While Indian startups across sectors are going through regulatory turmoil, including outright bans, their investors are committing large amounts to these startups and others in the sector, as they take a long-term view and look for outsized returns from risky bets.
The Supreme Court’s refusal to stay the Madras High Court’s ban on short video app TikTok and the Karnataka Transport Department’s decision to stop bike taxi startup Rapido from plying due to non-compliance of operating with a commercial license, both this month, have put a spanner in the works of these companies.
Online gaming and e-pharmacies are two other sectors that have seen the High Courts of Telangana and Delhi, respectively, ban their operations. Telangana’s order prohibits any online game that involves some amount of chance and uses money as rewards, and bars consumers from paying to play these games, as it is said to constitute gambling.
In spite of this, fantasy sports startup Dream11 raised a $60 million round from its existing investor Steadview Capital, catapulting it to become India’s latest unicorn — valued at over $1 billion. Similarly, three online pharmacies — PharmEasy, Netmeds and 1mg — are all raising between $100 million and $200 million, with the International Finance Corporation announcing a $70 million investment in 1mg in March. Mint reported on March 25 that Japan’s SoftBank Group Corp is looking to invest $100 million in PharmEasy.
Even Rapido, in the eye of the storm, is closing a $40 million round from WestBridge Capital, according to a Times of India report and two people aware of the matter.
“Investors know that an emerging market like India will have a certain amount of risk, with an evolving regulatory landscape, and that is the risk-reward argument that leads them to take these bets," said Rohan Ghosh Roy, partner at Trilegal who advises on technology deals.
“They believe that they can engage with the government to find an appropriate regulatory framework to operate in," he added.
Investors, lawyers and bankers alike are of the view that with a 7-10 horizon that most venture capital funds have, taking a long-term view makes sense, and makes these regulatory hurdles only short term.
“Some investors want to take bets in these sectors which are growing and have assessed the risk attached to them. “The law is very dynamic in these sectors and subject to periodic shifts," said Winnie Shekhar, partner at IndusLaw who has worked on deals in these sectors.
“VCs with a history of operating in India are conversant with regulatory uncertainties. These investors have the ability to address issues and pivot even in a changing regulatory system," she added.
Indian growth stage startups are also not the first to face these hurdles. Even startups such as Uber, currently filing for an IPO, have constantly battled with regulators across the globe in order to find a middle ground, and have generally looked to capture the market first in order to have an advantage when regulators come knocking.
"The core of our job as VCs is to back innovative startups that aim to change the status quo and transform a large market/space via technology. Regulation exists, but its extent applies differently," said Sanjay Nath, managing partner at Blume Ventures.
“Take mobility, where the degree of regulation is higher. How will we impact long-term change unless you can back innovation while working around such challenges (like regulation)?" he added.
“Regulations have always struggled to keep up with the change of pace in any sector globally, and this is especially pronounced in the internet sector where business tends to evolve much faster. India is no exception. Internet businesses around the world have not grown by voluntarily taking a conservative view of the law," said Roy of Trilegal.
To be sure, these regulatory hurdles do cause some pain, with startups’ valuations being hit, or sometimes drawing a smaller pool of investors willing to invest.
But investors say that if you take a long-term view, these regulations will come and go, and they are careful to examine whether these are temporary and narrow in scope, or long term and nationwide. This impacts investing decisions.
“In the long term you're backing innovation that is creating lasting change. When we invest, we examine carefully whether a regulatory ruling or development is a temporary blip or something potentially long lasting. Uber globally is a great example; it battled taxi unions and other ‘bans’ in almost every phase of its journey," said Nath of Blume.
