- India's technology start-ups will continue to attract capital from both private and public markets next year as they grow and mature, investors told CNBC.
- There was a notable shift in the country's start-up environment in 2021, with several high-profile companies making their stock market debuts.
- Indian tech start-ups also raised a record amount of capital from private equity and venture capital firms.
India's technology start-ups will continue to attract capital from both private and public markets next year as they grow and mature, investors told CNBC.
There was a notable shift in the country's start-up environment in 2021, with several high-profile companies making their stock market debuts. These include food delivery app Zomato, payments giant Paytm and the parent company of online insurance aggregator Policybazaar. More start-ups are in the IPO pipeline, including ride-hailing company Ola and Indian hotel chain Oyo.
Indian tech start-ups also raised a record amount of capital from private equity and venture capital firms. Those investors pumped in $28.2 billion worth of tech investments this year across 779 deals, according to information provided by Asia private equity and venture capital intelligence provider, AVCJ. That marked a 200% jump in capital compared with the $9.4 billion invested last year.
Rajan Anandan, managing director at Sequoia Capital India, told CNBC this month that the venture firm is "very bullish" on India's technology ecosystem and its ability to generate long-term value for stakeholders.
"The success of companies in both domestic and international exchanges has definitely led to increased interest from investors across the world," Anandan said. Sequoia Capital India saw eight portfolio companies make their stock market debuts in 2021, he added.
"It has validated the fact that large companies can be built from this region — and create significant shareholder value. And with several promising IPOs lined up for next year, we expect this trend to continue," Anandan said.
Investor appetite for new tech IPOs
The reception of some of India's top tech IPOs has varied among investors. While Zomato shares made a stellar debut and are up around 5.44% from their first day of trading on July 23, Paytm is down more than 13% from its Nov. 18 debut.
Another digital payments company, Mobikwik, delayed its IPO following Paytm's disappointing start. As such, there has been growing scrutiny into fintech companies and their ability to generate revenue and eventually profits, local media reports said.
Still, there will likely be appetite for future IPOs, according to Nikhil Kamath, co-founder of Indian brokerage platform Zerodha. The bigger question, however, would be how those companies would fare in the longer term, he told CNBC.
Kamath pointed out that many of the tech start-ups, including some of those that have gone public, remain overvalued.
"Majority of these [companies] are not profitable and they don't look like they will be in the next four or five years, so, it's a bit hard to justify the valuation," he said.
When looking at a start-up, investors should separate the company's valuation — which is determined by the public market — and its fundamentals, according to Sandeep Naik, head of India and Southeast Asia at global investment firm General Atlantic.
Speaking to CNBC's "Street Signs Asia" earlier this month, Naik said early-stage and growth-stage investors have made a lot of money in India over the last two years. That's partly because of exits, he said, which allowed them to pump additional capital into India's tech ecosystem and help start-ups grow.
An exit happens when a founder either sells their start-up to a bigger company or takes it public through an IPO.
"The last 18 to 24 months, you have seen the number of IPOs that are happening, the companies in the IPO pipeline, the way companies have traded and they have come out, which gives you a great validation that the global capital markets are looking at our region as one of the most attractive regions to invest in growth," Naik said.
While start-ups are expected to continue attracting capital in 2022, the pace of fundraising and growth may slow down comparatively.
That's because there was a lot of pent-up demand this year around funding rounds that were scheduled to happen in 2020, but were postponed because of the Covid-19 pandemic, according to Amit Anand, founding partner at Jungle Ventures.
"If I take all the fundraisings that have happened this year and maybe spread that across 2020 and 2021, then the picture looks different," he told CNBC.
The picture still shows India as a growing market, but points to steady, longer-term year-on-year growth instead of a one-off spike, Anand explained. For international investors like Singapore-based Jungle Ventures, he said India is a strategic market and bets are generally made for the long run.
"This is all credit to the local entrepreneurs and the local investor base that has built the ecosystem to a point where it is able to attract that kind of global capital because the growth rates are there and the maturity of the businesses [is] there," Anand said.
Sequoia's Anandan added that unprecedented liquidity due to ultra-accommodative monetary policies from global central banks helped take fundraising levels in 2021 to new heights.
India's market is also getting deeper and the quality of talent is improving, he said. The pandemic accelerated tech adoption, which has resulted in many start-ups growing much faster than before — and as long as they're able to show scale, funds will continue to flow in, Anandan said.
Still, there are some headwinds that start-ups will have to navigate, both when raising funds and when entering public markets. That includes navigating a slow economic recovery in India and inflation pressure as well as policy normalization from global central banks like the U.S. Federal Reserve.