startup funding tally fell by halve in comparison to the previous week, with startups raising $112 Mn via 22 deals this past week
• Ola Electric made a flat market debut, listing at INR 75.99 against the issue price of INR 76. But by the close of the week, the stock was trading at INR 91, 20% higher than the listing price

• Ecommerce giants FirstCry and Unicommerce are also set to get listed in the first half of the week ahead after their public offerings closed this week with healthy oversubscriptions for both companies
• US-based lenders of BYJU’S have moved India’s Supreme Court to appeal against NCLAT’s order quashing insolvency proceedings against the company
• The Economic Offences Wing has made an arrest in the alleged BharatPe fraud case, taking custody of an individual linked to fake vendors allegedly being paid by Ashneer Grover and Madhuri Jain Grover

The post Flipkart Minutes & The Quick Commerce Olympics appeared first on Inc42 Media.

Bhavish Aggarwal is in the thick of it. From Ola to Ola Electric and now Krutrim — the much-celebrated founder is now on the verge of taking Ola Electric public, the first of what is likely to be a series of IPOs.

After the public offering and a listing later this week, Ola Electric will also become the first auto sector company to list on the exchanges in two decades. While Aggarwal will take perhaps a few moments or a day or two to bask in the IPO limelight, his focus is likely to shift very soon from Ola Electric to Ola, Krutrim and the company’s new verticals.

While the attention is unsurprisingly on Ola Electric currently, this past week we turned the spotlight on other potential growth areas for Ola.

• A Fourth Bite At Food Delivery — Ola is back in the food delivery game, and for its fourth attempt it is getting a little help from ONDC and a lot more help from discounts
• Mapping The Future — The company’s Ola Maps product is the latest to grab the limelight with sources claiming it’s on course to become another name in Bhavish Aggarwal’s stable of unicorns. But it’s a long, long road ahead

Despite the optimism around these verticals, there are still quite a lot of questions around Ola’s ride-hailing business and whether Krutrim can indeed take on AI tech giants. So let’s take a closer look at Bhavish Aggarwal’s house of unicorns.

What About The Original Ola? 

It’s hard to talk about Ola without talking about the original Ola. These days, EVs and AI are the buzzwords, but when Ola started out in 2010-11, ride-hailing was the in-thing.

In that sense, Aggarwal has always had a penchant for sectors that were grabbing the headlines. Before we go into EVs and AI, let’s see how Ola capitalised on the ride-hailing opportunity, but seemingly has remained stagnant over many years.

The delightful experience of early adopters created a magical aura around ride hailing, and particularly Uber, which launched in 2009, and Ola wanted to bring the same experience to India. The first three to five years saw Ola acquire users by the millions fuelled by funding from Tiger Global, Sequoia (now Peak XV) and SoftBank. Ola was a darling of the Indian VC ecosystem, but the challenges in ride-hailing are still largely the same, more than a decade later.

Ola has raised more than $5 Bn in the past 12 years, one of the most heavily funded companies in the ecosystem.

The startup competed with Uber on price in the early days, but once discounts disappeared and driver incentives shrank, the complaints have continued to rise. The overall ride-hailing experience has continued to slide over the years, and only recently has competition once again forced Ola to review key aspects of the ride-hailing operations.

The New Rides In Town

The likes of newly-crowned unicorn Rapido, BluSmart, InDrive, Namma Yatri and others have accumulated capital and looked to usurp Uber and Ola.

Let’s take Rapido as an example. The startup found a go-to-market route through bike taxis, where it claims to have more than 60% of the market. In the last year, Rapido has also entered cab hailing and expanded auto rickshaw ride too. The company entered the unicorn club earlier this week with a $120 Mn round, which sets it up to scale up in the months to come.

And Rapido is growing quite rapidly. Ahead of FY24, it claimed to be on track to reach INR 600 Cr in revenue against INR 450 Cr in FY23. Ola’s ride-hailing business brought in INR 1,987 Cr as revenue in FY23, while Uber India recorded INR 679 Cr as income from ride-hailing.

One could say that Rapido has grown faster.

Ola’s ride-hailing revenue in FY23 is around FY20 levels (March 2020) when it earned INR 2,096.1 Cr. The pandemic years are largely to blame for this. Rapido on the other hand, only suffered a minor dent in revenue during the pandemic years, thanks to its relatively low revenue base. Rapido has seen 10X growth between FY20 and FY23 (INR 42 Cr to INR 450 Cr), as Ola went through a slump.

To fight the revenue problem, Ola launched the Prime Plus tier for drivers and riders. But as we argued last year, it’s not the greatest of propositions for either side of the Ola business.

After halving its losses to INR 772 Cr in FY23, Ola parent ANI Technologies would be hoping to cut this further. Firstly, it laid off 10% of its workforce or close to 200 employees in late April 2024, and added new revenue streams through ONDC and food delivery.

