Exclusive: Indian startups will survive the tech bubble, says Aranca's AVP
He clearly means to say that even though the tech bubble may be real, it is less likely to adversely impact the Indian market. It may slow down the growth considerably and raising capital which has become extremely easy for start-ups than ever may not continue to be so. Even then, we need not worry as most Indian startups (that focus largely on local innovations) are in a very early stage and the bigger ones are backed by investors with deep pockets who can steer through high risk situations.
“The bubble is the buzz around the valuation and valuations are dependent on who invests and in what context valuation is seen. Valuations in the VC world have a very different meaning. There are a lot of terms and conditions that go in funding termsheets. We interpret it in simplistic manner. So say, a VC invests Rs 100 million in a company at a certain stake and he values the company at 9 billion, it doesn’t mean the fundamental value of the company stands at Rs 9 billion. It doesn’t matter to investors because they have a downside protection always. Beyond actual money, the valuation is implied valuation. When it is corrected, it erodes the paper wealth of the founders or, to certain extent of employees, who have the common stock and not the preferred stock,” Bharat explains.
VCs on the other hand have preferred stock that is more like a debt-like instrument. So what they are investing in is more like a debt-like instrument rather than pure play equity which is at the same risk as the founder’s common stock. The attraction only is that it comes with additional rights that either protects the VC or helps increase the value of investment (at the expense of common stock holders). So for example VCs usually ask for a liquidation preference, so that if the company gets sold they get paid before any common stock holders.
“Moreover, there's lot of non-VC money that is also flowing into these companies that increases the valuation. Significant funding these days are also coming not only from financial investors but corporate too, let’s not forget that. So, I don’t think the bubble is going to hurt as much as we have seen in the past,” says Bharat.
In view of the fact that a lot of venture capitalists seeing India positively in terms of the size of market, funding is much more easily available now. Apart from Bangalore, there are lot of startup hubs coming up in the country. In fact, the start-up era in India is booming but to be able to build an ecosystem like that in the Silicon valley and attract more investments, the government plays a key role and it needs to bring clarity on regulations, according to Bharat.
“The regulatory angle comes into picture once you grown to a considerable size and you want to raise capital apart from venture capital. In general, the ease of business can improve when there is more clarity in regulation and the speed with which the government can address stumbleblocks. They have been moving in that direction but if you want India to become an innovation hub, you need to react fast and think ahead for investments to get attracted,” he says.
As for the performance of startups, Indian e-commerce companies, Bharat says, have got it right as websites like Flipkart and Snapdeal are increasingly investing in technology. However, most of the businesses, he says, are internet driven and in terms of hard technology, India still has a long way to go.
About global customized research and analytics firm Aranca, Bharat says: In India, there's not much focus on stock options. As the portfolio of India grows and starts seeing valuations seriously, Aranca plans to make a mark using its knowledge and experience of working in the US market. It has already has marquee clients here. The company’s valuation opinions assist clients in complying with tax regulations and financial reporting standards, and executing transactions, including mergers and acquisitions, fairness opinions for fiduciary duties and strategic planning.
Recently, Mark Shifrin, ASA, has joined as the Vice President of Valuation & Advisory Services. He has more than 16 years of valuation experience in providing services to publicly-held and privately-owned companies in manufacturing, distribution and IT, including internet, software and biotechnology industries. He will be helping Aranca meet an increasing demand for valuation services related to the diverse transaction and reporting needs of start-up, growth-stage and well-established private companies and private equity firms, including in India.
"Aranca’s differentiation is built around strong credentials and deep experience in business valuation, coupled with complementary capabilities in investment research, market intelligence and intellectual property research. Aranca’s diverse global clientele presents significant untapped growth opportunity for the valuation practice," Shifrin said.
"This is an exciting time for the firm as it expands its role in the U.S., and I look forward to helping Aranca clients understand and successfully navigate their competitive business environments."
(Image credit: Economic Times)
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