Indian Landscape For Venture Funding

Prof Thillai Rajan has been publishing the much-acclaimed annual reports on Indian Venture industry for

Each and every step in the formation of a company is a journey in itself. Receiving the incorporation certificate after incorporation, getting the first major external investment, either selling the business or listing in the stock exchanges are momentous milestones in the journey of the entrepreneur. Among the thousands of companies that get formed every year, only very few are able to go through the full cycle of founding to funding. For example, of the 1.26 million companies that get got founded between 2000 to 2017, less than 7000 companies were able to get Venture Capital (VC) funding. Only 2000 of the companies were able to provide an exit to their investors.

Venture Funding
VC funding is most prominently seen in large cities and in select sectors. Companies in bigger Tier 1 cities had a greater chance of getting venture funded. Of the 1.26 million companies registered, only 380,527 companies (about 30 percent) were in the top 8 cities, comprising Ahmedabad, Chennai, Mumbai, Bengaluru, Hyderabad, Kolkata, Delhi, and Pune.

Among the several sector categories, total companies registered in these sectors that normally attracts VC and PE investment was 274,571. Thus of the 1.26 million companies, only about 22 percent of the companies are in domains that would interest venture investors.

Figure 1 gives a perspective of the number of companies that have been formed in different sectors, and the number of companies that have received venture funding. If we take parallels to the physical universe, the number of companies formed is like the size of the sun, the venture funded companies are like the size of planets, and those that achieved exits are like the size of moons. Such is the difference in magnitude across the different stages, which indicates the scope for growth in venture capital funding in the country. It also indicates the need to provide more exits to attract more venture capital in the economy. The ratio of number of companies venture funded to number of companies formed is the highest for Software and Internet Services sector, and is the lowest for the Industrial Products category. Given the low odds of getting venture funding, if an entrepreneur is interested to attract venture capital, then he should form and develop the business in such a fashion so that that it can attract such risk capital.

Figure 2 gives a perspective of the number of companies that have been formed in the top cities, and the number of companies that have received venture funding. The trend is very similar to what was seen in Figure 1. The percentage of companies that have received venture funding as a proportion of total companies formed in each of the cities are as follows: Ahmedabad: 2.93 percent; Bengaluru: 21.68 percent; Chennai: 1.22 percent; Hyderabad: 4.67 percent; Kolkata: 0.14 percent; Mumbai: 1.87 percent; New Delhi: 0.83 percent; and Pune: 0.82 percent. The data clearly indicates why Bengaluru is considered as the "startup and venture capital" capital of India.

Figure 3 provides a proportional representation of the companies formed, funded by venture capital, and those that gave exits. The outer circle indicates the proportion of companies formed, the intermediate circle indicates the proportion of companies venture funded, and the inner most circle gives the proportion of exits in different sectors. While agriculture sector accounts for a large proportion of the companies formed, the proportion of them receiving venture funding or providing an exit is very low. On the other hand, while only a small proportion of companies formed are in Consumer Products and Services category, a significant proportion of those getting venture funded belong to this sector. Similar is the case with Health Tech sector. Thus it can be seen that while venture funds flows to some sectors, its availability is limited to many of the sectors to a variety of reasons. Thus entrepreneurs would do well to remember if the sector in which they found a venture falls in the rain shadow region of venture funding, they should actively look at other sources of funding.

Funded and Exits: Key differences
Another important aspect involves companies that have given an exit and those that have not. It is significant on all three parameters. Companies that provided an exit, on an average, had higher age as com-pared to those that had not provided an exit. This indicates that companies need to mature for the investors to get an exit. This is as expected. Comparing the average age shows that it takes approximately 3 years to exit from a venture. Next we compare the extent of staging between the two groups. Ventures that provided an exit had more rounds of funding as compared to those that have not or yet to give an exit. A possible explanation to this result is that staging increases the efficiency and thereby has a positive impact on performance, which results in exit. Number of investors is an indication of the level of syndication in the venture. The mean number of investors for companies that have provided an exit is significantly higher than the mean of the companies where there has been no exit.

This article tracks the contours of company formation, followed by venture funding, and finally exit to investors. Companies that could be a potential investment opportunity for VC form only about 22 percent of the companies that are founded. Within that segment, companies that get venture funding is only about 2.3 percent. This indicates that there is significant scope in the economy for expanding the footprint of venture investors. Sectors such as Software and Internet Services, FinTech and Payments, and Consumer Products and Services have features that would interest venture investors. Similarly, some cities like Bengaluru and Mumbai have a better ecosystem for venture funding.

However, once the company gets venture funding, the sector or location advantages tend to disappear. The performance of the venture largely determines whether they are able to reach the next milestone of exit. To an extent, this indicates the screening and selection efficiency of the venture investors. Staging and syndication seems to have a positive impact on exit. Funding the venture by multiple tranches instead of a single round and having an optimum number of investors can enhance the probability of achieving an exit.