Analysis of the Indian venture capital market and assessment of its status as a contestable market with adaptation strategies for Indian VCs

Abstract

Of late, the Indian start-up ecosystem has been in the news consistently, for a plethora of reasons, both good and bad, with prominent examples being Flipkart raising a billion dollars in series funding in the year 2014 to its valuation ,markdowns by Morgan Stanley in the subsequent years, both Flipkart and Ola burning their cash reserves in order to defend their turf in winner-take- all markets and multi-million dollar acquisitions in the e-commerce space, such as Facebook acquiring the IM platform WhatsApp for USD 19 Billion in the international scenario and Flipkart acquiring Myntra for USD 300 Million. Further, being located in Bangalore, which is considered to be the hub for India’s Start-Up ecosystem, we often encounter stories about the founding, funding and acquisitions of start-ups. The money involved in these deals is often mammoth, and often by VC firms that are based outside India. Hence a natural question that occurred to us was if the market was free to enter and compete, and in our quest for acquiring more knowledge on the topic we were introduced to the concept of contestability, originally discussed by William J Baumol, in the year 1982 in his paper “Contestable Markets: An Uprising in the Theory of Industry Structure”. This CCS has been an attempt to evaluate the Indian Venture Capital Industry to test its contestability based on the factors like presence or absence of entry-exit barriers, presence of inefficiencies in the industry and the whether the brand value of the Venture Capital Firms is an essential factor that is considered by start-ups that seek funding.