India Venture Capital and Private Equity Report 2016
Indian Institute of Technology Madras, publishes the 8th Annual Report on Indian Venture Capital and Private Equity on Start-ups, “Inspiration and Momentum for the Gladiators”.
IIT Madras has been publishing an annual report on the Indian Venture Capital and Private Equity industry since 2009. The 8th report in the series was released today. The Indian start-up landscape has also dramatically changed in the last few years. Today, India features in the top three countries globally in terms of the number of start-ups. Consequently, there is also a significant policy focus in creating a supportive policy framework to encourage Start-ups. The 2016 report focuses on the trends in Start-ups and Start-up ecosystem in the country. The report was released at TiECON 2016, the annual entrepreneurship conference of TiE Chennai today. Prof. Bhaskar Ramamurthi, Director, IIT Madras said that, “This report is the eighth in the series of India Venture Capital and Private Equity Reports from IIT Madras. Appropriately, the latest report focuses on Start-ups. Start-ups have an important role to play in the modern innovation economy. The national government has recognized this and start-ups have emerged as a focus area for policy making now. This report provides an interesting commentary on the trends in start-ups and the start-up eco-system of our country since 2005. The findings of the report would help the start-up founders, policy makers, and investors in making informed decisions.”
Anup Bagchi, MD & CEO of ICICI Securities Limited was the Chairman of the ten member Editorial Advisory Review Board comprising distinguished members from the industry. He said that, “Reflecting the trends in economy this year we have focussed on start-ups in the 2016 India Venture Capital and Private Equity report. The 8th report in the series continues to be path breaking in thought leadership and carries forward the legacy of rigour in understanding and furthering our ecosystems.”
Releasing the report, R. Narayanan, President of TiE Chennai said that, “TIE Chennai is committed to the fostering of entrepreneurship in Tamilnadu. We are privileged to be associated with a strong research and academic institution such as IIT Madras. The growing presence of the investing community in and around Chennai is encouraging. We hope to continue to be associated with this annual edition every year." Mr. Lakshmi Narayanan, Vice Chairman of Cognizant and senior charter member of TiE Chennai said that, “All ideas are born equal, some of which are made great by the Entreprenuers. In the spirit of making investors chase entrepreneurs, we have come a long way as reflected by the steady and significant reduction in the average age to receive Angel funding. This report will help investors and entrepreneurs get closer than ever to give every entrepreneur and idea a fair chance.”
Thillai Rajan, Professor, Department of Management Studies, has been the Editor and co-author of the publication since its inception. He said that “The 2016 report focuses on the topical theme of Start-ups. The Indian start-up landscape has been very vibrant in recent years. The total venture investment in start-ups during the period 2005-15 is estimated at ₹1,11,700 crores. The average annual growth rate in investment flow during the period 2005-15 is about 42 percent. Between the years 2005-15, more than 10,000 start-ups have received funding. The average annual growth in the number of start-ups that have been funded for the period 2005-15 has been 16 percent. The average age at which the start-ups get angel funding has consistently decreased with time, from 4.77 years in 2008 to 0.54 years in 2015.”
Key findings of the publication include:
Pivotal role of universities: About 56 percent of the incubators are located in universities, indicating the important role played by universities in supporting entrepreneurship and start-ups. One third of the incubators are located in private universities. Incubators in universities supported 58 percent of the total incubatees being supported in different incubators. In addition to the traditional teaching, research, and industrial collaborations, universities are increasing playing a very important role in creating ventures.
Sector focus: Technology sector is supported by the largest number of incubators. After technology, the healthcare sector occupies the second position in terms of the number of the incubators supporting it. Telecommunications, industrials, and consumer goods come close, in terms of the third spot. The number of incubators supporting the other sectors are very limited. Incubation is not seen as the preferred approach in commercializing innovations such as in utilities or in the oil and gas sector.
Growth in incubator presence: More than 50 percent of the incubators were set up in the last five years. While the number of incubators in different types of cities were more or less equal till 2010, there has been a dramatic increase in the number of incubators in Tier 1 cities after 2010.
