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2016: Not too bad after all; barring ecommerce

The year 2016 is set to go down in the history of investing in India as the year of "lull", or the year in which deal activity slowed to such an extent that a section of observers began flashing red signals about the future of India's startup industry.

There is no denying that funding slowed in 2016 but the slowdown wasn't as acute as it has been made out to be. A close look at the trend over the past five years reveals that it was 2015, which was an unusual year that saw a steep rise in investments as well as the size of investments. And, 2016 looks lackluster when compared with 2015.

"Last year was an aberration. Few companies in the consumer internet space raised large capital and the activity was led by hedge funds," says Harish HV, partner at accounting consultancy Grant Thornton, arguing that hyperactivity of some of the big hedge funds led the industry into an investment frenzy creating a euphoria that couldn't have been sustained for long.

To be sure, the value of funds raised in the first 10 months of 2016 plunged by a whopping nearly 54% to $7.3 billion against $16 billion raised in the same period of 2015. Likewise, the total number of deals closed dropped 37% from 663 to 413 in the period in question, according to News Corp VCCEdge, the research and analytics arm of News Corp VCCircle.

A closer look at the data, however, reveals that more than 60% of the funding in 2015 was raised by ecommerce, real estate, energy and banking-finance-services-insurance startups. Among these, the largest deal was the one in which Flipkart scooped $700 million in its seventh round of funding since 2012. The ecommerce company's existing investors Tiger Global and Steadview Capital led this round with participation from other investors.

Alongside Flipkart, cab aggregator Ola held the distinction of raising maximum capital-- $900 million in two rounds -- by a single firm in 2015.

In 2016, however, consumer Internet deals were reduced to one-fourth while real estate fundings fell to almost one-fifth when compared with the same period of 2015. "People categorize Flipkart, Ola as startups; these are not startups," says Grant Thornton's Harish adding: "The kind of funding these companies raised is not required by the real startups. Cut these deals out and we are alright. Include them and the conclusion will be that there was a lull in 2016."

Agrees Sanjeev Krishan, transaction services and private equity leader - PwC India. "There was too much froth last year. Interest in consumer internet is withering away," he says, adding that 2015 was an aberration and may remain that even going forward.

To be sure, even without including the consumer Internet deals, the total number of deals this year came down to 369 against 589 secured in 2015 and likewise, the value of these deals plummeted from $12.9 billion to $6.5 billion. But the slide isn't as stark as it seems when all the deals are taken into account.

"In our zeal, we are connecting deals in ecommerce, cabs (aggregation) and food tech as an indicator of investors' appetite. These industries are yet to show returns. India's financial services, FMCG, healthcare, logistics are intact stories and most India focused funds are looking at them," says a senior executive of a consumer sector focused investment firm.

Given that it were the startups that got funded this year, and not really the mid-level companies looking for growth capital, the size of cheques, too, shrank this year.

Among the big deals in 2016 was the fund raise of $300 million by One97 Communications Ltd, which runs Paytm. The investors included Taiwanese chip-maker MediaTek Inc., China's Alibaba Group Holding Ltd and venture capital firm SAIF Partners. Another high profile deal included $175 million raised by messenger firm Hike Inc. from Chinese investment firm Tencent Holdings Ltd, world's largest contract electronics manufacturer Foxconn Technology Co. Ltd and US-based Tiger Global.

While agreeing that the pace of investment slowed in 2016 but not to the extent as is made out, many market observers feel that the year may end the year on a par with 2011 and 2012. Deals amounting to $11.5 billion and $10.7 billion were closed in 2011 and 2012, respectively.

Investors, meanwhile, are hopeful of a decent turnaround in 2017. An indication to this is the fact that at least 36 new funds with more than $5.65 billion in their pocket are gearing up for investments in 2017.

"We have seen several early stage deals this year though Series B and C had moderate action. With several new funds being raised this issue may get addressed," says Anil Joshi, managing partner at Unicorn India Ventures, an early stage investment fund.

Krishan says 2017 will be better for several other reasons and that include a larger set of family offices looking at infusing capital in investment funds, a fast emerging asset class and a newer set of limited partners (LPs or investors in investment funds) taking interest in the Indian market. "If you look at the larger LP base, there is a focus on this asset class (investment funds) in the East, which was not seen in the past. GPs are going east. It is a very sector specific interest in infra and green energy."

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