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Why Flipkart Sale Needed Walmart: Startup India Fails To Stand Up On Its Own

Journalist, Inc42 Media
May 11, 2018 2:04 PM 3 min read
Editorial

US retail giant Walmart wins a $16bn bid to acquire 77% of Flipkart, thereby culminating with it the largest ever cross-border M&A transaction in India. Tiger Global and SoftBank, major investors in the Indian e-commerce company, are expected to exit. Both still hold significant stakes in Ola and Snapdeal. Ola also has the backing of Chinese Investment Company Tencent, much like its payments compatriot Paytm, majorly owned by Chinese internet major Alibaba. Alibaba’s affiliate company Ant Financial recently invested $200m into Zomato.


Why Flipkart Sale Needed Walmart: Startup India Fails To Stand Up On Its Own

 

Indian start-ups are dependent on foreign capital. Period.

 

Over 1,000 Indian tech startups emerged in 2017, making us the third largest startup ecosystem in the World as per a NASSCOM report. Startup India and Digital India have provided a much-needed boost, but domestic capital has been found to be lacking, if not absent.

 

Why Foreign First?

 

As per estimates, almost 90% of funds that flow into Indian venture capital (VC) and private equity (PE) are of a foreign origin. This figure was 98% about five years ago. Domestic investment has been slow to pick up. It would be naïve to assume a lack of interest. Domestic share of investment in start-ups has only gone up with a lock-down in deployed capital towards the corporate sector courtesy our banking system’s twin balance sheet conundrum. However, fund sizes are comparatively small, and appetite is limited to $100m, almost negligible vs. $100bn+ funds created by players such as SoftBank. Naturally, a smaller fund size means a reduced risk appetite. This results in domestic players being more conservative, following the curve instead of beating it. Sky-high valuations, often driven by interlopers, make them uncomfortable. The recent acquisition war between Walmart and Amazon to buy Flipkart at an eye-watering $20bn valuation very early ruled out the possibility of any domestic interest.

 

Foreign VCs also bring a solid brand, an international network, sector knowledge, and higher valuations! A lower cost of capital and larger fund sizes tones down their return expectations and payback periods. Easier terms to deploy invested capital combined with reduced interference in decision-making act as a sweetener.


Why Flipkart Sale Needed Walmart: Startup India Fails To Stand Up On Its Own

Government Needs to Share the Risk!

 

The government needs to upgrade its role from not only being an enabler but a risk sharer. As per a TiE report, only a small proportion of startups get funded. Considering the market lacks domestic capital, and foreign investments come only during growth phase, nascent ventures face a crunch.

 

Globally, sovereign wealth funds and pension funds are active startup investors. India’s public-sector managed pools such as Life Insurance Corporation of India (LIC) and Employees’ Provident Fund (EPF) in contrast are quite conservative. Removing restrictions and releasing this liquidity is an idea worth considering.

 

The government announced a SIDBI headed INR10,000cr Fund of Funds plan for startups. This was launched to motivate Alternative Investment Funds (AIFs) float startup-oriented schemes. The disbursement has remained sluggish making the initiative lack effect. This has been a pattern across state funds created to support startups. There is a dire need to cut down bureaucratic hurdles.

 

If one digs deep into this problem, the over-cautious attitude of bureaucrats sitting over state funds is not because of traditional red-tape but for the excessive fear of being seen in wrong light if the investment goes south. The government, therefore, needs to ensure a much larger participation of private professionals in making swift decisions to ensure efficiency of such policy initiatives. 

 

Listing in India has remained another roadblock faced by the startup community in accessing market capital. Most companies prefer listing abroad than to go through complex procedures in India. Government and SEBI must come together to simplify the listing process to have smoother access to the capital markets. Government can always amend tax laws to incentivize venture capital investments, especially with imposition of rules like angel tax causing tax terrorism!

 

There is no doubt that the Indian startup ecosystem requires much more domestic capital infusion. If the government is willing to take a step forward to become a risk sharer and successfully mobilize confidence from the private sector, there is nothing that can stop the Indian startup ecosystem from becoming the brightest star in the global entrepreneurial environment.