Ever since Flipkart raised its billion dollars in July, the Indian start-up ecosystem has seen a positive fallout in terms of being able to raise massive investments from foreign as well as domestic funds.

Over 100-odd start-ups have since raised funds ranging from a few million dollars to over $100 million.

Companies such as Snapdeal and Housing.com among a few others, which were struggling to even pay salaries, have managed to ride on the investors’ sudden interest in the Indian start-up ecosystem.

In the last one week alone, there have been two deals, with Zomato raising $70 million and Housing.com raising a similar amount from SoftBank.

According to advisory and accounting firm Grant Thornton, the amount of private equity investment that came into the system increased to $2,726 million in 2014 from $725 million in 2013.

Business model

The spate of investments has, however, raised several questions on the business model and sustainability of these start-ups, especially since the dot-com bubble burst in the early 2000s.

For example, it took seven years for Flipkart to generate revenues worth ₹3,000 crore and it is yet to turn profitable. Investors and e-commerce evangelists say that in order to avoid a repeat, fund managers are being extra cautious and investing not in ideas but in companies with the right talent. “There is always a risk and a few will fail. It is ok to fail and that is quite normal. There is a frenzy but we can’t call it a bubble. Also it is difficult to measure valuations as they are subjective. In the coming months, as the market is going to get more competitive, investors will start chasing just a few deals,” said angel investor and a serial entrepreneur Sanjay Mehta.

Experts feel that the key differentiation between then and now is that in late 1990s entrepreneurs didn’t have anyone to guide them whereas now investors have got enough expertise to handhold entrepreneurs who want to scale up their business.

Several foreign private equity investors such as Rocket Internet, Tiger Global, DST and SoftBank are not only putting money on the table but are also closely guiding and helping them grow. “They are not only investing in what the companies are doing today but also for what they will become tomorrow,” Mehta added.

High valuation

The hope of doing well in the future has resulted in giving some of the start-ups high valuations despite being non-profitable now. Flipkart and Snapdeal are being valued at around $6-7 billion as they bet on future growth. “These massive volumes make the valuations look reasonable, thus there is no bubble effect,” said Rehan Yar Khan, founder, Orios Venture Partners.

Orios has investments in several tech start-ups, including Zivame, which focuses on a single category, lingerie.

According to Mehul Jobanputra, founder of a price comparison and review site Desidime.com, “There are only few start-ups in India that have seen some really high valuation, not all start-ups can pull that kind of number.

“By and large Indian start-ups have never seen crazy valuations like their Silicon Valley counterparts. Indians are much more conservative.”

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