It also cut tech costs by moving away from Microsoft Azure and Google Maps. The latter, Aggarwal claimed, would result in savings of INR 100 Cr per year. While the migration from Azure and Google Maps has been framed as global giants vs homegrown tech debate, it makes most sense from a cost-saving point of view.

But ride-hailing as a proposition is also changing. Electric vehicles will soon become the norm if state and the central governments keep up with their green mobility targets. Ola has been slow to get on the green mobility curve.

The hope in the long term is that Ola’s potential electric car business will feed the supply chain for EV-hailing. But the electric car plans are being put on hold for now, and Ola is largely looking at EV two-wheelers on the ride-hailing side.

As we argued in March this year, Ola’s green mobility journey has been stop-start. Aggarwal has to balance costs of running the ride-hailing business with the investments needed to move towards EVs in the next few years. Even if Ola turns profitable by FY25 (if we assume generously), can profits be sustained through this transition?

A Brief Word About AI & Krutrim

Ride-hailing might yet prove to be a profitable business in the next couple of years, but Aggarwal will also need to look at Ola Electric and Krutrim from the point of view of profitability.

It’s too early to look at Krutrim given that it’s only just started rolling out products and solutions, but being a unicorn and the current focal point for new products (cloud and maps), we believe that Krutrim is being seen as the lynchpin by Aggarwal & Co.

For instance, GPUs for AI cloud computing will come into play for Ola Maps and Ola Cabs in the future. AI-driven calculations will be critical for battery manufacturing and testing. In turn, Ola Maps will be a key part of food delivery and ride-hailing and EVs.

If we squint hard enough, we can see this flywheel taking shape, but of course all of this hinges on how well Ola can scale it up and whether it has the endurance that AI will take.

While Krutrim could launch its language models, chatbots and translation models as standalone products, the real big money is in becoming a provider of AI tools and computing to enterprises. It’s also why Aggarwal is wooing developers with free access to the Krutrim Cloud and Ola Maps products to start with.

However, profitability is a distant prospect because in many ways, Krutrim is currently in the proof of concept stage, looking to demonstrate that this approach can work and Ola and Ola Electric are the testbeds.

When it comes to profits, OpenAI is struggling to get there, so is Google and Meta too. The capex needed for scaled-up AI platforms is massive as evidenced by OpenAI. The AI giant is expected to make between $3.5 Bn to $4.5 Bn in revenue in 2024, as per The Information, but it could finish the year with a loss of over $5 Bn, thanks to a staggering $8.5 Bn in operating costs alone.

OpenAI is likely to raise more funds by next year, so Krutrim’s fundraising spree is just beginning, if anything. In other words, this is going to take a long time, especially if the idea is to feed the appetite of the Indian market, where scaling up revenue will be slower than OpenAI or Google or Meta.

Ola Electric Tosses The IPO Coin

Of course, if you ask Aggarwal about Ola and Krutrim right now, you may not get a response at all, because all eyes are on Ola Electric. We have a few interesting observations on Ola Electric’s business, which we have captured in the past in our coverage, but more of that will be coming in the next few days.

While it’s undoubtedly a huge landmark for Ola Electric, the company has lost some of the bullishness from earlier this year when it filed its draft red herring prospectus.

For one, the valuation in the final prospectus has been slashed to around $4 Bn from $5.4 Bn (over 25% lower) and investors such as Ab Initio Capital, Alpine Opportunity Fund, and Tekne Private Ventures will be selling shares in the IPO at a loss over the acquisition price.

Of course, these investors might well make up for these losses in the long run with their remaining holdings, but the IPO is not going to generate the same kind of returns for all investors.

In fact, just about 10% of the IPO involves existing shareholders selling their stake, which shows just how early the IPO is for some of these investors. It’s no surprise that many analysts believe the Ola Electric IPO is coming a little too soon, and perhaps is banking on the gap in the auto sector for new-age businesses.

The company continued to post losses at the operating level, along with negative cash flow from operations during FY24. It has also borrowed heavily since March, securing more than INR 3,000 Cr through loans, with just INR 1,700 Cr in cash and bank balances (as of March 2024).

This level of borrowing indicates that perhaps Ola was not confident of raising enough funding through the public markets at the high valuation that it was touting in January 2024. The company is looking to utilise over 15% of the IPO proceeds on debt repayments for the core Ola Electric Technologies business.

Ola Electric may indeed raise enough money to plug in whatever funding gaps it has through this IPO, but retaining the faith of investors and shareholders will need a consistent effort towards reducing the debt exposure and profitability.

Ola Electric seems to be doing the hard work of the IPO before it has cleared all doubts with regards to how it will scale up profitably. This sets it apart from many of the profitable startups that public investors have seen IPO this year, and not in a good way.