Incubation thesis varies between incubators: Average number of incubatees supported in the different type of incubators vary widely. While the average number of incubatees is around 36 in universities, it is only 13 in the case of private non-universities. This indicates that different type of incubators could have different investment thesis. Independent private sector incubators without any university affiliation might have more stringent criteria because the financial sustainability of the incubators could depend on the success of the incubatees. On the other hand, incubators supported by the government institutions could have the primary objective of encouraging start-ups rather than just financial success, and thus they are prepared to support more number of incubatees.
While incubators are present across different locations in the country, accelerators are essentially an urban phenomenon: Except for a couple, virtually almost all of the accelerators are located in the main cities – Chennai, Bengaluru, Hyderabad, Mumbai, Ahmedabad, and New Delhi. The highest number of accelerators are found in Bengaluru, followed by the NCR region and Mumbai.
Scale of the accelerator programs: In our sample, 17 accelerators have supported a total number of 1816 start-ups. Though some of the accelerators like 500 start-ups, Kyron, TiE Bootcamp have been associated with a large start-ups, in general, accelerators are able to guide more number of start-ups as compared to that of incubators.
Angel investments in Tier 1 and 2 cities: Companies in Tier 1 cities are getting funded earlier and obtaining larger amounts of funding. Average deal sizes for companies in Tier 1 cities are about 62 percent higher than that of deals in Tier 2 cities. Investment rounds are more than 40 percent higher in Tier 1 cities as compared to that of Tier 2 cities.
Growth in angel investments: Angel deals have shown an annual average growth rate of 124 percent during the period 2008 – 15. The estimated investment amount through angel deals has grown at an annual growth rate of 205 percent during 2008-15. The number of angel investors also has grown at an annual average of 107 percent during the above period. While the number of first time angel investors has grown at a rate of 98 percent, the growth rate of investors who are reinvesting has been 105 percent.
Age of start-ups at the time of receiving angel investment has consistently decreased: There has been a steady decrease in the average age of the start-up at the time of receiving angel investment from 4.77 years in 2008 to 0.54 years in 2015, indicating that age of the start-up at the time of investment has reduced by about 27 percent annually. However, the average investment amount has increased.
Profile of angel investors: Analysis of the angel investor sample indicated a good mix of experienced (i.e., who have made five investments or more) as well as new investors (i.e., who have made less than five investments). The proportion of the former was 48 percent while that of the latter was 52 percent, indicating that the mix of angel investors is well balanced. In terms of their professional background, senior executives from large corporations comprised the largest segment, accounting for more than half of the investors. Entrepreneurs comprise the second highest category, accounting for close to 40 percent of the investors. The traditionally wealthy, i.e., those engaged in family businesses account for less than 9 percent of the investor sample.
Location of angel investors: Analysis of registered angel investors in Lets Venture platform shows that 88 percent of those are from Tier 1 cities. The number of angels in Tier 2 and 3 cities are 11 percent and one percent respectively. Among the six tier 1 cities. Delhi (i.e., the National Capital region that comprises of adjacent cities to Delhi such as Gurgaon, Noida, and Okhla) has the largest number of angel investors, followed by Mumbai and Bangalore. Taken together, these 3 cities account for 88 percent of the total angel investors in Tier 1 cities. The remaining cities of Chennai, Hyderabad, and Kolkata account for only 12 percent of the total investors in Tier 1 cities.
The active as well as the occasional angel investors have a part to play in the growth of angel investing:Angels investors were classified into two separate quartiles based on the number of deals and the amount of investment. Based on the number of deals it was found that top quartile investors have a higher degree of sector concentration with most investments in technology whereas the bottom quartile investors exhibit a higher degree of diversity in terms of the number of deals in different sectors. Based on the investment amount, it was found that the active angels invest lower amounts per deal, but make more number of investments whereas occasional angels on an average invest higher amounts per deal. As a group, the aggregate investment made by occasional angels are also higher than that of active investors.
The rise of angel networks: A noteworthy development in the last few years has been the evolution of the angel networks. While many of the angel networks are organized around cities (such as The Chennai Angels, Mumbai Angels, and so on), there are other forms of networks as well. The annual growth rate of the number of investments by angel networks made during the 2009-15 period has been about 75 percent. In a span of 7 years, the number of networks have increased 20 times.
