Secondary deals worth $1.7 Bn in 12 months: Hasn’t exit funnel improved for investors in India?

Indian Internet space has been notorious for not offering exits to investors. Over the years, many venture capitals (VCs), experts, and media have been lamenting over clogged exit funnel, time and again. However, with Flipkart acquisition by Walmart, concerns around exit seem to have come down.

Flipkart exit certainly has offered an impetus to the confidence of investors in the Indian Consumer Internet story. Meanwhile, back to back secondary share sale in companies such as Ola, Zomato, BigBasket, Lenskart, Paytm, and Policybazaar have offered much-needed liquidation to their backers.

For uninitiated, secondary share purchase is essentially a process through which investors acquire a share of promoters, investors, and employees in a company.

So far, this year has witnessed secondary share purchases worth $710 million across 7 consumer Internet companies and one enterprise startup. Paytm, Ola, Lenskart, Zomato, BigBasket, Pine Labs and Flipkart had offered a partial exit to their investors, founders as well as employees.

Since going IPO is difficult for Indian startups, secondary transactions are certainly helping VCs to show exits to their limited partners (known as LPs).

Let's look at successful secondary transactions executed this calendar year. In January 2018, Discovery Capital along with others had bought $47.2 million of ESOPs in Paytm.

Next month, Ant Financials had acquired Info Edge’s $50 million worth share in Zomato while Growth Story diluted $65 million shares in BigBasket in a secondary transaction which were purchased by Alibaba.

Both companies collectively raised over $500 million from Alibaba and its payments affiliate.

Hybrid eyewear retailer Lenskart’s early backers TR Capital and Premji Invest had bought $61 million worth shares in a secondary purchase from IDG and TPG Growth. Recently, it did yet another secondary share sale of $75 million. The aforementioned investors including Unilazer made a partial exit while Steadview and Epiq Capital acquired their stakes in the company.

Policybazaar also saw a secondary purchase worth $30 million during its latest fund infusion up to $236 million Series F round led by SoftBank.

In one of the largest secondary share purchase by Temasek this year, investors, as well as employees of Ola liquidated shares worth $255 million.

Secondary transaction in 2017

Although, there is no consolidated figure about volume as well as the value of secondary deals in 2016 and 17. As per media reports, SAIF Partners had expectedly made about $400 million return on its early bet on Paytm while Sixth Sense Ventures founder and CEO Nikhil Vora cashed out $23.4 million by selling a stake in the payments firm last year.

Besides Paytm, Lenskart had also seen a secondary deal in January 2017 where Unilazer bought $3.5 million worth equity through a secondary transaction. In March 2017, Reliance Capital offloaded shares worth $41 million to Ant Financials in Paytm. Saama Capital and SAP Ventures had also sold out shares but their values were undisclosed.

During the same month, about 47 employees of Vijay Shekhar Sharma-led company diluted $15.3 Mn (Rs 100 Cr) valued shares in another secondary round.

Last year, Flipkart’s huge funding deal in October, where Softbank invested $2.5 bn, also included a secondary sale of shares worth $1 billion. During this time period, Tiger Global diluted 2.2 per cent of its share for $424 mn, Accel India cashed in $113.5 mn, and DST Global let go of shares worth $53.7 mn.

Why is secondary share purchases good for startup ecosystem?

As we mentioned that exit via IPO is harder to come by, secondary share purchase are a confidence booster for VCs, founders, and employees. A major chunk of money made through the secondary sale will eventually come back to the ecosystem.

For instance, Flipkart’s co-founder Sachin Bansal’s exit from the company was estimated to be in tune of over a billion USD. According to recent media reports, Bansal is launching a billion USD wort fund to invest in early-stage startups. He committed $400 million worth of personal contribution in a yet to be launched fund.

Similarly, many VCs who have made fortunes in secondary deals would deploy the significant portion of it in promising startups. Moreover, several employees who scored million of USD via ESOPs sell likely to become angel investors while some prefer donning an entrepreneurial hat.

Ultimately, secondary deals would also help VCs and other institutional investors to show that exits to LPs from the country (India) which is otherwise notorious for lack of exits.