So is Aggarwal jumping the gun with the Ola Electric IPO, the first from his house of unicorns?

30 Startups To Watch: The July 2024 Edition

Every month we pick 30 of the hottest and most innovative startups that are making waves in the startup ecosystem. And our list this month is testament that many of these early-stage startups don’t need bags of funding to live up to their potential.

In the July 2024 edition, just eight of the 30 startups have raised more than $1 Mn in funding, while a whopping 16 early stage startups raised less than $1 Mn or just about $1 Mn. Plus, a significant portion (20%) of the list remains bootstrapped.

Dive into our list now

Sunday Roundup: The D2C Summit, Q1 Results & More

• Kirana tech startup 1K Kirana has collapsed under the weight of its cash burn-heavy business model after rasing INR 250 Cr+ in funding. Inc42’s in-depth investigation shows just what went wrong for the Info Edge-backed startup \
• The D2C Summit is back this week, with a series of riveting panel discussions and illuminating fireside chats featuring 40+ luminaries from the world of modern retail and D2C — including Future Group’s Kishore Biyani, BlueStone’s Gaurav Singh Kushwaha; The Moms Co’s Mallika Datt Sadani among others
• Indian startup funding regained momentum with a total of $222 Mn invested in startups this past week across 25 deals, a whole lot better than the slump of the previous week
• Zomato announced net profit of INR 253 Cr in Q1 FY25 and saw a massive rally on the stock as its market cap inched closer to the $30 Bn mark

• Logistics unicorn Delhivery returned to the black, posting a net profit of INR 54.3 Cr in Q1 FY25 and is eyeing the booming quick commerce sector for growth next
• Among other listed tech cos, ixigo reported profit after tax of INR 14.85 Cr; Tracxn saw profit nearly double to INR 1.27 Cr, while Fino posted profits of INR 24.27 Cr

The post Ola Electric On Cusp Of IPO, But What About Bhavish Aggarwal’s Other Unicorns? appeared first on Inc42 Media.

The likes of Groww, Zerodha, Angel One and others have seen unprecedented growth in the past couple of years, adding millions of active investors to their platforms. But this good run has seen two separate setbacks this month.

On July 1, SEBI decided to halt the zero-brokerage facility on discount broking platforms such as Zerodha, Groww, Upstox, among others, a move that was largely seen as tackling the massive surge in futures and options trading.

The second setback came via this week’s Union Budget (see highlights from our coverage below.) A hike has been proposed in capital gains tax and securities transaction tax. We’ll delve into why these taxes were hiked, but common sense dictates that retail investors are more likely to think twice about how much they now want to invest.

Together, these two developments threaten to disrupt the investment tech gravy train, and the risk of Jio Financial Services coming in and grabbing the market cannot be underestimated. So what happens to the top two players — Groww and Zerodha?

Let’s find out, after we go through the top stories from our newsroom this week:

• Josh Fizzles Out: VerSe Innovation’s Josh is faltering after failed monetisation models, 80% YoY dip in monthly downloads and 50% decline in monthly active users. Will it drop off like other short video apps?
• The Soothe Story: What’s surprising about women’s hygiene startup Soothe Healthcare entry into the INR 100 Cr revenue club is how it got there despite not playing by the rules of the D2C game. Here’s why

Budget Blues For Groww, Zerodha

Before we get to the impact from SEBI’s changes, let’s see what changes for Groww, Zerodha and others after the Union Budget.

The finance minister proposed increasing the rates of STT from 0.0625% to 0.1% on options and from 0.0125% to 0.02% for futures. Short term gains on certain financial assets will attract a tax of 20%, whereas the long term capital gains on all financial and non-financial assets, on the other hand, will attract a tax rate of 12.5%.

Many have called the budget a deathblow to the rapidly growing investment tech space as retail investors reassess their exposure to taxes.

Industry experts believe that this will largely impact F&O trading, which has seen exponential growth in the past year. As per the latest SEBI’s monthly bulletin, the equity derivatives volumes of the two bourses saw a whopping 71% YoY growth to INR 9,504 Lakh Cr in May 2024.

This growth has coincided with investors flocking to discount broking platforms. Groww now boasts over 10 Mn active investors as of May 2024, with Zerodha trailing at 7.5 Mn and Angel One not far behind at 6.5 Mn.

F&O and intra-day traders contributed to the revenue and user growth (more than 80%) for discount broking platforms such as Zerodha, Groww and Angel One, as per industry sources.

• Zerodha’s operating revenue grew 37% to INR 6,832 Cr in FY23 — fees and commission charges accounted for 84% of this total.
• Groww’s operating revenue more than tripled to INR 1,277.8 Cr in FY23, with the company breaking into profits. A whopping 95.9% of its revenue came from subscriptions and commissions fees in FY23.
• For publicly-listed Angel One, broking fees constituted 65% of the overall revenue in Q1 FY25.

