Sky rocketing valuations for Indian tech start-ups are being spurred by bullish interest in mobile internet, a senior executive at one of the world's most storied venture capital firms warned Monday.
The number of Indian companies raising more than $50 million-$100 million has risen exponentially in the past two years as investors pile in, attracted by the fast growth in India's mobile internet user base that is forecast to rise to more than 500 million in the next five years, said Shailendra Singh, managing director of Sequoia India.
"But when a glut of capital turns up, companies develop bad habits, they use balance sheets as a source of competitive strength," Singh said at the Kauffman Fellows' first-ever Southeast Asia Venture Capital Summit in Singapore.
Valuations for Indian start-ups in particular raised a number of eyebrows during 2015 as Asia's third-largest economy enjoys an e-commerce boom, fueled by climbing smartphone penetration rates. Flipkart, which claims to be the first billion dollar company in the Indian e-commerce market, is valued at $15 billion while its rival Snapdeal is valued at $5 billion.
New ventures, including e-commerce platforms, raised a total of $8.4 billion last year through nearly 1,000 deals, local media reported in December, citing data compiled by domestic technology and startup blog trak.in. That's a major increase from the $5 billion raised in 2014.
Fears that companies may be unable to justify their high valuations have led some industry veterans to question whether the bubble may be about to burst. But that's still not stopping major players, like Sequoia, who remain bullish on mobile internet.
"There will be no big global internet company to dominate the world unless they dominate a large part of Asia so that's the mega opportunity… We will eventually see more global companies being built in Asia that will dominate the world."
For a seasoned investor like Singh, the phenomenon isn't a new one.
"All industries in India have been through this: insurance, airlines and now internet. It's all so accelerated so huge discounting on e-commerce has led to gross merchandise volumes [GMVs] multiplying, something that was hard to predict a few years ago when they were burning cash."
The issue of high valuations isn't just present in India, but in China and Southeast Asia as well.
Chinese companies aren't often able to raise the valuations they're being asked for so they look into consolidation, explained Helen Wong, partner at Qiming Ventures. "Once you consolidate, you don't burn as much cash so it's a good opportunity for investors," she said during the Summit.
In Southeast Asia, half a billion people are coming online for the first time each month so the region's growth curve is especially luring for investors, especially via crowdfunding. noted Vinnie Lauria, founding partner of Golden Gate Ventures. But while he does acknowledge that valuations are high, he doesn't believe it's especially dangerous right now.