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Demonetisation effect: VC, PE deals set to fall further in 2016

According to latest data by analyst firm Venture Intelligence, VC investments in nine months of 2016 dropped 24 percent to 290 deals (worth USD 1 Billion) compared to 381 deals (worth USD 1.5 Billion) in the same period 2015.

November 22, 2016 / 04:21 PM IST

Harsimran Julka


Even as lakhs of people are queuing up outside ATMs and banks across India, after Prime Minister’s demonetisation scheme, foreign investors say they welcome the move which is expected to have a lasting impact on the economy, making it more digital.

Investors who have substantial portfolio in e-commerce companies are making swift visits to India to assuage their entrepreneurs, who will be hit in the short term. The fly-by-night operators and ‘tourist VCs’ have vanished from the Indian ecosystem.

According to latest data by analyst firm Venture Intelligence, VC investments in nine months of 2016 dropped 24 percent to 290 deals (worth USD 1 billion) compared to 381 deals (worth USD 1.5 billion) in the same period 2015. This figure is expected to fall further for the year due to PM Modi’s demonetisation drive.

PE investments in the first 9 months of 2016 to USD 10.6 billion across 443 transactions – down 23 percent compared to USD 13.8 billion across 594 deals in the same period in 2015, the report added.

(Note: These figures include Venture Capital investments, but exclude PE investments in Real Estate.)

“In the short term, serious investors will adopt a wait and watch strategy as numbers of most startups are expected to take a hit,” said Ash Lilani, co-founder of Saama Capital, which in the past has invested in companies such as Snapdeal, Paytm, ChaiPoint, Bluestone, Hotelogix,, LendingKart and others.

Deals are likely to be on hold for most large investors

“However, in the medium and long term we might see significant and unparalleled growth in the Indian ecosystem. We remain committed to Indian ecosystem. There should be a short term pain in the next 90 days. After that things will normalise,” he adds.

Most startup investors Moneycontrol spoke to are happy about demonetisation as they expect significant upside after the turmoil subsides. “The coupling of Jan Dhan accounts, Aadhaar and now Mobile wallets with demonetisation can prove to be a godsend for fintech startups in the country,” said Sanjay Swamy of Prime Venture Partners, which has backed firms such as ZipDial (acquired by Twitter), Ezetap, SmartOwner, HackerEarth, Happay, and Vidgyor, among others

Investors are advising that this is the best time for startups to take advantage and build models without legacy.

“Ecommerce is here to stay as a matter of convenience. The mobile wave will continue not only in top tier but also in its small towns and villages,” says Lilani.

A few investors feel that Series A and B deals might be impacted. “Seed deals will continue. However will late stage startups, a wait and watch situation will continue for the short period as all numbers will become awry,” says Manish Singhal, co-founder of Pi Ventures.

Investors also advise e-commerce entrepreneurs to stabilise operations in the current scenario and then look for raising another round.

E-commerce is expected to be deeply impacted in the short term. “As of now cash on delivery has fallen for e-commerce. But it will improve profitability in long run as COD is a big drain. At this time, everyone is having to wait and watch,” said Shailesh Vikram Singh, angel investor in startups such as Nearify, VResorts. “If government bungles up cash distribution then economy will face severe trouble. Otherwise it is going to get a V-shaped recovery in next few months,” Singh added.

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first published: Nov 22, 2016 12:09 pm