The tax shock is likely to pull back the growth in FY25 to some extent, when combined with the hike in STT.

Zerodha cofounder and CEO Nikhil Kamath tweeted on budget day that the STT increase could increase tax collections by up to 66%, if trading volumes don’t drop. Kamath expects this to go up to INR 2,500 Cr annually from October, based on 2023 volumes.

Though he did not elaborate on how or whether this will affect trading activity, others say the budget has all but ended the frenzy around F&O, intra-day trading.

“Zerodha contributes 20% to the retail trading volumes of stock exchanges in India. Groww’s active user base was more than 11 Mn in June. Broking companies which have the highest market shares will get hit the hardest by these changes,” a Bengaluru-based wealth management app’s founder told Inc42 this week.

SEBI’s Slap

Now let’s step back to early July when SEBI asked MIIs such as broking platforms to levy a uniform exchange fee, irrespective of volume or turnover. They can no longer offer any rebate to traders for bringing in more volume through their platforms.

The regulator pressed ahead with the change as many platforms were nudging retail traders towards F&O trading. This is expected to push up the brokerage costs especially for investors who have become habituated to zero or near-zero fee structures.

Here’s how it used to work: Stock exchanges impose a transaction fee on trades executed on their platform, which they charge to brokers on a monthly basis. This fee constitutes the main revenue stream for any stock exchange such as NSE or BSE. In Q4 FY24, for instance, 74% of NSE’s revenue came from income from transaction fees.

While the exchange applies these transaction fees on a monthly basis, broking platforms charge their clients fees on a daily basis. The difference between the collected fees and the actual fees paid to the exchange is the net margin for the broking platform. Suffice to say, driving traffic on a daily basis is important for these platforms from the point of view of overall profitability.

“A majority of new investors in India prefer discount broking platforms such as Zerodha or Groww or Upstox or Paytm Money because of the zero-brokerage model. But now we have to let go of the zero-brokerage structure and increase brokerage for F&O trades from October 1,” said the cofounder of a Bengaluru-based discount broking platform.

In fact, zero brokerage was a USP, but now it’s gone. In the case of Zerodha, the change is expected to have a 10% impact on revenue, according to CEO Kamath.

The founder quoted above said platforms have lost the incentive to generate huge turnovers as this directly impacts margins at scale. The market making activity will be adversely impacted in the long term. Brokerage fees will also rise in the long run because intermediaries such as depositories and advisories will attempt to recover revenue losses.

Jio Waiting To Pounce

What will be really interesting to see is where the three largest platforms ended up in FY24 after flying high in FY23. If anything, we expect revenue to be at record levels for all the players due to the boom in F&O trading.

The financial performance is going to be even more under the spotlight when Jio Financial Services enters the market. Competition in this space is only growing, and existing players were all extremely bullish about growth — at least before July 2024.

Paytm is redoubling its efforts on this front as it looks to diversify revenue reliance on payments.

Walmart-owned PhonePe continues to press the accelerator on its investment platform Share.Market, which is a key part of its super app plan. CRED acquired investment tech startup Kuvera in January to enter the fast-growing wealth management space and expand its platform play.

As we wrote a few weeks ago, Zerodha, in particular, has lost pace to rivals such as Groww and Angel One. With IPO season in full swing (at least for the new-age tech companies) and likely to continue well into 2025, investor activity was expected to surge as these platforms competed for every trade.

What happens now after the double blow of SEBI changes and the changes from the budget? A stormy July has left Zerodha, Groww and every other player at a disadvantage after the boom of the past two years.

Best Of The Union Budget 2024-25

• Nirmala Sitharaman’s budget signalled that the government is looking at startups not as a separate class of businesses but as a key component of the business landscape at large. Here are the key takeaways
• Angel tax was an albatross across the neck of all Indian entrepreneurs for 12 years, and now the battle has been won, writes 3one4 Capital founding partner Siddarth Pai
• The INR 1,000 Cr VC fund for space tech shows the government’s faith in the space economy, and is a strong validation for the innovation in the sector, according to Vishesh Rajaram, managing partner at Speciale Invest
• While the abolition of angel tax has come as a big relief, now the government needs to dismiss pending cases, urges Mohandas Pai, the former CFO of Infosys and partner at Aarin Capital

Sunday Roundup: Tech Stocks, Startup Funding & More 

• Weekly investment activity fell to a new low for 2024, as just $43 Mn was invested into Indian startups this week. Effect of the Union Budget?
• The blame game continues in the WazirX crypto heist as the company pointed at digital asset management platform Liminal as being the weak link, which in turn laid the fault at WazirX’s doors

• Electric vehicle maker Ola Electricis is set to open its IPO on August 2 and has filed its red herring prospectus in preparation for the public listing
• Apple is set to begin manufacturing high-end iPhone Pro and Pro Max models in India, starting with iPhone 16 series, as it looks to further move production away from China

The post Zerodha, Groww In Revenue Storm  appeared first on Inc42 Media.

