India PE valuations

Are investors spooked by high Indian consumer company valuations?

Although India remains high on the list of many early to late stage investors’ priorities, there is mounting evidence attention on consumer companies is shifting to business-to-business opportunities.

When Walmart bought the e-commerce firm Flipkart in 2018, many viewed it as a clear sign confidence in the business-to-consumer (B2C) market in India was high.

The subsequent year witnessed an increase in Chinese investors flying into India searching for cheap B2C companies to place bets. As such, many investors have recently started complaining valuations of Indian B2Cs are getting too rich for their blood, notably for some of the smaller funds with less cash to burn.

Iron Pillar Fund, a late-stage venture capital investor in India with $90 million in assets under management, is one such investor with a preference for business-to-business (B2B) companies. The fund acquires minority stakes of up to 20% typically with between with $5 million to $10 million of investment. It expects up to 10 times return on exit. 

“The bar is really high now for consumer-facing startups in India,” Anand Prasanna, managing partner of Iron Pillar Fund told FinanceAsia. “Business-to-business enterprises is one of our main focus areas now.”

For example, Prasanna said the fund is seriously considering funding a Series B of a local robotic process automation (RPA) company. It operates a similar business to that of US-based Automation Anywhere, which automates business processes, and recently completed its Series A fundraising. It is planning to finish the $30 million Series B by the second half of 2020.

There are similar examples of funds with a keen eye on Indian B2B companies. Season Two Ventures is an early-stage venture fund based in California but with operations in India. It has been raising a $100 million fund since December 2019 dedicated exclusively to the funding of B2B startups in India.


One of the major difficulties for B2C businesses anywhere is the cost of user acquisition. This is particularly the case among fintech companies in India. When the majority of online traffic volume is controlled by the likes of Flipkart and Paytm Mall, obtaining new customers is hard. But it is also getting very expensive. Online lending startups, for example, have seen a 20% to 30% increase in user acquisition cost in 2019, according to research conducted by The Economic Times of India.

More broadly, the average cost to acquire a new user last year was $1.11 within Asia Pacific, according to incubator platform iamwire.  India’s average cost to acquire a new user is roughly $1.12 to $1.69.

It is also tough to part Indians from their money. A report conducted by AppAnnie showed that while India saw the world’s highest growth within the “app economy” – up 190% between 2016 and 2019 – consumers rarely spend money on them.

When consumer-facing companies face the difficulties of making money, clearly investors are less willing to pay a high premium for them.

“Chinese investors will not pay a premium unless the startup has a business model that has proved effective,” Chen Renchuan, vice president of China TH Capital told FinanceAsia in an earlier interview in October.

Under such circumstances, B2B companies are a natural alternative for investors looking to buy the India story but take less risk. Baring Private Equity Asia, for example, has already started deploying some of its $6.5 billion for its seventh fund to a couple of companies in B2B IT services. The large population of IT specialists and a 5.7% expected GDP growth rate in 2020 is appealing, it says.

Any company that can successfully follow the Alibaba model is always likely to find investment suitors. Udaan, the B2B e-commerce platform in India, raised $585 million in its Series D fundraising in October 2019 for further business expansion. Several big names joined the round including: Tencent, Hillhouse, GGV Capital, Citi Ventures, DST Global and Lightspeed Venture Partners.


The biggest challenge for most enterprises is the ability to sell. One fund manager, who declined to be named, said he was focusing on companies with international clients. “They have a broader client base and it’s easier to make a profit,” the manager said. “They should be better able to build scale faster.

That doesn’t mean B2C is entirely out of vogue, however, but investors are clearly more discerning. “B2B business or consumer-tech companies with a high gross margin are [now] our preference because within a period of time they can get profitable and we can exit faster and make money for our investors,” Prasanna said.

The need for a clear path to an exit is always important for such investors, too. With a corporate-facing strategy, these B2B companies may wish to aim for a buyout to keep their investors happy. Buyout will still be the biggest driver for Indian investors to exit in 2020, Prasanna predicts.

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media