Last week marked a watershed for technology startups in India, as a record bout of fundraising shifted attention to the world’s second-most populous market, just as investors were becoming spooked by a crackdown on internet companies in China.

Food-delivery app Zomato Ltd. became the nation’s first unicorn to make its stock-market debut, raising $1.3 billion with backing from Morgan Stanley, Tiger Global and
Fidelity Investments. The parent of digital payments startup Paytm filed a draft prospectus for what could be India’s biggest IPO at $2.2 billion, while retailer
Flipkart Online Services Pvt raised $3.6 billion at a $38 billion valuation, a record funding round for an Indian startup.

“Indian entrepreneurs have been quietly building startups for a decade now, the country’s internet infrastructure has vastly improved in that time and there’s a very good appetite for tech stocks globally,” said Hans Tung, the Silicon Valley-based managing partner of
GGV Capital, which manages $9.2 billion in assets. “Investors are beginning to see the huge upside and they expect India to be a China.”

Unlike China, where online usage is much more developed, many of India’s 625 million internet users are just dipping their toes into the world of video streaming, social networking and ecommerce. Opportunities in online shopping are particularly attractive, as ecommerce accounts for less than 3% of retail transactions. Tech startups in India are still paying to build supply chain and delivery networks.

India’s population is expected to overtake China’s this decade and the mood now among investors could not be more different in the neighboring nations. China is reining in its tech companies, wiping over
$800 billion off market valuations from a February peak and shaving billions off the net worth of its most famous entrepreneurs. This month, the government abruptly pulled ride-hailing service Didi Global Inc. from app stores, months after regulators forced Jack Ma’s Ant Group Co. to halt a blockbuster IPO at the eleventh hour. The clampdown is expected to continue, as regulators curb the power of internet companies and wrest back control of user data.

Indian tech companies “can attract global investors who’ve burnt their hands in Chinese tech companies,” said Nilesh Shah, group president and managing director at
Kotak Mahindra Asset Management Co. in Mumbai. The successful listing of a few loss-making startups could lead to re-rating of many existing companies and send the market higher, he said.

Record Funding

India had a record $6.3 billion of funding and deals for technology startups in the second quarter, while funding to China-based companies dropped 18% from a peak of $27.7 billion in the fourth quarter of 2020, according to data from research firm CB Insights.

Flipkart, one of India’s two dominant ecommerce players along with Amazon.com Inc., is among a slew of startups planning to tap public markets in the next 24 months, with a line-up that includes insurance marketplace Policybazaar’s parent ETechAces Marketing & Consulting Pvt., logistics provider Delhivery Pvt. and ANI Technologies Pvt.’s Ola ride-hailing service. The IPOs will give retail investors a chance to own a stake in the startups, which had been available only to global private investors.

In those private markets, India has been minting startups valued at $1 billion or more in recent months at unprecedented speed. In April, half-a-dozen unicorns were born within a span of four days, while intervals between fundraising rounds have contracted to weeks for many startups.

“$1 billion is the new $100 million,” said Krishnan Ganesh, a serial entrepreneur who now promotes companies that have attracted investors such as
Sequoia Capital,
Lightspeed Venture Partners and
Qualcomm Ventures. “Global investors see the potential upside in India’s huge, under-penetrated market and capital flows have multiplied 10 times.”

Optimism about India is tempered as one of the worst coronavirus outbreaks in the world threatens to erode decades of economic gains, with over 31 million infections and more than 400,000 deaths. At least 200 million Indians have regressed to earning less than the $5 minimum daily wage, Bangalore-based Azim Premji University estimates, while the middle class shrank by 32 million in 2020, according to the Pew Research Institute.

Nor are investors in India free of political risks. Technology startups also face a tightening regulatory regime with Narendra Modi’s government clamping down on foreign retailers, social media giants and streaming companies. The administration is expected to present a bill on data ownership and storage during the month-long parliament session starting Monday that would restrict the ways they can handle user information.

On top of that, some analysts are concerned that stock markets are a bubble waiting to burst and that many company valuations are far above their fundamentals. They caution that retail investors in new-age companies that have yet to generate profits will need to look beyond traditional value measures like EPS and P/E and must be able to assess factors such as investment in building a loyal customer base as the startups scale up.

Habit-Forming

“Many of these businesses are in habit-forming stage of acquiring customers and hence the losses can be front-loaded,” said Ramesh Mantri, a director of investments at Mumbai-based White Oak Capital. “What really matters is the potential to generate cash flows.”

The new ventures also have competitive advantages over many traditional bricks & mortar rivals, which have high real estate costs and often suffer from broken distribution chains and complicated structures. Those constraints mean the many retail, banking and healthcare chains haven’t arrived at even the smaller cities, let alone the millions who live in remote rural areas.

“The proliferation of smartphones and the internet has allowed tech entrepreneurs to create new age business models to reach the country’s farthest corners,” said entrepreneur Ganesh.

And the promise of attractive returns for major investors as startups increase the number of public share sales could spur further rounds of funding. For example, Japan’s SoftBank Group Corp, which sold out of Flipkart three years ago for a profit, returned to invest in last week’s round.

“India’s consumer internet companies have come of age,” said tech tycoon Nandan Nilekani, chairman of outsourcer
Infosys Ltd. whose 1993 IPO introduced investors to an IT services industry that now has almost $200 billion in
annual sales and made billionaires of its founders. “When these new startups convert their pole position to earnings and cash flow, their future is assured,” Nilekani said.

— With assistance by Ashutosh Joshi