New age businesses see private equity investment multiply fourfold

Topics PE investments

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In the last decade, investors have seen the amount of funds poured into businesses that include consumer discretionary and information technology (including consumer internet) grow by 400 per cent to $6.6 billion in the year to date. In relative contrast, old economy ventures that include materials, energy and telecoms have also grown but have been overtaken by emerging businesses, based on research by VCCEdge, the data platform of VCCircle. 

In part, the trend defies what should be the growth arc of fast-developing nation with core areas seeing as much attention as possible but all the micro-indicators reflect an uneven maturing of businesses. 

Renuka Ramnath, founder of Multiples Alternate Asset Management says that investors looked at online market places such as Flipkart and Snapdeal early on but held off because of the enormous capital required to fund such a model, in addition to the “depth of conviction” required to believe in its long term success. “What we see is the emergence of new business models which can only happen in online ventures, that are driven by gaming, financial services, and businesses that go after making Internet penetration a reality, and thereby reaching the unreachable,” she says.  

Multiples was an early investor in Dream 11, a gaming company that’s been valued at a billion dollars. “You can’t ignore the reality and new business models of today.” Ramnath points to Kissht a financial services company  funded by Sachin Bansal. Kissht is a consumer lending firm.

Growth capital investor General Atlantic internationally has been adept at latching on to early internet growth stories that include Uber, Slack, Alibaba, and Airbnb. Here in India, the New York-based investor started with bets on IT services firms such as Genpact, Infotech, Hexaware, and Patni Computers before moving on to invest in consumer internet ventures. Byju’s, an ed-tech firm valued as high as $5.5 billion saw General Atlantic invest at least $125 million. While GA did not respond to questions, its partners in India have said they typically back businesses which are run by first generation entrepreneur, and have a proposition that solve a real problem.

BookMyShow as a new-age businesses tries to achieve just that — solve a real problem in real time by allowing a consumer of entertainment to buy tickets by transcending the latencies in a traditional purchase channel that could include long wait times, lack of choice in seating preference and so on.  One  investor who declined to be named says, “New-age businesses have started to come of age and now have balance sheets that are profitable at a unit level. When that happens, investors discard themes and focus areas and shoot for catching success stories early.”

His point is that investing styles shift shape according to how the economy is maturing and how industries are developing. He is not wrong. Internet-driven businesses can be of two types. They can be tech-enabled aggregators or distributors of products that have traditionally been around and available in brick-n-mortar format. Examples are LensKart and Nykaa which sell eyewear and cosmetics. The second is businesses driven by models that serve products that never existed before or replace their historical versions and end up tapping new consumer groups. 

Vivek Soni partner for private equity advisory at EY says that In the media and entertainment world, the ‘cord cutters’ in the US (those who cancel cable to use online subscriptions) are increasingly being emulated by Indian consumers who are doing away with DTH and ‘cable walla’s. These customers consume content not only on TV but on other devices that are handheld and portable and their numbers are rising fast.  “This has piqued the interest of Private Equity and Venture Capital as thanks to the technology backbone, making content that works is increasingly becoming less of an art and more of a science,” he says. Funds are already looking to back digital content businesses which can own the IP and the clincher is that depending on the OTT partner, global distribution is possible.  As an example, any show made by an Indian production house (say Sacred Games for Netflix) for a global OTT gets global distribution, which is a win win for both the content creator/owner as well as the OTT. 

Ramnath, however, cautions that anyone betting on new age businesses has to dig their heels in and be ready for the long haul. Payment gateway Billjunction which she funded in 1999 for Rs 15 crore sold for Rs 450 crore but eight years later in 2007. Similarly, “Dream 11, she says became an overnight success but was a decade in the making,” Ramnath says. “Change to happen in India takes much longer than it should.”

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