Why traders stay optimistic about India’s start-up outlook for 2022

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A restaurant will advertise the use of the Paytm digital payment system on Saturday, July 17, 2021, in Mumbai, India.

Dhiraj Singh | Bloomberg | Getty Images

India’s tech startups will continue to attract capital from 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 as several high-profile companies made their stock market debuts. These include the Zomato grocery delivery app, payment giant Paytm, and the parent company of online insurance aggregator Policybazaar. Other start-ups are in the IPO pipeline, including ride hailing company Ola and Indian hotel chain Oyo.

Indian technology start-ups also raised record amounts of capital from private equity and venture capital firms. These investors made $ 28.2 billion in technology investments in 779 transactions this year, according to Asian private equity and venture capital intelligence provider AVCJ. That was a 200% jump in capital compared to the $ 9.4 billion invested last year.

Rajan Anandan, Managing Director of Sequoia Capital India, told CNBC this month that the venture firm is “very optimistic” about India’s technology ecosystem and its ability to create long-term value for stakeholders.

“The success of companies on national and international stock exchanges has definitely generated increased interest from investors around the world,” said Anandan. At Sequoia Capital India, eight portfolio companies made their public debuts in 2021, he added.

“It confirmed the fact that large companies can be built from this region – and create significant shareholder value. And with several promising IPOs coming up next year, we expect that trend to continue, ”said Anandan.

Investor appetite for new tech IPOs

The uptake of some of India’s leading technology IPOs has varied among investors. While Zomato stock made a stellar debut, up roughly 5.44% since its first day of trading on July 23, Paytm is down more than 13% from its November 18 debut.

Another digital payments company, Mobikwik, has postponed its IPO after Paytm’s disappointing launch. Because of this, fintech companies and their ability to generate revenue and ultimately profits are increasingly being scrutinized, according to local media reports.

Still, according to Nikhil Kamath, co-founder of Indian brokerage platform Zerodha, there is likely to be an appetite for future IPOs. The bigger question, however, would be how these companies would fare in the longer term, he told CNBC.

Kamath pointed out that many of the tech startups, including some that have gone public, are still overvalued.

“The majority of them [companies] are not profitable and don’t look like they will be in the next four or five years so it’s a bit difficult to justify the valuation, “he said.

When looking at a start-up, investors should separate the company’s valuation – which is driven by the public market – and its fundamentals, said 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 that early-growth and early-growth investors have made big bucks in India over the past two years. That’s in part because of exits, he said, which enabled them to pump additional capital into India’s tech ecosystem and help startups grow.

An exit occurs when a founder either sells his start-up to a larger company or goes public through an IPO.

Zomato’s grocery delivery partner in Kolkata, India.

Debarchan Chatterjee | NurPhoto | Getty Images

“Over the past 18 to 24 months you have seen the number of IPOs, companies in the IPO pipeline, the way companies have traded and come out in our region as one of the most attractive regions to invest in growth” said Naik.

What’s next?

While startups are expected to continue to attract capital in 2022, the pace of fundraising and growth could slow comparatively.

Because according to Amit Anand, founding partner at Jungle Ventures, there was a lot of catching up to do this year for the financing rounds planned for 2020 but postponed due to the Covid-19 pandemic.

“If I take all the fundraising drives that have happened this year and maybe spread that over between 2020 and 2021, the picture will be different,” he told CNBC.

The picture still shows India as a growth market, but indicates steady, longer-term year-on-year growth rather than a one-off increase, Anand said. For international investors such as Singapore-based Jungle Ventures, India is a strategic market and bets are generally long-term.

“This is all thanks to the local entrepreneurs and investor base who built the ecosystem to attract this type of global capital because the growth rates are there and the businesses are ripe.” [is] there, “said Anand.

Sequoia’s Anandan added that the unprecedented liquidity due to the ultra-accommodative monetary policies of global central banks helped take fundraising levels to new heights in 2021.

India’s market is also deepening and the quality of talent is improving, he said. The pandemic has accelerated the adoption of technology, causing many startups to grow much faster than before – and as long as they are able to show greatness, funds will continue to pour in, Anandan said.

Still, there are some barriers that startups face, both in raising funds and in entering public markets. These include dealing with a slow economic recovery in India and inflationary pressures, as well as normalizing monetary policy through global central banks such as the US Federal Reserve.

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