indianotes

Today, India has developed one of most vibrant start-up ecosystems in the world. We now have more than 2.2 lakh “recognised” start-ups, and have created more than a hundred “unicorns” in the last decade or so. Many of our smartest kids today dream of “doing” a start-up, instead of migrating to the US.

This is amazing, but hides an important question. Who gets to own these start-ups before they go public?

Just a few weeks ago, all India celebrated Skyroot Aerospace’s path-breaking rocket launch. Their medium-term ambition is to launch a couple of rockets monthly, build larger rockets and even their own launch facility. As per media reports they’ve raised ~$150 million from investors like GIC, Temasek, Blackrock, Sherpalo, Greenko; and plan to raise another $200 million at a valuation of $2 billion.

Eventually, they will go public, at a much higher valuation. This illustrates how the structure of financial markets has substantially changed. The IPO is no longer the beginning of the growth story. Increasingly, it is the exit for private money.

Consider this: Infosys did their IPO at a valuation of ~₹100 crores, and HDFC Bank at ~₹800 crores. Compare that with today’s leaders. Swiggy went public at ₹95,000 crores, Zomato at ₹65,000 crores, PB Fintech at ₹44,000 crores.

During their most explosive growth phase, Indian start-ups are funded by foreign VCs and PE funds, Canadian retirees, American universities, and citizens of Singapore or Abu Dhabi. A few rich Indians get to participate via AIFs or angel funds, but the larger public is absent.

I don’t have a problem with foreign investors. Without them, many of our exciting young companies (including Skyroot) might not be where they are today. We need more capital, and especially patient capital. VC and PE funds are willing to take risk and invest in companies that won’t make profits for several years.

The real issue is: where are the Indian PE or VC or pension funds?

EPFO, PPF, NPS and insurance companies manage more than ₹125 lakh crores between them. Almost nothing goes into the Indian VC and PE ecosystem. NPS and insurance companies are belatedly being allowed to invest in AIFs, but the numbers are still miniscule.

Yes, there is more risk, and we need to be cautious when investing the public’s money.

But are we regulating for yesterday’s economy?

Our rules haven’t changed for decades. They were designed when the word “start-up” was unknown, VCs barely existed and IPOs happened early.

Today, start-ups stay private for many years, much of the value is being captured by private capital, and public capital comes in much later. And it’s not only about tech or consumer start-ups. This applies equally to infrastructure – roads, airports, renewables, ports, etc.

The regulations haven’t adapted to this new reality.

Interestingly, Canadian retirement and pension funds have now demonstrated a model that others could follow. They are managed and governed independently, have large specialised teams – and significant exposures to private equity, venture capital, infrastructure and real estate.

This works because pension funds and insurance companies have a very long term investment horizon, ideally suited to long-gestation projects. Needless to say, such investments get them better returns than government bonds!

Today, India has significant depth and scale in domestic savings. But this is constrained by rules that belong in the last century. Risk aversion is fine, but the question we need to ask is: In the next generation of Indian companies, who gets to own the future?