Finance minister Nirmala Sitharaman only mentioned the word ‘startup’ twice in her entire Union Budget 2024-25 address, but the budget itself had plenty in it for the evolving startup ecosystem, including companies in the manufacturing and MSME spaces.

Indeed, this year’s budget address signalled that the government is looking at startups as part of the corporate world at large, given many of the broader measures and the budgetary allocation for large sectors and industries.

The biggest announcement for startups was related to the abolishment of the contentious Angel Tax for investors in all classes, which would be a big relief for startups, but pending Angel Tax investigations are still a sore point for many startups.

In terms of sector-specific allocation, India’s spacetech startups are under the spotlight once again in the Union Budget 2024, but besides this, the biggest push has come for the manufacturing industry.

Additionally, the Union Budget 2024-25 showed that the government is looking at uplifting the MSME sector and startups in a big way by expanding the various credit access platforms available to this class of businesses.

For individuals, though, not much relief was found from the current tax regime in the Union Budget 2024. While some adjustments were made to the income tax structure, the bigger focus has been on increasing the tax collection by targetting the growth seen in securities and derivatives trading.

Sitharaman also spoke about the government’s focus on digital public infrastructure (DPI) for modernising agriculture, healthcare, finance, ecommerce, education, law and justice, logistics and other key areas. These are undoubtedly areas that Indian startups can target.

For instance, land records in urban areas are set to be digitised with geo information systems (GIS) mapping, while sector-specific databases will be created under the Digital India mission to improve data governance, collection and processing.

Here are the five key areas that were under the spotlight during Sitharaman’s 90-minute Union Budget 2024-25 address:

Huge Focus On Skilling, Employment 

• One-month wage to all persons newly entering the workforce in all formal sectors
• Incentive boosts for employers and new employees in the manufacturing and other sectors
• 1,000 Industrial Training Institutes will be upgraded around skill-focussed outcomes
• Loans for upskilling and higher education in domestic institutions

As expected in the run-up to the Union Budget 2024, Sitharaman focussed heavily on encouraging new employment and job creation in key sectors.

Job-creation measures included the new internship scheme, EPFO-based benefits for employees and employers as well as a focus on skill development through the Industrial Training Institutes.

In addition to the PLI schemes that have catapulted India in the global supply chain market, the government is looking to encourage investments in large-scale manufacturing and formal sectors by rewarding employers for hiring new workers.

Those in the manufacturing sector, in particular, stand to benefit as the pace of new job creation is higher in this sector as compared to the services industry. We can see these incentives driving investments in new manufacturing units for semiconductors, automotive and EV industry, while the already booming electronics manufacturing industry is likely to expand its base in India — especially when you read these changes along with the lower customs duty on many critical raw materials and inputs (more on this later).

Interestingly, the budget speech did not announce any particular government investments in the semiconductor manufacturing space, preferring to focus on incentives that cover the entire gamut of manufacturing. In the past year, the government set aside INR 1K Cr to fund semiconductor design startups, along with a $10 Bn allocation for semiconductor manufacturing research and design.

Budget 2024 Brings Mixed Bag For Taxes

• Contentious Angel Tax For Startups Abolished From April 1, 2024
• 2% Equalisation Levy AKA Digital Tax On Foreign Cos Abolished From August 2024
• Short-Term Capital Gains Tax Hiked To 12.5% From 10%
• Long-Term Capital Gains Tax Hiked To 20% From 15%

When it comes to tax-related changes, Sitharaman’s budget dished out the good news with an equal measure of the bad.

Firstly, most startups will welcome the abolishment of Angel Tax, which has been a thorn in the side of early-stage startups for the past six years when the IT department began looking at potential violations and sending notices to companies and their investors.

Ever since it was introduced in 2012, the Angel Tax clause was used to harass startups whichraised capital from investors, often at a premium based on valuation reports. The tax was levied on the difference between issue price of unlisted shares and their fair market value.

The government has now abolished the contentious Section 56(2)(viib) from April 1, 2024, but several cases are still pending with authorities as we reported a few days ago. These are unlikely to be cast away without a resolution, so startups could still see some residual pain from angel tax for the time being.

In conversations with Inc42, many investors have suggested that the government needs to wipe the slate clean when it comes to these pending probes.

Equalisation Levy Removed, TDS On Ecommerce Slashed

Next, Sitharaman threw a surprise when she abolished the 2% equalisation levy often called the digital tax on foreign tech and ecommerce companies operating from India. This tax was meant to offset the loss of revenue for India from foreign companies selling services or products in India.

The change in the equalisation levy is expected to provide a lot of cheer for US-based companies, which have long asked for this tax to be removed. The change will reduce the cost of some online and digital services, such as global companies advertising in India through digital ad networks, which have to pay a 2% premium to the service provider in many cases.

For ecommerce operators in India, the government has proposed a lower tax deducted at source (TDS) rate, slashing it significantly from 1% to 0.1%. This is likely to spur on digital commerce adoption as it reduces the cost of online selling in a big way. The TDS was introduced as a way to monitor ecommerce transactions for round-tripping of funds and to prevent money laundering. Lowering this will allow the government to continue monitoring transactions for those red flags, while operators will have to incur lower upfront costs to facilitate transactions.

Concerns Over Capital Gains Tax Hikes

Finally, in what is expected to raise a lot of concerns among individual and institutional investors, the finance minister hiked the tax rate on short term and long term capital gains, as well as the securities transaction tax (STT) applied for derivatives (futures and options). From October 1, 2024 — subject to the passing of the Finance Bill — the STT on options up from 0.062% to 0.1%. STT on futures goes up from 0.0125% to 0.02%.

According to Zerodha CEO and cofounder Nithin Kamath, this would result in 66% higher STT collection from users based on 2023 volumes. The volumes themselves have grown significantly —  monthly futures and options turnover reached a record $1.1 Tn in March 2024 from approximately $27 Bn in March 2019.

These higher taxes, coupled with higher STCG and LTCG taxes, are likely to cool down some of the F&O frenzy in the derivatives market, particularly for traders with low volumes.  If the idea was to cool down the activity in the markets, this might just do the trick,” Zerodha’s Kamath said in a post on X.

Budget 2024 Boost For Spacetech Startups

• INR 1,000 Cr government-backed venture fund for space economy

Following the privatisation of the space sector in 2020, and after introducing 100% foreign direct investments (FDI) for spacetech in February this year, Sitharaman brought in more good news for the space economy.

While the contours of the dedicated space economy fund will become clearer in the next few months, we know that the focus has been on indigenous manufacturing and creating application testbeds for spacetech startups.

While the FDI route is essential for scaled-up startups and for growth funding, the government-backed fund is likely to be a big boost for startups in seed and pre-seed stage.

Besides this, exempting and lowering customs duty on minerals such as lithium, copper, cobalt and rare earth elements is seen as a critical boost for sectors such as nuclear and renewable energy as well as space, defence and telecommunications, which have overlaps in terms of the component value chain.

Fuelling Manufacturing Growth

• Customs duty on mobile phones, mobile printed circuit board assembly (PCBA) and chargers reduced to 15%
• Ecommerce exports hub to be set up for MSMEs in manufacturing space
• Customs duties on 25 critical minerals, oxygen-free copper and parts for manufacturing of connectors
• 50% increase in customs duty on importing PCBs for telecom equipment

As expected, Sitharaman’s Union Budget 2024-25 ushered in the next phase of the central government’s major focus on manufacturing.

A host of raw materials and inputs have seen a reduction in basic customs duty (BCD), which is expected to drive domestic manufacturing and is seen as a hope of reducing the cost of finished goods. These savings are likely to be passed on to consumers in key areas such as smartphones and mobile devices, EV and smartphone batteries, and finished goods that are dependent on refining minerals and chemicals.

“A comprehensive review of the customs duty rate structure will also be carried out over the next six months to rationalise and simplify it for ease of trade, removal of duty inversion and reduction of disputes,” Sitharaman said in her budget speech.

While manufacturing costs are expected to go down, the changes are also likely to reduce disputes with the customs and imports authorities over raw materials. The customs duty exemptions are for 25 critical minerals, including cobalt, lithium, copper, germanium, and silicon, many of which are vital for electronics and battery manufacturing.

In addition, the relief through reduced customs duties on gold and silver (6% vs 15% previously) and platinum (6.4% from 15.5 %) will give a fillip to gems and jewellery industry as well as other sectors that leverage precious metals for manufacturing components, such as semiconductors and electronics manufacturing.

Credit Push For MSMEs

• Credit guarantee scheme for purchase of machinery and equipment without collateral
• Public sector banks will build their in-house capability to assess MSMEs for credit
• The limit of Mudra loans doubled to INR 20 Lakh for entrepreneurs
• Expanding TReDS trade invoicing platform to boost MSME working capital
• New SIDBI branches to serve major MSME clusters

The lower BCD on input and raw material will be critical to fuel large-scale manufacturing in electronics, space, clean energy, and other emerging industries. What did the Budget 2024-25 have in store for smaller businesses that are also looking to build India’s manufacturing capacity.

Firstly, the government plans to establish ecommerce export hubs in a public-private partnership (PPP) model to empower MSMEs and traditional artisans to sell their products in international markets.

These hubs will operate under a seamless regulatory and logistic framework, offering a comprehensive range of trade and export-related services under one roof, significantly enhancing the ease of doing business for small and medium enterprises (SMEs).

The ecommerce export hubs will be backed by over 100 food quality and safety testing labs certified by the National Accreditation Board for Testing and Calibration Laboratories (NABL), which are likely a measure to boost MSME food exports.

Further, the limit of loans provided under the Pradhan Mantri MUDRA Yojana (PMMY) will be increased to INR 20 Lakh from the existing INR 10 Lakh. The loan limit will be increased for entrepreneurs who had applied, availed and repaid MUDRA loans under the TARUN category previously.

Expanding MSME Credit Guarantees

Sitharaman also announced a credit guarantee scheme for MSMEs in the manufacturing sector. The government has provided MSMEs in the manufacturing sector with a guarantee cover of up to INR 100 Cr. “The scheme will operate on pooling of credit risks of such MSMEs, a separately constituted self-financing guarantee fund will provide to each applicant guarantee cover up to INR 100 Cr, while the loan amount may be larger,” the finance minister said.

The FM added that national banks will be tasked with creating credit assessment models for MSMEs based on a digital footprint score, instead of relying on external assessment, which rely on asset and turnover criteria.

The credit guarantee programmes should ideally allow MSMEs to secure loans from registered entities without providing collateral or a third-party guarantee. Additionally, term loans will be made available to facilitate the purchase of machinery, further supporting the growth and operational efficiency of micro, small and medium enterprises.

The post [Key Takeaways] Decoding The Budget For Startups: Mixed Bag For Taxes; Big Boost For Manufacturing appeared first on Inc42 Media.

In the build-up to the Union Budget 2024-25, we have noted a lot of optimism among startup ecosystem stakeholders. For one, there’s a feeling that this budget will see heightened government spending for key areas such as foreign direct investments or FDI to drive economic growth.

We have already reported about how those catering to the consumer class have called for a focus on job creation through higher allocation for infrastructure creation and the manufacturing industry. These two areas are seen as pivotal for the Indian economic growth story, particularly as the focus has been on improving per capita income metrics by expanding the so-called middle class.

While on paper, focussing on infrastructure and manufacturing may seem obvious, it is not necessary for the Indian government to cater to this through government revenue and collections alone. The record $25 Bn (INR 2.1 Lakh Cr) surplus transfer from the Reserve Bank of India to the central government is certainly a great way to fund infrastructure spending. This gives finance minister Nirmala Sitharaman and her ministry more room to spend without expanding the national fiscal deficit.

Recent statistics from the RBI also highlight the pressing need to alleviate issues in the way of FDI in India. The country saw a significant 62% drop in FDI inflows in FY24, with the total FDI figure falling to $10.58 Bn.

India’s position fell from 8th in 2022 to 15th in 2023 in global FDI inflow rankings. Even though FDI inflow declined in 2022 as well by 10% compared to 2021, the total investment was still close to $49 Bn. In light of this, analysts have called for a sharper focus on policies and measures that will drive foreign direct investment in line with global investing themes such as ‘China+1’, cleantech and green energy, AI development as well as digital banking and financial inclusion.

Besides this, it is expected that the upcoming budget may relax FDI regulations for growth sectors such as defence, and agriculture, thereby attracting more investments and fuelling job creation.

Will Budget 2024 Fix FDI Blues?

In February’s interim budget, the finance ministry increased allocation by 33% for the PLI schemes related to manufacturing. But as per those in the manufacturing industry, sharper focus is needed across 14 key sectors that are linked to manufacturing.

So far, the government’s push has primarily been on electronics manufacturing, which has seen consumer tech giants such as Apple, Samsung and Google increase their manufacturing footprint in India through local partners.

As per the India Cellular and Electronics Association (ICEA) data, India’s electronics manufacturing output reached a record-breaking $115 Bn market in FY24, with $29.1 Bn in electronics exports, making electronics the fifth-largest export category from India.

With PLI schemes restricted to certain sectors of manufacturing, foreign investments — whether it is in capacity building or capex — are restricted to those sectors alone.

Besides smartphones and mobile devices, analysts have called for a big push on pharmaceuticals, automobiles, semiconductors, toys, textiles, apparel, and commercial aircraft. According to Kaushik Mudda, cofounder and CEO of deeptech startup Ethereal Machines, the PLI schemes need to be tailored such that the benefits can trickle down the manufacturing value chain, with component makers and those creating manufacturing tech also garnering foreign investments.

“While the budget announcements are awaited, I think the government’s preliminary steps are on the right track as it has covered the first layer to start with. But if it wants to achieve the scale it is looking at in a very short span of time, the government should start thinking a bit broader,” the CEO of Ethereal Machines added.

