Is this a game changer for start-ups?

Mon, 9 Nov Pre-Open

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Indian e-commerce firms have been on a fund raising spree. Venture Capitalists (VCs) and Private Equity (PE) funds have bought stakes at sky-high valuations. Rich individual have also joined the party. We have even heard of some hedge funds committing money to various start-ups.

These investors have one thing in common. They all wish to exit these firms at a profit in a few years. In other words, they are not long-term investors. However, they are quite demanding. They are willing to pay a high price only because in return, they lay down performance targets. If these firms don't meet the targets, things can get ugly.

The recent cases of employee lay-offs among start-ups are a case in point. Promoters of start-ups including e-commerce firms, are under huge pressure to deliver. If they don't, they may find it impossible to raise more funds. Thus, we read with great interest, a recent story in the Economic Times. As per the article, Snapdeal, one of India's leading e-commerce firms has a new kind of investor.

Believe it or not but a large pension fund has acquired a stake in the company! The pension fund, the Ontario Teacher's Pension Plan, is apparently the largest single-profession pension fund in Canada. It has a corpus of over US$ 152 billion. This is the first investment of its kind in the Indian e-commerce space.

Pension funds are long-term investors. They have deep pockets. They don't interfere in day-to-day operations. They don't demand a seat on the board. They don't set performance targets for the management. Best of all, they have considerable clout on Wall Street, a big help in case these firms wish to go public.

So is this a game changer for the industry? Will global pension funds bring some sort of stability to India's start-ups? Unfortunately, things are not so simple.

Firstly, the Canadian pension fund did not provide any money to Snapdeal. It bought the stake from existing investors. Pension funds are conservative by nature. It is likely that others, if they invest in India, could follow this path. Thus, start-ups can't depend on large global pension funds to replace VCs and PE funds.

Secondly, these funds invest only in established businesses. Snapdeal is India's third largest e-commerce firm. It's unlikely that a new start-up will receive money from these funds, no matter how promising their growth story.

Lastly, the sheer size of these funds means that small start-ups are not their top choice. This is why global pension funds prefer to invest indirectly in start-ups. They invest in large VC and PE funds, which help them, spread their risk. In the bigger picture, this allocation would probably not be comparable to their main investments in government bonds and index funds.

However, interest rates are near zero in the developed world. Their search for yield has brought them to India. Unfortunately, for most of India's start-ups, these investors will not find their business models exciting enough to loosen their wallets.