Home-grown e-commerce leaders Flipkart and Snapdeal between them raised nearly $3 billion from investors during 2014. Online services companies, as a whole, accounted for 37.6 per cent of the $10.9 billion invested by private equity (including venture capital) investors during the year, according to figures compiled by Venture Intelligence.

Startups are clearly back. And how. PE investments in India during 2014 were second only to their historic high of 2007, the year Flipkart was founded. At that time, PE investments in the IT sector were focused almost exclusively on mature IT services and BPO companies.

Unicorn Club effect

Flipkart, Snapdeal and a few other Indian tech start-ups recently joined the ‘Unicorn Club’ (members of which have valuations of $1 billion or more). It will be interesting to see what the long-term impact of this phenomenon will be. Will we see more stories of “two guys with a business plan walking into a VC firm’s office and leaving with a cheque for millions of dollars”?

Here’s what the data from Venture Intelligence for 2014 reveals about investments by PE/VC firms in early stage companies — those that are less than five years old and are raising their first and second rounds of institutional capital.

The latest rounds of investment in Flipkart and Snapdeal were their seventh and eighth rounds respectively. The latest investors in these firms included hedge funds, mutual funds, sovereign wealth funds, MNCs and ultra HNIs (high net-worth individuals) from various parts of the world, including Russia, Qatar, Singapore and South Africa. While these companies are very much a product of venture capital funding in their initial stages, the kind of money they have been raising in the last couple of years is no longer in the VC realm.

Venture capital firms invested about $428 million across 163 deals in the early stage segment in India during 2014 — not much higher than in 2013, which saw 162 investments worth $378 million, and almost 22 per cent lower than the peak year of 2012 (208 investment worth $540 million).

Investments by industry

With 124 investments worth about $299 million, the information technology and IT-enabled services (IT & ITES) industry was the favourite destination for early stage investors in 2014, accounting for 76 per cent of investments (70 per cent in value terms). Healthcare and life sciences companies followed, attracting 11 investments worth $49 million. Early stage investments in this segment were actually down by over 30 per cent, compared to 2013 (16 investments, $80 million).

Of the about $9 million that education companies managed to attract, $6 million was grabbed by two online test preparation start-ups. Clean energy companies had to rely on interest from sector-focused seed funds for the less than $2 million raised across four companies.

Within IT, online services firms, which attracted 59 investments worth $118 million, accounted for 47 per cent of early stage investments in 2014. Enterprise software retained the second spot (28 investments, $75 million) and mobile VAS companies were third (19 investments, $39 million).

The Tiger Global-led $15-million second round raised by women’s apparel and accessories e-tailer LimeRoad.com was the largest in the online services sector, followed by the $10 million second round raised by jewellery e-tailer BlueStone and the $8 million second round raised by fashion apparels e-tailer Fashionara.com.

Even among enterprise software companies, the top investment featured Tiger Global, which led a $10 million second round investment in Unicommerce, a provider of logistics management software to retailers. Among mobile tech focused start-ups, consumer app makers such as Tinyowl (a food ordering start-up) and Vee (a mobile dating service) as well as enterprise targeting firms such as Mobstac (focused on publishing) and SilverPush (focused on mobile ads retargeting) found favour during 2014.

In healthcare and life sciences, specialised clinics were in focus, with dental chain Denty’s, renal care chain DCDC Health Services and Lokmanya Hospitals attracting investments. Eye-care diagnostics equipment maker Forus Health was the sole medical devices start-up to attract VC funding during 2014.

For entrepreneurs from outside the Internet and mobile sectors, it certainly seems as if the chances of getting investor attention are going to be tough. What could bring about a change during 2015?

Exits : Exits are the name of the game in venture capital. Even if they have not actually sold their holdings, the mega valuations that Flipkart and Snapdeal commanded in later rounds have made the fortunes of their early stage investors (or, at the least, enabled the firms to close new funds).

If the exit momentum for private equity, in general, picks up, including through the mother of all exit routes — IPOs — the likelihood of new funds being raised and, in turn, the trickle-down impact of more dollars becoming available for start-ups (of all kinds) will follow.

Regulatory VUCA : VCs have favoured non-IT sectors in the past — like microfinance and education — only to be scared away by political and regulatory risk. Even for investors in online services companies, it was hardly smooth sailing in 2014. Coming as it did soon after Japan’s SoftBank led a $210-million investment in OlaCabs, the race to ban the operations of online taxi booking start-ups, post the Delhi-Uber episode, is still a live issue.

The perennial grey area in which e-commerce companies are forced to operate vis-à-vis FDI rules and taxation continue to pose threats to the sector. Unless the VUCA (volatile, uncertain, complex and ambiguous) risk in regulation subsides, VC dollars will flow only to where the risk-reward equation appears the best.

US bubbles, local ripples : There is a theory that the excitement for start-ups in India is highly correlated with the latest bubble in Silicon Valley and fed to public markets in the US. As and when those bubbles get pricked the corresponding “start-up waves” in India collapse.

But Flipkart and Snapdeal have established that ambitious, young, first-generation entrepreneurs building on their dreams are no longer stories that happen only in Silicon Valley. And drawn by the phenomenon, in 2014, Indian billionaires like Ratan Tata and Azim Premji have opened their wallets to start-ups. On their part, Flipkart and Snapdeal have, between them, acquired or invested in a dozen Indian start-ups, and have become active angel investors themselves. Clearly, the 2014 wave has left the start-up environment in India much richer.

The writer is founder of Venture Intelligence, a research firm tracking private company financials, transactions and valuations in India.