Indian investors also display a geographical bias, for instance Bangalore-based startups are valued higher than average, clocking valuations of about $3.1 million, while those in New Delhi are valued at about $ 1.9 million. Experts are of the view that investors worry about the market for new technologies built by India-based companies and as a result drive down the valuation.
“India is not a starter ecosystem, Indians are secondary adopters,” said Sharad Sharma, co-founder of iSpirt, a software product thinktank. “But the density of people who can try out new technologies in the initial stages is very high in the United States.”
The assurance that investee companies will find and a large number of customers, thereby guaranteeing profitable exit options, helps embolden investors in mature markets.
“Such an investment thesis is not applicable in India,” said Samir Kumar, managing director at early stage investment firm Inventus Capital Partners, which backed online ticketing firm redBus bought by South Africa’s Naspers last year.
A poor track record of exits is also a dampener for Indian investors. Between 2012 and 2013, Silicon Valley saw 311 exits, according to research firm CB Insights. In the same period, India had less than 50 deals, including the sale of redBus, Hitachi’s purchase of ATM services company Prizm Payments.
If the volume is low, so is value. When Facebook acquired messaging app maker WhatsApp for $19 billion, venture investor Sequoia Capital is estimated to have received nearly a sixth of sale value. In comparison, Facebook bought Bangalore-based mobile app maker Little Eye Labs in a deal valued at about Rs 90 crore in January.
Entrepreneurs said these modest numbers hold them back from dreaming big. Frrole, an analytics platform for enterprises, started off as a social newspaper. But the three-year old venture began life as a social media newspaper with an ambition to take on Google News. After failing to raise money for over two years, the company shifted its business model in the middle of last year.
“I’m sure several people would have got influenced by our decision to pivot. They would think twice before starting a consumer facing product,” said Amarpreet Kalkat, chief executive of Frrole, which recently raised funding from a group of angel investors including iSpirt’s Sharma and Eka Software founder Manav Garg.
“Angel and seed money tend to follow very safe and proven models, the propensity of VC’s to take diverse bets is still not there in India, ” said Saurabh Saxena, co-founder of Vedantu, an education-based startup.