Windfall from Venture Capital (VC) for the Economy?

Start-up Capital has surprisingly emerged as the new sparkle for stimulating the old economy

In July, something sensational happened in VC funding. For the first time in many years, VC investments in India outpaced that of China. As per Bloomberg report, Indian start-ups raised nearly $8Bn in July while funding to China fell to below $5Bn. Is it a one-month wonder or early signs of things to come? Only time will answer that question. Nevertheless, it is an important milestone for Indian VC investments. Though the jump in July numbers could be coming from the catalysts of China tech crack-down and Zomato’s bull run, the broader trend in VC-PE investments has seen a sharp uptick in 2021. Year to date (July end), this number is up by over 50% at $36Bn (ref below chart). If the trend continues, for the first time ever, VC-PE investments could be closing near $60Bn this year. That is 2% of GDP. Not to forget, it was less than 1% in 2017, not very long back. What is more exciting is, within the VC-PE flows, share of VC has been sharply moving up as can be seen in the chart.   

So far so good. There is something more interesting in terms of what this change in trend could do to the broader economy. That is the topic that is more riveting. All capital flows don’t come in same colors. Some come for capital appreciation (FPIs come to mind), some come for capex investments (FDIs) and some come for “burning”.  This last category where much of VC-PE investments belong, is an interesting one, as it contributes to the growth in the broader economy by boosting spending (burning), unintended though.

Spurt in ad-venture money has accidentally addressed one of the long-standing demands of India Inc. Let me explain. If you rewind back to March 2020 when the pandemic began, one of the common complaints from the captains of the industry was that India stood out indignantly as the country that came last on the stimulus-stringency index i.e. least Govt. stimulus with the most stringent lockdown. Basically clamoring for stimulus to boost spending. Industry bodies had a number also in their heads. They wanted at least 2% of GDP as stimulus. As usual Govt. turned its deaf ears, not surprisingly.

But someone at the top (not the Indian Govt.) must have heard the cry. Else, how does one explain the bounty that is coming from the “burn” capital and that too exactly matching up to what they asked. Jokes apart, it is a serious stimulus that is on the way that can boost demand by fueling spending. Much of the money raised by start-up eco-system goes towards technology up-gradation, hiring and ad spending. Credit should go to Zomato’s stunning debut and to chaotic Chinese tech crack-down for this unexpected windfall. The most exciting part is that it is just the beginning and we may not have even scratched the surface in terms of potential given the abundance of tech talent and robust start-up eco-system in the country.

It doesn’t stop here. Fundraising from IPO market is likely to scale a new peak in this year. The previous high for the IPO market fundraising was 2017. In that year, Rs. 75K cr+ was raised from the primary markets. With over Rs 55K cr+ raised already in this year, 2021 may end on a new high for IPO fund raising. Though stimulus effect from IPO is not much, as most of the primary market action is towards Offer-For-Sales (Promoters/Investors exit), the rub-off effect on QIP (Qualified Institutional Placement), Rights and other fundraising activities, tends to positively impact the overall investment demand in the economy.

Add to this the prospect of huge earnings momentum that is set to play out in the coming years on favorably turning macrocycles such as credit, property, export and capex cycle turns, one can’t help but to build a bull case for the economy. Interesting times to watch out for!!

This article of mine was published in the online edition of Economic Times (01/09/2021). Glad to share the link: