Rummy is turning out to be a great bet for the exit-starved startup investors.
Venture capital firm Matrix Partners India has made over 20 times returns by selling its stake in Hyderabad-headquartered Head InfoTech India, which operates the online rummy gaming company Ace2Three.
The venture capital firm is said to have made over $40 million (Rs 257 crore) on its seven-year-old investment, as the Canadian investment firm Clairvest picked up a majority stake in Ace2Three for $74 million (Rs 474 crore) last week.
The transaction is one of the rare large-cash exits in the Indian startup ecosystem, but not for players running rummy businesses.
The deal comes as investors in Adda52, backed by the Indian Angel Network, saw similar returns of 22 times when it was acquired by Delta for Rs 155 crore in September 2016. The startup had raised angel funding from investors including entrepreneur-investor Alok Mittal and Onida’s Gulu Mirchandani at a valuation of Rs 7.2 crore, according to filings with the Registrar of Companies.
Another startup in the space is RummyCircle, owned by Tiger Global Management-backed Play Games24x7.
These startups are highly profitable, with margins for some as high as 35%. The gaming space has also started to see the interest of global strategics from markets like the US and UK, besides private equity firms who prefer cash-generating businesses.
Ace2Three was founded by Deepak Gullapalli in 2006, when the Internet user base in India was still small. Around the same time, Matrix Partners India was looking to back gaming startups, after seeing the success of players in China like Shanda and Netease, which had taken gaming as the base to become big platforms for content.
“But then we figured that gaming like in China will not work here, and that’s how we ran into Ace2Three, which was made for India and a made-in-India gaming company,“ said Avnish Bajaj, MD at Matrix Partners India, adding that the exit is an example that “local and innovative business models also provide opportunities for the best-in-class venture returns“.
According to companies in the space, interest continues from both the local as well as global investors. These players are also using profits earned from rummy to expand into other cardbased games.
“Our focus has been on growing our RummyCircle business and our freemium games, which we are very bullish about. From private equity guys, venture capital investors to international gaming companies, who are looking to enter the Indian market, there are diverse investors interested in this space,“ said Bhavin Pandya, cofounder of Play Games 24×7.
What has also helped Rummy boom as compared to poker is the regulatory clarity around it. In 1968, the Supreme Court gave a verdict that recognised rummy to be a game of skill. But legal challenges for players in this space still continue.
In November 2016, the Telangana police filed a case against Ace2Three based on complaints that the company was duping players by manipulating its software.
“The differing rules from state-to state and meeting those guidelines can be challenging,“ said Anuj Gupta, cofounder of Adda52.
Earlier in 2012, the Madras High Court passed a verdict calling Indian rummy, illegal as it involves stakes. As a result of that verdict, the police started putting Mahalakshmi Cultural Association and its members on trial and made the club’s owner go to the Madras High Court regarding the case hearing and prosecution.
Subsequently, the Mahalakshmi Cultural Association filed a petition in the Supreme Court along with few more hosts of clubs and online rummy gaming sites. The case was initiated with the support of advocate Sunil Fernandes.
However, the high courts of Karnataka and Andhra Pradesh, in separate orders, said rummy was not illegal. Due to these divergent views, the top court was approached by clubs as well as online companies like RummyCircle and Ace2Three. The bench questioned keeping online Indian rummy websites out of the inspection procedure, saying the Madras High Court didn’t include Indian rummy online portals in the verdict.
“There were no allegations in the case against us but the order had an impact on our business in Tamil Nadu. We then filed a petition with the Supreme Court. They set aside the Madras High Court order. This resulted in a favourable order in 2015,“ said Deepak Gullapalli, the founder of Ace2Three.