Exits are Coming

July 19

Happy Monday folks, we're more than halfway through 2021 and we're just weeks away from Zomato's debut on the Indian public market- a monumental event for the Indian ecosystem. Since the last newsletter, we've also seen a couple other Indian companies file their Draft Red Herring Prospectus (DRHP), a precursor to listing publicly in the country, including the likes of Paytm and fellow fintech company Mobikwik.

There were also several major funding rounds (where companies raised over $100M) and dozens more smaller rounds, announced and unannounced, that we won't be covering today. The activity and FOMO in the ecosystem is at an all time high and we will touch on that as well in today's main story.


Vedica and I are also excited to announce that we're syndicating an investment into a company that we're very excited about, and have known the founders for several years. The founders already have an oversubscribed round backed by well known operators in India and the US but saved us and the Keeping Up With India community a small allocation in the round. Please fill out the following form if you're interested (we promise it'll only take 2 minutes) and we’ll follow-up with you later this week.

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Exits are coming

Indian food delivery startup Zomato has filed for an Initial Public Offering and will be one of the few venture-backed tech companies to list in the public markets in the last decade. The only other public exits that the country has seen have been the B2B marketplace IndiaMART and gaming company Nazara Technologies but both have had quite different journeys than the prototypical Indian startup.

Zomato's debut on the public market, in a couple of weeks, will be a monumental event for the ecosystem that has been starved for public exits. The startup ecosystem in the country has grown leaps and bounds in the last decade- thousands of companies have raised capital from venture capitalists (domestic and international); investors have poured billions of dollars in fast-growing tech companies; Indian VC firms have scaled their fund sizes and firms from all over the globe have set-up shop (some left and some stayed). However, the ecosystem has missing a component of a successful ecosystem- exits. The few major exit events we have seen have largely been M&As by American (Walmart's acquisition of Flipkart) or Indian (Tata's acquisition of BigBasket) companies.

But why does India need exits? Venture firms investing in India have to eventually show that their investments in the country result in actual cash returns rather than just other investors marking up their investments. And while micro-funds and some seed funds can show those through secondaries or the few M&As, the larger and global funds need a steady pipeline of their investments returning capital- which points to IPOs. A couple years ago, Karthik Reddy (Managing Partner at Blume) penned this 3-part piece on the need for Indian companies to list publicly, and he makes a great point why Indian companies and firms need public exits- "no legendary Fund Vintage cycle is created without enough quality IPOs."

If India truly wants to be the next Silicon Valley, it needs to produce globally recognizable companies on the public market (whether in India or in the US). And the Zomato IPO is so important because it shows that after the tens of billions of dollars invested in the Indian ecosystem, a loss-making Indian company can successfully list in the public markets and deliver liquidity to the Limited Partners of firms investing in India. Some of Zomato's largest investors are InfoEdge (one of the few listed tech companies in India who have backed the likes of Zomato and Policybazaar), the legendary Sequoia Capital, Uber (through their divestment of Uber Eats India to Zomato), Chinese financial services company Ant Financial and several others including Tiger Global and Kora Capital.

The actual offering has already been been subscribed many times over and there has never been as much frenzy and demand for an IPO in India before. But if Zomato performs as well on listing day as all the frenzy around it, we could see several other companies join Paytm and Mobikwik in dropping their DRHP and accelerating their timelines for a public exit. And while the initial subscription has been successful, a majority of successful companies' value gets created after their IPO so I (as will millions of retail and institutional investors) will be looking to see how Zomato performs in the public market and under the quarterly scrutiny of analysts. While venture firms that who have supported these companies have tolerance and patience it is still to be seen how public market investors will react if these companies continue making losses. There is no doubting the enthusiasm for the upcoming IPOs, but the start-up ecosystem does also have a lot of "old economy" skeptics. We’d love nothing for these companies to prove their skeptics wrong, and will be following their public journeys closely.

While Zomato, Paytm and the likes are listing in India, we are also waiting for all the Indian SaaS companies incorporated in the US to drop their S-1s or go public through a SPAC as well. There are several large SaaS giants who seem to be in a position where they could go public soon (Freshworks, Druva to name a few), and Sequoia Capital India also hosted 20 portfolio companies and 15 SPACs for its inaugural SPACDay so maybe we see some listings out of that as well. What we have seen in the last 18-24 months have been seed rounds getting larger and larger, Tiger and other global investors pre-empting and leading Series A and growth rounds, and now finally Indian companies are going public delivering cash-on-cash returns for their investors. If Reliance put India on the map in 2020 while fundraising for Jio, the Indian unicorns and IPOs have increased the attention on the country in 2021.

But what does this mean for the rest of the ecosystem as a whole? Well firstly, everyone who remembers the 2016 down cycle is probably breathing a sigh of relief given that we will see several actual public exits in all likelihood. But it also means that there will be an increase of capital and attention flowing to the ecosystem. The Zomato and Paytm (hopefully) exits will have shown local and global investors that $10B - $30B outcomes can be creating in this growing economy; and there is a path for those companies to go public. Employees at these newly listed companies will also have a chance to cash in on this liquidity and will further either start companies themselves or become angel investors in other newly created startups. A recycling of capital and talent is imminent but early stage venture is about to get even more competitive.

I was also talking to a couple of early stage fund managers this week and the competition for allocation in hot deals and companies is getting insane. Global hedge funds are moving down the stack to leading As, which is resulting in larger firms i.e Sequoia (their venture fund not Surge) and Lightspeed leading pre-seeds and seeds which is resulting in other early stage funds and micro VCs not being able to hit ownership targets in these rounds. On the other hand, founders who angel invest and scout are deploying more capital squeezing out institutional investors from rounds. The pace at which rounds are getting oversubscribed and closing has also been increasing at a scary pace, which means firms who cannot act fast or don't develop relationships with companies early enough will have a much harder time deploying their capital and get allocations in the best companies. It has never been a better time for founders (though mostly pedigreed and male) to raise capital for ideas, but it has also never been harder for firms to deploy capital from their funds. There has been a clear shift in the power dynamic between founders and VCs. We think the IPOs of Zomato and Paytm will continue to push the balance towards the founders.