BENGALURU (BLOOMBERG) - Last week marked a watershed for technology start-ups in India, as a record bout of fundraising shifted attention to the world's second-most populous market, just as investors were becoming spooked by a crackdown on internet companies in China.

Food-delivery app Zomato became the nation's first unicorn to make its stock-market debut, raising US$1.3 billion (S$1.76 billion) with backing from Morgan Stanley, Tiger Global and Fidelity Investments. The parent of digital payments start-up Paytm filed a draft prospectus for what could be India's biggest initial public offering (IPO) at US$2.2 billion, while retailer Flipkart Online Services raised US$3.6 billion at a US$38 billion valuation, a record funding round for an Indian start-up.

"Indian entrepreneurs have been quietly building start-ups for a decade now, the country's internet infrastructure has vastly improved in that time and there's a very good appetite for tech stocks globally," said Hans Tung, the Silicon Valley-based managing partner of GGV Capital, which manages US$9.2 billion in assets. "Investors are beginning to see the huge upside and they expect India to be a China."

Unlike China, where online usage is much more developed, many of India's 625 million internet users are just dipping their toes into the world of video streaming, social networking and ecommerce. Opportunities in online shopping are particularly attractive, as ecommerce accounts for less than 3 per cent of retail transactions. Tech start-ups in India are still paying to build supply chain and delivery networks.

India's population is expected to overtake China's this decade and the mood now among investors could not be more different in the neighboring nations. China is reining in its tech companies, wiping over US$800 billion off market valuations from a February peak and shaving billions off the net worth of its most famous entrepreneurs. This month, the government abruptly pulled ride-hailing service Didi Global from app stores, months after regulators forced Jack Ma's Ant Group to halt a blockbuster IPO at the eleventh hour. The clampdown is expected to continue, as regulators curb the power of internet companies and wrest back control of user data.

Indian tech companies "can attract global investors who've burnt their hands in Chinese tech companies," said Nilesh Shah, group president and managing director at Kotak Mahindra Asset Management in Mumbai. The successful listing of a few loss-making start-ups could lead to re-rating of many existing companies and send the market higher, he said.

Record funding

India had a record US$6.3 billion of funding and deals for technology start-ups in the second quarter, while funding to China-based companies dropped 18 per cent from a peak of US$27.7 billion in the fourth quarter of 2020, according to data from research firm CB Insights.

Flipkart, one of India's two dominant ecommerce players along with Amazon.com, is among a slew of start-ups planning to tap public markets in the next 24 months, with a line-up that includes insurance marketplace Policybazaar's parent ETechAces Marketing & Consulting, logistics provider Delhivery and ANI Technologies' Ola ride-hailing service. The IPOs will give retail investors a chance to own a stake in the start-ups, which had been available only to global private investors.

In those private markets, India has been minting start-ups valued at US$1 billion or more in recent months at unprecedented speed. In April, half-a-dozen unicorns were born within a span of four days, while intervals between fundraising rounds have contracted to weeks for many start-ups.

"US$1 billion is the new US$100 million," said Krishnan Ganesh, a serial entrepreneur who now promotes companies that have attracted investors such as Sequoia Capital, Lightspeed Venture Partners and Qualcomm Ventures. "Global investors see the potential upside in India's huge, under-penetrated market and capital flows have multiplied 10 times."

Optimism about India is tempered as one of the worst coronavirus outbreaks in the world threatens to erode decades of economic gains, with over 31 million infections and more than 400,000 deaths. At least 200 million Indians have regressed to earning less than the US$5 minimum daily wage, Bengaluru-based Azim Premji University estimates, while the middle class shrank by 32 million in 2020, according to the Pew Research Institute.

Nor are investors in India free of political risks. Technology start-ups also face a tightening regulatory regime with Narendra Modi's government clamping down on foreign retailers, social media giants and streaming companies. The administration is expected to present a bill on data ownership and storage during the month-long parliament session starting Monday that would restrict the ways they can handle user information.

On top of that, some analysts are concerned that stock markets are a bubble waiting to burst and that many company valuations are far above their fundamentals. They caution that retail investors in new-age companies that have yet to generate profits will need to look beyond traditional value measures like earning per share and price-to-earnings ratio and must be able to assess factors such as investment in building a loyal customer base as the start-ups scale up.

Habit-forming

"Many of these businesses are in habit-forming stage of acquiring customers and hence the losses can be front-loaded," said Ramesh Mantri, a director of investments at Mumbai-based White Oak Capital. "What really matters is the potential to generate cash flows."

The new ventures also have competitive advantages over many traditional bricks & mortar rivals, which have high real estate costs and often suffer from broken distribution chains and complicated structures. Those constraints mean the many retail, banking and healthcare chains haven't arrived at even the smaller cities, let alone the millions who live in remote rural areas.

"The proliferation of smartphones and the internet has allowed tech entrepreneurs to create new age business models to reach the country's farthest corners," said entrepreneur Mr Ganesh.

And the promise of attractive returns for major investors as start-ups increase the number of public share sales could spur further rounds of funding. For example, Japan's SoftBank Group, which sold out of Flipkart three years ago for a profit, returned to invest in last week's round.

"India's consumer internet companies have come of age," said tech tycoon Nandan Nilekani, chairman of outsourcer Infosys whose 1993 IPO introduced investors to an IT services industry that now has almost US$200 billion in annual sales and made billionaires of its founders. "When these new start-ups convert their pole position to earnings and cash flow, their future is assured," Mr Nilekani said.