The startup story is particularly intriguing for one of its characteristics – the fact that it yields morals at frequent intervals, rather than at the very end as in conventional stories. Of course, one may make the argument that it’s a story which is not only unfinished, but also never finished – implying that its readers must elicit morals habitually from time to time. We thought of taking this opportunity to specifically explore three themes of this story – first, the manner in which startups have challenged convention globally; second, an explication of the funding flows in this context; and third, recent developments that lend credence to the value created by startups, with particular reference to the Indian landscape.
Undoubtedly, one of the foremost character traits of a startup is to engender creative destruction – by pointing to a large enough opportunity for a small enough enterprise to go for the kill. A reliable method to assess such creative destruction is plausibly to analyze the interplay between the ‘developed industry’ and ‘emerging industry’ in various sectors. Take the automobile sector for instance. The Ford Motor Company (which produced several models of cars christened with letters between “A” and “I” and beyond a century ago) has recently invested $1 billion in a joint venture with Argo AI, a Pittsburgh-based machine learning startup. It is noteworthy that the 113-year-old auto pioneer is entrusting its largest investment in automated technology yet to a few-months-young startup! Their collaborative goal of commercializing fully self-driving cars over the next 5 years also confirms to us that the ride together isn’t a short distance affair. Neither is this a one-off: last year, another automotive behemoth, General Motors, sought a lead in the race by acquiring self-driving startup Cruise for $1 billion. Such developments have been afoot on other tracks of the automotive race as well. Three deals have been consummated over the recent past in the on-demand ride sharing arena: Toyota – Uber, General Motors – Lyft, and Apple – Didi Chuxing.
The financial services sector also features a rich repository of such partnerships. In a bid to challenge ApplePay, JP Morgan struck a deal with LevelUp, a payments startup, to bolster ChasePay (its mobile payments app). ANZ (one of the Big-4 Australian banks) recently walked in similar shoes by launching BladePay, a mobile payments solution for Australian businesses, in partnership with South African startup ThumbzUp. In yet another move, Goldman Sachs and JP Morgan invested in Axoni, a startup focused on distributed ledger technology (DLT), more popularly dubbed ‘blockchain’. Unlike outsourcing, which is primarily employed as a cost saving tactic for non-core / low-value functions in organizations, these moves fall in a strikingly dissimilar ambit as they relate to product or market strategy in core / high-value areas going forward.
Let’s now turn our attention to the funding flows in the startup ecosystem. In the United States, venture capital investments in 2016 were pegged at nearly $70 billion, while capital raised via IPOs in the same period was less than a third of this figure at roughly $20 billion. If the United States is to be considered the world’s bellwether startup ecosystem, several other geographies may see higher doses of fresh capital being deployed in the early stage private markets viz-a-viz the public markets. India itself has seen a narrowing of this gap – 2016 ended with $3.8 billion in the form of IPOs as against $3.3 billion in terms of venture capital investments. The supply of sizeable chunks of investment dollars into the early stage private markets coupled with the demand for these investment dollars from promising early stage ventures is a harbinger of a key trend: high quality private companies have greater access to patient capital, which as a corollary implies that patient capital will have to access a segment of growth opportunities shifting from the public markets to the private markets.
Our third theme for today is to exemplify the value creation by startups, especially in 1Crowd’s land of investment, India. To begin with, the interest of listed players in the startup space has been particularly encouraging. Titan (India’s largest jewellery and watch retailer) acquired a 62% majority stake in CaratLane (a leading player in the online jewellery industry) at a valuation of nearly USD 90 million in July 2016. Talwalkars (India’s largest fitness chain) acquired a 19% minority stake in GymTrekker (online fitness and health discovery platform) in November 2015. The common thread in these transactions is the innate ambition of agile larger players with well-entrenched businesses to brace for a new paradigm of customer acquisition and thereby inorganically grow their market reach. And one of the foremost ways they seek to achieve this is by cherry picking successful startups which represent complementary or adjacent plays. It is interesting to note that businesses of this vintage (Titan has been sparkling for over 3 decades and Talwalkars has been healthy for over 8 decades!) are actively sensing long term commercial merit in these deals.
Such activity has been witnessed in various pockets of the economy. Peer to peer payments startup Chillr was one of the first of its kind. Chillr has not only partnered with a dozen banks (including the country’s most valued HDFC Bank), but also planned to expand its coverage for rolling out UPI-based payments across P2P and merchant transactions. Even in the auto arena, India has seen its share of synergistic deals inked – such as the ones between Mahindra and Ola as well as Tata and Uber. The media world is no less active. Times Internet Limited, the digital business arm of India’s largest media group has already completed nearly a dozen acquisitions in the past couple of years. As part of its strategy going forward, a dedicated M&A fund will be used to consummate an estimated three acquisitions annually (in addition to acqui-hires) as a sustained effort to augment monetization opportunities through its massive user base.
As keen stakeholders in this ecosystem, the progress and promise is evident. And as participating investors in this market, the thrust consequently lies on what is often phrased as “capital allocation” in the financial lexicon. In other words, how does one ensure that capital chases the most meritorious opportunities – and further, how does one ensure that such capital is well shepherded over time. Investment teams and investment firms are in tireless and tenacious pursuit of the secret sauce for alchemy in these investment opportunities. We’ll look to address this facet in greater measure in a subsequent piece. In many ways, one can’t take away from this: the startup story is stronger than ever – around the world in general, and in India in particular. Relatively anemic growth in several segments of the old economy, coupled with appreciable developments in the startup arena, have created a climate that has rarely been significantly superior for startup and early stage investing.