Exits for Indian VC investments: Tough Luck

“How do you spot a VC in a party?” “He looks for the exit, when he enters the party hall” It’s a popular joke I heard at the PE/VC conference at Oxford.

Most common exit options for VCs are secondary sale, acquisitions and IPOs. Secondary sales are not popular for LPs who might have invested in both the sell and buy side VCs and end up losing on the transaction charges. Only a few Indian firms are product driven, most are growth/market stories and do not look attractive targets at their valuations. Unlike their US counterparts, Indian companies are conservative and do not acquire companies to hire top talent. The last exit option is through the IPO route, this is the most expensive exit option due to the high transaction costs.

Let’s assume the high transaction costs are justified by the valuation, but Indian public markets pose various challenges, the markets are underdeveloped with little retail participation, IPO drought in the last couple of years make the promoters nervous (Micromax postponed its decision to IPO) and FII caps in certain sectors (e-commerce retailing) make it difficult to sell shares to foreign investors. The domestic institutional investors have not succeeded in evaluating the risks associated with new age companies and have stayed away. It is tough luck for VCs in India looking for exits, but there is a silver lining – selling in the foreign stock exchanges like Singapore, London AIM or Nasdaq seem to be a better exit alternative.

 

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