Is this the return of hyperfunding?
Investment in India’s tech sector has rocketed to hyperfunding levels in recent months, amounting to nearly $10 billion so far this year.
With two months of the year left to go, investment in unlisted technology companies has reached a new record, comfortably above the $7.9 billion previously set in 2015.
The year started slow, fuelling concerns that India’s faltering economy was breeding reticence in investors. But the last few months have shown this year’s initial big funding rounds to be the beginning of a trend rather than anomalies.
The list of constituent funding rounds includes big names and big sums: Flipkart ($4 billion), Paytm ($1.4 billion) and Ola ($1.1 billion with another $1 billion reportedly in the cards).
The vast sums being ploughed into the tech sector are, in large part, driven by SoftBank; who have embarked on a recent rampage to spend their $93 billion Vision Fund. The Japanese firm has coughed up $6 billion for India’s rising stars of late, not all of which has gone to plan: their $900 million investment in the now-faltering Snapdeal resulted in unsuccessful attempts to broker its sale to Flipkart.
The recent bout of hyperfunding is cause for concern among some who remember a similar trend during 2014-15. There is some speculation that it can cause questionable practices and incentives. But a more reasonable spin might be that there’s a danger in giving a young company a lot of money before it’s had time to stabilise and mature it’s approach.
Late-stage investment has rocketed the world over with the likes of Uber, WeWork and AirBnB receiving huge valuations. The large valuations reflect the views of investors that the companies’ proven track record equates to lower risk, and the next step is to capitalise on executing in new markets and new products. But if investors start playing chicken with how soon they can offer these high valuations the market could start seeing some big crashes in the pre-IPO phase.
In any case, not taking the risk isn’t an option left for Indian tech, which is in need of homegrown companies capable of keeping intellectual property, and revenue, within borders. Outsourcing layoffs have led to the top seven IT firms shedding 56,000 jobs just this year, prompting concerns the Indian tech sector is developing AI too slowly.
Failure to develop a meaningful home-grown tech sector could lead to a situation where developing countries like India lose their ability to develop, and global inequality begins to increase again.
Large-scale investment often contributes to increased investment overall, because big-name companies attract business and fuel the growth of developing regions. Some big overseas players in India, like Intel, are heading in the right direction; but it remains to be seen if the current hyperfunding craze will pull some stable flagship companies for Indian tech.