Fuelling China+One Movement

A day ahead of the Union Budget, the Economic Survey suggested that increased FDI inflows from investors looking to diversify away from China can be a big boost for India.

“China is India’s top import partner, and the trade deficit with China has been growing. As the US and Europe shift their immediate sourcing away from China, it is more effective to have Chinese companies invest in India and then export the products to these markets rather than importing from China, adding minimal value, and then re-exporting them,” the survey stated.

Will FDI Chase Green Manufacturing? 

Besides these expectations, those working in the green energy and cleantech space pointed at the disparity in the PLI schemes in the energy manufacturing sector.

For instance, a majority portion of the INR 19,744 Cr PLI budget for green hydrogen goes for the production of green hydrogen molecules and manufacturing of electrolysers at scale, and those who miss out are companies working in capacity building such as manufacturing efficiency, supply chain platforms and intellectual property-related models.

The current structure of PLIs in green energy manufacturing is in favour of importing existing technologies, rather than building up India’s capabilities in areas that are imports-reliant.

In this regard, one key expectation of those in the climate tech sector is introduction of green FDI through international carbon market mechanisms. This would not only attract capital for decarbonisation efforts but also put India among the leading nations for climate-related innovation.

The climate tech industry feels that the budget allocations over the years have failed to support the scaling up of renewable energy infrastructure. Reducing customs duties on imports for the solar energy industry, expanding green and climate finance through registered entities, and revising GST on renewable energy production and sources could be some signals to international investors to back Indian businesses.

A January 2024 report by the World Economic Forum and Bain & Company ranked India as the world’s third-largest economy in terms of energy requirements, with energy demand projected to increase by 35% by 2030. In 2022, India’s energy import bill totalled $185 Bn, which underscores the need to build green capacity to support domestic energy demand.

A Game Of Taxes, Subsidies And Exemptions

Ease of doing business has always been a hot topic in India. The policy measures over the past 10 years have certainly improved India’s position in this regard, but taxation remains the single biggest sore point for foreign investors in India.

As ever, the industry is eyeing proposals from the finance minister that will reduce the tax burden on companies and individuals, as well as more simplified compliance procedures to resolve tax-related issues.

These are considered to be vital to fuel private equity inflow into Indian startups as well as companies in hot sectors. The wide expectation is a reduction in corporate tax rates to align with global standards, making India a more attractive destination for foreign investors. An economist at Kotak Mahindra Bank said that while industry-wide tax cuts are unlikely, key sectors that desperately need FDI for growth and capacity building need to be given a longer rope.

For instance, the manufacturing industry believes that an extension of the sunset date for the 15% tax regime for new manufacturing entities by another fiscal year will prove to be a major factor pulling in FDI.

The current scheme allows for a 15% tax rate for manufacturing companies set up on or before March 31, 2024. Many believe that in addition to production-linked incentives in manufacturing (PLI), the favourable tax positions for new manufacturing companies will drive FDI in this space, which is interlinked with several other sectors.

Despite the relatively cushy position of the central government given high tax collections and the RBI dividend, economists and analysts caution against overenthusiasm on issues such as changes in the long-term capital gains exemption thresholds, or significant tax breaks for sectors such as healthcare, education and others.

On the other hand, tax rebates could be seen in investments in climate tech and green energy, but as expected there is no certainty on how this might be implemented by the government. “If tax incentives in climate tech necessitate fresh investments, this could make large-scale investments in conglomerates attractive, but it won’t exactly be a boon for MSMEs or startups. We’ll have to wait and see how the government looks to enable smaller businesses in this space as the focus is always on large-scale energy production,” said the Kotak economist quoted above.

As reported by Inc42 last week, Indian startup investors are looking forward to clarity on tax liabilities, prevent double taxation, and offer favourable tax treatment to entities redomiciling to India. The experiences of PhonePe, Groww and other startups has shown that reverse flipping isn’t without its pitfalls.

Archit Gupta, cofounder and CEO of fintech unicorn Clear, told Inc42 that advance rulings or certifications from tax authorities regarding the tax implications of redomiciling will provide certainty to startups and foreign investors.

The industry experts said that tax exemptions or reductions for strategic relocations, especially for startups in priority sectors could be a massive boost for FDI. The “Onshoring Indian Innovation to GIFT IFSC” report suggested a comprehensive scheme to help startups relocate to India in a tax-free manner, implementing parts of which could be the way forward.

Indian founders are hopeful that the upcoming budget will endorse the report, allowing flipped startups to redomicile with the lowest possible tax burden, reducing the tax burden for investors in India in the short and long run.

The post Union Budget 2024: How Will FM Nirmala Sitharaman Revive India’s FDI Fortunes? appeared first on Inc42 Media.