Silicon Valley startups in Bangalore

Krithika Krishnamurthy, ET Bureau

(Indian investors also display…)

BANGALORE: Indian startups are valued much less than their peers in Silicon Valley, often less by nearly half. While most believe this is due to the difference in the quality of companies, investors admit that it is more a function of demand.

Global deal-making platform Angel List displays an average of around 14 investors in Silicon Valley, chasing about ten companies, while in India there could be about eight investors in the fray.

"It's not how good or bad a startup is, it is a demand-supply equation. In the Valley, there are more people chasing the same deals, " said Sasha Mirchandani, co-founder of early stage investment firm Kae Capital, which has backed mobile ad network InMobi and app maker Little Eye Labs.

Typically, India-based startups that are yet to receive funding receive a valuation of about $2.4 million (Rs 15 crore). For a startup in Silicon Valley this number, termed as pre-money valuation, is almost double at $4.7 million.

Indian investors also display a geographical bias, for instance Bangalore-based startups are valued higher than average, clocking valuations of about $3.1 million, while those in New Delhi are valued at about $ 1.9 million. Experts are of the view that investors worry about the market for new technologies built by India-based companies and as a result drive down the valuation.

The assurance that investee companies will find and a large number of customers, thereby guaranteeing profitable exit options, helps embolden investors in mature markets.

"Such an investment thesis is not applicable in India, " said Samir Kumar, managing director at early stage investment firm Inventus Capital Partners, which backed online ticketing firm redBus bought by South Africa's Naspers last year.

A poor track record of exits is also a dampener for Indian investors. Between 2012 and 2013, Silicon Valley saw 311 exits, according to research firm CB Insights. In the same period, India had less than 50 deals, including the sale of redBus, Hitachi's purchase of ATM services company Prizm Payments.

If the volume is low, so is value. When Facebook acquired messaging app company WhatsApp for $19 billion, venture investor Sequoia Capital is estimated to have received nearly a sixth of sale value. In comparison, Facebook bought Bangalore-based mobile app maker Little Eye Labs in a deal valued at about Rs 90- crore in January.

Entrepreneurs said these modest numbers hold them back from dreaming big. Frrole, an analytics platform for enterprises, started off as a social newspaper. But the three-year old venture began life as a social media newspaper with an ambition to take on Google News. After failing to raise money for over two years, the company shifted its business model mid last year. "I'm sure several people would have got influenced by our decision to pivot.