High-flying corporate investors In India, hundreds of millions of dollars under management are tempering expectations, making early-stage startup bets that, at best, they hope will return 3-5 times their invested capital.
Several leading investors from India, including Peak XV Partners, Elevation Capital, Lightspeed, Nexus and Accel, have raised an additional $500 million over the past two years, buoyed by earlier registrations and huge buying potential.
However, the prevailing mood has changed this year. Investors are increasingly warning they are struggling to find opportunities to return capital – their latest headache in the world’s most populous nation. (One VC with capital recently raised below $250 million claimed that investment firms with capital reserves of $500 million or more face more difficulty deploying those assets profitably.)
VC firms generally make between 20 and 30 investments per fund, betting on a select few startups that can potentially generate big returns to offset other losses. These firms aim to have two to three of their portfolio companies drive the bulk of a fund’s capital gains. This strategy of pursuing high-risk, high-reward deals is especially common among early-stage investors who allocate most of their capital to new startups in hopes of getting in early on the next big thing.
The capital glut has led India’s investors to become unusually cautious and selective, founders and investors said. Companies are scrutinizing deals at the Series A and B stages for up to six months now, one investment banker said, when such deals once required much less due diligence. India’s sovereign wealth fund has been evaluating an investment in agritech startup WayCool for more than six months at this point, according to two people familiar with the matter. Gaming startup Loco is also in talks with investors to raise about $80 million, but more than six months later no deal has materialized.
Bessemer Venture Partners’ India team has signed just one new net deal this year, according to people familiar with the matter. One investor noted that Bessemer takes months and months of due diligence and maintains a high level of skepticism.
Anant Vidur Puri, a partner at Bessemer Venture Partner, confirmed that the firm has made only one net new investment in India this year, saying the fund is “focusing on the roadmap” of building a concentrated portfolio of high-quality and often wishes to double the existing supports.
“We’re also stage agnostic, so we can come to Seed, Series A, B or C and continue to support our investments across stages, consistent with our pooled portfolio strategy. Some years we do 6-7 new deals and some years we also do 0, which could depend on when we see attractive and exciting investments in the market, but on average we don’t do more than a handful of new investments every year,” he told me. in a message.
Reflecting the slow pace of investment in startup ecosystems globally, Indian startups have secured around $7 billion in funding in 2023, according to market intelligence platform Tracxn, up from around $25 billion in 2022 and $37 billion in 2021. In fact, it is the lowest five seven years, as Tracxn said five. (Only two Indian startups — Zepto — and InCred — made it into the unicorn club this year.)
Late-stage funding saw the biggest decline, down more than 73% year-over-year. Additionally, the number of mega-rounds over $100 million totaled just 17 for the year, down 69% compared to 2021.
Top VC markets, by investment volume in 2023. Data: PitchBook and Barclays
Some investors have said they are taking more precautions because of the declining value of many of India’s top startups, which they say has forced them to rebuild their thesis on the Indian market.
Prosus recently cut Byju’s valuation below $3 billion. (Byju’s, which has raised more than $5 billion to date, was valued at $22 billion early last year.) Pharmeasy, once valued at $5.4 billion, recently raised capital at a 90% discount. Vanguard has cut the valuation of giant Ola by more than 60%. Food delivery giant Swiggy, merchant payments platform Pine Labs and SaaS Gupshup have also seen declines this year. Reliance and Google-backed Dunzo, which has raised more than $500 million, is struggling to make payroll and BNPL startup ZestMoney, which raised more than $130 million, is shutting down.
India-focused investors are also increasingly bearish on Southeast Asia. In recent years, companies like Peak XV and Lightspeed have expanded into the region, backing many early-stage startups, some of which have become big winners.
But some big investors are now worried, saying excess capital is chasing too few viable deals in Southeast Asia, inflating valuations and reducing potential returns. (In a recent interview, Peak XV said it remains very bullish in Southeast Asia.)
Investors also question whether they have overestimated India’s SaaS opportunity. “Everybody was taking product risk, companies were able to build products. No one has been able to sell/scale revenue past a significant point,” said a US-based early-stage India investor, adding that very few companies have been able to break into US networks to sell to US companies.
Dev Khare of Lightspeed Venture Partners India he said There were less than 100 deals for Indian enterprise software startups during growth in 2023. The market remains very focused on startup deals and the Series A round is the “choke point”.
“Hundreds of seeds made in India in 2021/2022 are struggling to fit into business budgets given shrinking budgets and/or many are self/light,” he wrote.
