Smaller Companies Finance Startups While Incumbents Drag Their Feet
Large companies have refrained from entering the funding space or have focused on making strategic investments.
They should not become rent-seekers, but must remain actively involved in risk-taking activities and boost the country’s startup ecosystem.
Before venture capitalists (VC) and private-equity firms recognised India’s huge investment potential, home-grown companies and angel investors were funding startup ideas. Relatively small technology companies have been at the forefront of startups funding in India.
Back in 2008, Info Edge, a pioneer in the Internet space, was probably the only listed company ready to take on the risk of funding early-stage startups. These startups hadn’t generated revenues, let alone profits.
For instance, Info Edge’s annual report for the financial year 2009 shows that it had invested in ETechAces Marketing and Consulting Private Limited. ETechAces is the parent company of the hugely successful finance portals, Policy Bazaar and Paisa Bazaar.
Similarly, in the same year, it had also invested in Applect Learning System, the company that operates Merit Nation. It was investing in fintech and edutech startups, before they became buzzwords.
InfoEdge knew the nuances of running Internet-based businesses — an invaluable asset for the startups it was funding. The company was using the surplus funds generated from its flagship product, Naukri.com, to fund its investments in startups. These were the times when entrepreneurs or startups were not really a part of mainstream narratives. However, given the current optimism around startups,Info Edge has raised capital and dedicated a fund to identifying growth opportunities in India.
Similarly, IndiaMart Intermesh Limited, the parent company of IndiaMART has followed in the steps of Info Edge. The company generates large volumes of surplus cash as customers prepay for their subscription to IndiaMART’s plans. The surplus funds are used to finance the investments in startup companies. These companies receive funding and guidance from IndiaMART, while IndiaMART leverages some of their products to make its offerings better.
Recently, Dream Sports, the owner of Dream11, launched a fund dedicated to funding sports, gaming and fitness technology companies.
For all three companies, venture funding takes up a significant part of their finances and operational resources. However, larger companies that have a huge deployable cash base have stayed away from the startup space for a long time. They awoke from their slumber a few years ago when foreign investors started pouring in. While large conglomerates began their own corporate venture funds, the amounts were often paltry in comparison to their balance sheet sizes.
The largest technology companies in India — Infosys, HCL, Wipro and Tata Consultancy Services (TCS) have combined idle liquid assets (cash on hand and current investments) of more than Rs 70,000 crore on their balance sheets.
Infosys had launched an Innovation Fund in 2015, but the investments were focused outside India. Out of the seven investments made, only two were based in India. The fund has remained virtually idle after the departure of the ex-CEO Vishal Sikka. TCS had started an incubation programme which has received lukewarm response.
Similarly, HCL has never indicated any plans to begin funding startups. Wipro is probably the only large technology company that actively invests in the startup space through its investment arm, Wipro Ventures. However, the investments remain focused on overseas startups.
Similarly, other large companies have refrained from entering the funding space or have focused on making strategic investments.
Most Indian companies view startups as strategic investments rather than financial investments capable of creating wealth. Another issue is the very nature of the venture capital business. For most venture investment funds, returns follow a power law. Out of a portfolio of a hundred investee companies, probably one goes on to become a great investment, while a few others perform well, and the remaining companies struggle to survive.
With larger corporates reluctant to fund startups, the startups are forced to turn to foreign investors, resulting in a high proportion of overseas funding in Indian startup ecosystem. Foreign investors own a majority stake in unicorns like Flipkart, Paytm, and several others.
Recently, Commerce and Industry Minister Piyush Goyal highlighted the importance of domestic funding for Indian startups. Despite these negatives, companies like Info Edge, IndiaMART and individual investors continue to risk proprietary capital and focus on helping startups grow.
Corporate venture capital can help Indian startups grow as well as give them access to huge distribution networks and a large established customer base. Well-established firms should not become rent-seekers, but must remain actively involved in risk-taking activities and boost the country’s startup ecosystem.
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