Nitin Sharma, Venture Capitalist, on FinTech and Prediction of VC Funds in 2017

With the digital wallet space becoming synonymous for every transaction, innovation has started reaching roots in India. In the aftermath of demonetization, the fintech companies demonstrated an advancement which brought unprecedented growth of online transactions. The traditional perception which was apprehensive of building a cashless economy transitioned, now finding a massive population of the nation using various tech-enabled payment platforms.

In an exclusive conversation with Nitin Sharma, Venture Capitalist at Lightbox Ventures, we spoke about the surge of investments in fintech companies, the effect of demonization on startups, top financial models for India and the outlook of Silicon Valley on Indian startups.

In 2016, approximately $ 3.5 Bn was invested around the year with an average of 13 Mn invested per month. There has been a 27% rise in the deals closed than the previous year. How do you predict the rate of investment in 2017?

I do believe some of the later-stage dollars will return in 2017, as the landscape matures and some of the current Series B and C companies scale with better unit economics. Even with higher interest rates in the US, it is expected that 2017 will have several strong Silicon Valley IPOs, and I expect that the sentiment towards India will get better as well, especially with the rapid digitization of financial and other sectors. So I think the overall funding amount will beat 2016 easily, somewhere between $5-$7 Bn, but not as high as the irrational 2014 and 2015 period when it crossed $9 Bn.

In terms of the number of deals, that is largely driven by the growth of the ecosystem at the seed, angel and Series A stages. I expect the deal volume will grow by another 20% or more with newer angel groups and smaller VC funds emerging. I do worry though that too many low-quality ideas continue to get funded, and will struggle to survive or raise venture rounds.

Do you think FinTech innovations will become more visible to investors as the idea of a cashless economy is emerging in India?

Absolutely. I consider fintech, edtech, healthtech, content and agritech as the 5 areas where local players can win.

In my recent conversation with VC peers in different countries, it is clear that as far as fintech goes, India is currently the largest hotbed of innovation globally.

No other country is seeing the combination of (a) a large, growing market with a low penetration of financial services, (b) policy push (demonetization, GST and structures like payment banks), (c) open frameworks like IndiaStack (Aadhaar, eKYC, UPI, digital lockers, etc.). This is amazingly revolutionary.

Is there any specific Indian FinTech company which is doing things right? If so, why do you opine so? 

PayTM of course has done a remarkable job at capturing the opportunity and mindshare for the mass market. Capital Float, Getfiscal and Scripbox also come to mind. Streamlining of B2B payments is another space which while not in the limelight, has some massive problems and opportunities, and Paymate is a company (and Lightbox investee) that I have worked with very closely with.

According to you, which are the most common or most important business models for FinTech companies?

In general, I consider fintech a sum of five areas:

(a) payments (payment gateways, POS, wallets, remittance products, etc.)

(b) lending (P2P, SMB) and equity crowdfunding

(c) personal finance (online aggregators, robo-advisors, etc.)

(d) backend software for banking, institutional clients, research

(e) emerging technologies like blockchain and crytocurrenies like Bitcoin

In terms of business models, most of these have traditionally relied on a per-transaction fee (flat or variable), whereby the business scales with volume.

In the case of lending, you see either the entity being/buying an NBFC and being the lender, or matching lenders and borrowers – essentially an arbitrage around cost of capital.

In other cases when it’s a software-as-a-service (SaaS) product, the business earns subscription or licensing revenues.

What have been the effects of demonetization on the Indian startup ecosystem?

In the short-term, venture-funded companies in most of the e-commerce verticals have seen GMV or sales declines of 10%-50%, based on the prevailing cash-on-delivery portions of the business. Most of the fintech companies on the other hand have obviously risen with the tide of digital payments in the last 2 months.

In any case, most investors are quite comfortable with the adjustment of expectations for the year, since the larger long-term story can be far more positive. Even if growth slows down, a higher percentage of digital payments will improve the unit economics and quality of the cohorts coming in. I was recently in Silicon Valley, and there is increasing recognition of India as an improving place to do business transparently and efficiently.

With the demonization of Rs.500 and Rs.1000, will an influx of VC money and consequently, a surrounding marketing push lead to a surge in the FinTech industry?

Yes, absolutely. In my recent conversation with VC peers in different countries, it is clear that as far as fintech goes, India is currently the largest hotbed of innovation globally.

Beyond the factors outlined above, I am quite bullish on the power of the IndiaStack platform, which is a unique example of public-private partnership and mass-scale innovation. The largely open framework (that comprises of  eKYC, digital signatures, UPI and digital locker) on top of Aadhaar can unlock not only tremendous efficiency and additional revenue streams for fintech companies in India, but also open new business models in education, healthcare or agriculture.

Mark Twain mentioned, “History doesn't repeat itself, but it often rhymes”. Do you think the surge of investments in Indian startups is an economic bubble or will it further soar?

The answer is, that it’s both. My best guess is that venture and growth investment went from roughly $1bn in 2013 to $5bn in 2014 to around $9bn in 2015, and now back to $4-5bn. When you see such exponential growth (2013-15) in a space, it obviously means there is a risk of overfunding, overspending and overvaluation (a “bubble”). Bubbles are inevitable.

The correction has made everyone realize how hard it is to scale profitably in India, and consequently, how hard it is for investors to realize venture-type returns here. However, that doesn’t change the fact that for long-term investors willing to patiently tap into huge, fundamental market-shifts, India is one of the biggest opportunities. When you look at sector after sector in India, there is fragmentation, inefficiency and lack of trusted brands. This means that tech startups that actually innovate and localize their solutions (while avoiding unsustainable burn) can eventually become the largest companies in these spaces.

What is your opinion about peer-to-peer lending business models in India? Is there any specific startup which comes to your focus to exemplify this business model?

There is an important role for P2P payments in India, when you consider the demand-supply gap, and the inefficient and expensive forms of traditional credit that also exclude several segments of the population. Globally, the industry had exploded in the last few years and is now under scrunity (LendingClub as well as several in China). In India, the RBI provided some regulatory clarity and new requirements recently, but it is not 100% clear whether the model will require an NBFC or whether pure marketplaces that simply connect lenders and borrowers will operate freely. Faircent and i-lend have put in quite a bit of groundwork in place to scale in the coming years.