Large Indian startups explore corporate venture funding

In the last decade, the Indian startup ecosystem—the third largest in the world—has grown by leaps and bounds. So far this year, the country has seen two dozen new unicorns and at least two startups go public, while another five have already filed the papers to list their shares. In yet another sign of the Indian startup ecosystem maturing, large local startups have begun to set up corporate venture capital (CVC) funds to buy stakes in smaller companies.

Earlier this month, Dream Sports, a gaming unicorn backed by Tiger Global, launched a corporate venture fund with a corpus of USD 250 million to invest in startups across sports, gaming, and fitness. Similarly, in June, omnichannel eyewear retailer Lenskart constituted a USD 20 million fund to back product and technology startups across eyewear, eye-care, supply chain automation, and omnichannel retail.

These startups are strategically investing in firms that are building allied technologies or working in adjacent sectors to create an ecosystem of related services for inorganic growth.

Lenskart would collaborate with startups in relevant areas and co-create value, said Peyush Bansal, founder and CEO of Lenskart, while announcing the fund, adding that the company’s infrastructure “can help startups test innovative ideas and thus allow them to attract capital.”

 

In a recent interview with local media Economic Times, Harsh Jain, co-founder and CEO of Dream Sports, said, “the idea is to build an overall sports technology ecosystem and back a whole host of startups through this initiative.”

Pratip Mazumdar, co-founder and partner of Inflexor Ventures, said the trend of large startups forming their own venture fund shows their maturity. These CVCs, he said, “deepen the ecosystem to a great extent.”

“Companies cannot do everything themselves at all times. As they scale up, they become much more process-driven and may lack nimble footing,” said Mazumdar. Corporate venture investing allows scaled startups to be agile, and it opens up mergers and acquisitions opportunities that can add value to their overall larger portfolio, he added.

As such, bigger internet startups, which have raised hundreds of millions of dollars, are looking to supercharge growth through M&A. Setting up CVC is likely to help them with their M&A strategy going forward.

The trigger

Bigger startups investing in smaller companies isn’t new. But unlike earlier, constituting a CVC makes it a formal affair. This could be attributed to the fact that more than enough capital is available at a time when several local startups have scaled significantly and are eyeing public markets.

“While money is available, the number of potential opportunities [to grow by obtaining stakes in relevant startups] is much larger right now for larger startups to benefit their cause,” said Mazumdar. Furthermore, many of these companies are setting up processes and frameworks around it before they go to IPO, he added.

For instance, Dream Sports has a separate team for corporate development to execute its M&A strategy headed by a former venture capitalist Dev Bajaj. The gaming giant put together a team last year to diversify its offerings before it could even think about listing publicly. Establishing a CVC fits perfectly with its long-term plans.

“We want to go public as a sports-tech company. For that, we need to have a substantial portion of our business coming from non-fantasy sports,” Jain said in another interview earlier in March.

Interestingly, both Dream Sports and Lenskart reportedly turned profitable before they unveiled their venture funds. Jain has already made it clear that Dream Sports plans to reinvest its earnings to grow inorganically through its corporate venture fund.

The investors KrASIA spoke to believe that even if companies setting up a CVC are not profitable, they should at least have positive unit economics. They can divert a portion of the venture capital raised to their CVC.

“While the preference should be that startups become profitable before they start buying stakes in other companies, the way internet and technology startups are trying to shoot the stars, shareholders are okay with it as long as the unit economics is positive,” explained Mazumdar. “Because these strategic investments can improve the unit economics.”

However, Ankur Bansal, co-founder and director of BlackSoil, a venture debt firm, said the fact that these startups are profitable might have played a role in their decision to set up a corporate venture fund.

“These companies have a much larger picture in mind. Innovation and expansion are important when it comes to long-term growth, as a single product might not sustain the business in a highly competitive market,” he said. “While focusing on its core product, Dream Sports will redeploy its profits in investments and acquisitions, primarily to support founders and form a holistic sports and gaming network instead of building everything from scratch.”

The next wave

One of the first startups to experiment with corporate venturing was One97 Communications, the parent company of fintech giant Paytm. In 2010, the company set up a USD 100 million fund along with its PE backer Elevation Capital (formerly SAIF Partners) to invest in other businesses. At the time, the Indian startup ecosystem was at a nascent stage. Over the course of the next nine years—till the fund was active—it invested in 11 companies and made several exits. However, none of them showed any significant growth and never came on the radar of bigger tech companies for acquisition purposes.

Since these investments didn’t really work out, Paytm has been parallelly making direct strategic investments to add more use cases in and around its core payments offering. Last year, Paytm founder Vijay Shekhar Sharma launched two investment vehicles, VSS Holdings and VSS Investco, to invest in the startup community.

“One97 was ahead of its time,” said Mazumdar. “The opportunity size then versus now is different because of the advancement in technology and digital adoption.”

Besides One97, e-commerce giant Flipkart is another company that has been an active investor in the startup ecosystem over most of the past decade. It has made minority investments in more than 12 companies, including startups such as Ninjacart, Shadowfax, and Blackbuck, as well as established corporate entities such as ABFRL (Aditya Birla Fashion and Retail) and Arvind Fashion. Even though Flipkart incorporated its investment arm Flipkart Ventures with a USD 100 million fund in March 2019—nine months after being acquired by Walmart—it was only earlier this July that it made its first investment in GOAT Brand Labs, a Thrasio-modeled startup.

Interestingly, Flipkart began tapping its corporate venture fund, just as rival Amazon set up a USD 250 million venture fund to invest in Indian startups and entrepreneurs.

Until now, highly valued startups have been primarily making direct investments in other startups. High-profile entrepreneurs like Paytm’s Sharma, Snapdeal co-founders Kunal Bahl and Rohit Bansal, Cred founder Kunal Shah, and Oyo founder Ritesh Agarwal are either floating new investment vehicles or cutting checks as angels.

However, a host of companies like Lenskart and Dream Sports, which entered the unicorn club in the last few years, are expected to drive strategic investments in startups.

According to a recent report by research firm Zinnov and tech startup lobby NASSCOM, Indian unicorns made 24 startup investments compared to 20 in 2019 and 11 in 2018. In the first half of this year, this number stood at 14, as more startups entered the billion-dollar club after raising fat checks. This trend will likely continue as investors pour almost USD 17 billion in Indian startups between January and July 2021. The funding deluge has propelled 25 startups into billion-dollar companies.

Overall, Indian unicorns have invested around USD 1.45 billion in startups over the decade, the report said. “While 85% of deals with Indian unicorns participation were either seed or early-stage investments,” a spokesperson from Zinnov told KrASIA, “since 2019, Indian unicorns have participated in nine series C and above stage rounds, indicating an aggressive outlook of Indian unicorns towards investments in startups.”

Given that unicorns are turning into active investors, many will probably choose to make strategic investments through separate venture arms.

Anup Jain, managing partner at Orios Venture Partners, believes that dominant startups behave like any Fortune 500 company; that is, they wish to grow and protect themselves through M&As compared to developing internally. “It has superior return on equity for shareholders when the acquired target has incremental IP and segment adjacency,” he said.

Bansal said setting up a corporate VC arm is strategically motivated rather than a financial choice, as it allows companies to either advance their current business strategies or complement their existing business strategy.

“Corporate VC arms, with their sector expertise, will support and help relevant startups build sustainable business models and the right product-market fit,” he added. “This also presents opportunities for these companies to tap into emerging business models and a chance to passively earn a financial return.”

Moreover, Mazumdar believes these CVCs can become another exit path for micro and early-stage VCs, aside from IPOs and M&As.