Average investment amounts made by angels have consistently increased: The average investment received from an angel round by a start-up has increased from ₹10.63 million in 2009 to ₹46.76 million in 2015 indicating an annual growth rate of 27 percent. The average investment made by an individual angel investor has increased from ₹2.16 million in 2009 to ₹16.95 million in 2015, indicating an annual growth rate of 34 percent. Individual investments made by angels in a networking platform are lower. For example, data from Lets Venture indicates that the average investment per investor was about ₹11 million. The number of investors is the highest for the average commitment amount of ₹500,000, followed by ₹1 million. Beyond that, there is a sharp fall in the number of investors, indicating that the sweet spot for investors in an angel networking platform is between ₹0.5 – 1 million.
Contours of start-up founding differ from that of SME’s: The geographical spread of SMEs and start-ups show interesting variations. Tamil Nadu and Gujarat has the highest number of SMEs, but they are not the top states in terms of venture funded start-ups. On the other hand, Karnataka and Maharashtra, which account for the highest number of venture funded start-ups do not occupy the top slot in terms of number of SMEs. This indicates that the ecosystem for development of SMEs and start-ups could be different.
Venture funding is concentrated in Tier1 cities: The 6 Tier 1 cities of India received the largest chunk of investment of ₹661.29 billion, accounting for about two-thirds of the angel and venture funding. Tier 2 cities received 31% of the total investment (about ₹306 billion) and start-ups in Tier 3 cities accounted for only ₹19.74 billion, which is about 2 percent of the total investment. There exists a big gulf in investment flow between start-ups in Tier 1 cities and the other two tiers.
Comparison of funded and non-funded start-ups
Maturity index of start-ups that have received funding are higher: Maturity index of start-ups were calculated based on the lifecycle stage of the start-up. The average maturity index of start-ups that have received funding was 3.54 whereas those that did not get any funding was 3.00. Start-ups that were a part of incubation or accelerators also had a higher maturity index (3.4) as compared to those that did not receive any incubation or acceleration support (3.0).
Incubators and accelerators can increase the probability of getting funding: In the overall sample, only 8.3 of the start-ups are successful in getting external funding. But among those who have been a part of an incubator or accelerator, 24 percent have been able to get external funding. Thus incubators and accelerators have been able to increase the chance of getting funded by about three times. Similarly, 5 percent of those who have been with an incubator or accelerator have been able to get funding on the LetsVenture platform, while the proportion of those getting funded on the platform for the overall sample is only 1.1 percent. Incubators and accelerators have thus been able to increase the chances of getting funded on the LetsVenture platform by five times.
Odds of success for getting funded continue to be low: In our estimate, for every 875 start-ups that get founded, only one is able to successfully raise 4 or more rounds of funding. Out of the total start-ups that get founded, about 6 percent take part in an accelerator or incubation program. 75 of the 875 are able to get first round of funding, out of which only 15 are able to get the second round of funding, and only 5 are able to secure the third round of funding.
The line of separation that distinguishes the funded and non-funded start-ups can often be very thin: The case study of Keiretsu Forum, Chennai Chapter, indicates that the average number of positives (or concerns) is just higher by a count of 2 (or lower by a count of 2) for the invested companies as compared to that of non-invested companies. Similarly, the average prior investment made by companies as seen from Chennai Angels is not very different between the invested and applicant companies (₹7.98 vs ₹6.88 million respectively). However, the case studies also provide various pointers on increasing the probability of success. The most common causes of rejection of proposals has been limited interest among the angel network members, low traction, and scalability issues. Data from Keiretsu Forum indicates that the strengths of the business model, the value proposition, and market size are significant factors that influence the investment decision. The count of concerns for companies that were not successful in receiving investment was considerably higher for the following parameters: business model, customer traction, margins and profitability and market size.
Approaching the funders through a reference can improve the odds of funding: Increasingly, investors are relying on developing a proprietary deal flow network. For one of the venture firms interviewed for this report, 37 percent of the deal flow was through personal contacts. In terms of the importance of references, the finding from The Chennai Angels case study provides an important perspective. Ninety two percent of the investments made by The Chennai Angels were sourced through or had a reference from angel investors or members of the angel network. None of the deals that were received directly without any reference were successful in getting funding.