Over 150 investorsincluding Singapore’s sovereign wealth fund Temasek and Malaysia’s Khazanah, gathered at Mumbai’s five-star Trident Oberoi hotel on a recent Friday for venture capital firm Lightspeed India Partners’ ‘Lift Off’ summit.
The two-day event aims to spark collaborations by allowing “in a short window, many opinions, ideas and investments to be shared between nC2 connections (every permutation and combination),” describes Karthik Reddy, co-founder of Blume Ventures.
The event builds on the success of last year’s inaugural Lift Off, which helped drive deals and networking, including paving the way for Singapore Sovereign Fund GIC’s investment in business-to-business marketplace VeGrow later this year.
The upbeat atmosphere this year reflects India’s recovery in startup funding over the past three to four months. But the lavish setting couldn’t hide the pressing questions the industry still faced.
Byju’s, once India’s most valuable startup at a valuation of $22 billion, is seeking new capital through a rights issue that would dilute its valuation by a whopping 99%. Paytm, once the poster child of India’s startup dreams to go public at a valuation of $20 billion in 2021, has seen its market capitalization shrink below $3 billion amid tech market carnage and regulatory upheaval.
Many late-stage startups are clinging to their peak valuations in 2021. And many valuable 2021 seed offerings are floundering without further funding. At the same time, Indian VCs are currently at a record high $20 billion in dry powderincreasing the skepticism of many investors about excessive fundraising.
About the size of VC capital
“Sitting here in early 2024, with the benefit of seeing 2023 levels of investment activity as well as the pace of start-up creation, I think the answer is yes,” Lightspeed partner Bejul Somaia said when asked if Indian VC firms have raised too much. , raising more funds than they can responsibly deploy.
“The current capital harvest was concentrated in 2021/2022, when activity levels and investment dollars were significantly higher than in 2023. In 2021, $33 billion of venture capital (early and late stage) was invested in India. In 2023, that number was $9 billion. So we have to bear in mind that the funds raised in 2021/2022 were sized for an opportunity that reflects that time,” he explained.
“If you look at the number of investments, the number was 2,200 in 2021 and about half of that in 2023. Now that doesn’t mean the market won’t pick up again in two to three years…. market cycles happen. Thus, 2023 does not necessarily reflect business market opportunities in India,” he added.
Lightspeed Venture Partners India — which had returned more than $1 billion in LPs by the middle of last year — was unusually subdued during the 2021 bull run, with deals closing on days of inflated valuations and absurdly investor-friendly terms. the founders – a frenzy Somaia hopes the market never visits again.
“Environments like 2021 make me very anxious. Investment opportunities are moving fast and at high prices… and growth, hype and salesmanship are starting to matter more than building resilient companies. Even though our mark-to-market performance looked incredible, it’s probably one of the few years at Lightspeed that I’ve had the most stress. On the one hand, these valuations were determined by the market, on the other hand they did not reflect our valuation of the business,” he said.
“So how do you know who is right? Does the market know something we don’t? Fortunately we stuck to our beliefs for the most part during that time.”
Magicpin founder Anshoo Sharma, One Assist founder Gagan Maini with Lightspeed’s Bejul Somaia (Image: Lightspeed)
Over the past three years, several India-focused venture capital firms have raised significant new capital that exceeds their previous vehicles – Peak XV has raised $2.5 billion for the region in recent closes, while Nexus Venture Partners has raised $700 million dollars, Elevation raised $670 million, and Accel raised $650 million. Lightspeed, which started investing in India more than 15 years ago, and later created dedicated funds for the country, unveiled a $500 million fund, its fourth for India, in 2022.
“Relative to Lightspeed India’s most recent fund, I believe it is sized at the lower end of our peers. This size is a deliberate choice,” Somaia said. “That said, maybe our peers see an opportunity that we don’t, or we have a more expansive investment strategy – and we’re always curious to know. But we want to guard against the risk of too much capital leading to a shift in strategy.”
Somaia said he expects many companies, including Lightspeed, to take three to four years to deploy their capital instead of the typical two-and-a-half to three-year cycle. “We need to deliver top performance to our LPs, who are used to a certain type of performance from a company like Lightspeed. We will never compromise that to put money to work,” he said.
India in the global AI race
With AI progress growing in Western hubs, India lags behind in fundamental research as very few of its startups attempt to build large language models.
Lightspeed sees parallels with the company’s early investment in the Indian Energy Exchange – creating an energy trading platform the likes of which did not exist in Western markets. “My view is that right now we’re in a phase with AI where a lot of the infrastructure and some tools are being built. This happens mostly in Silicon Valley. It was indeed a reminder that the concentration of tech talent in Silicon Valley is unparalleled,” said Somaia.
“During our time investing in India, we have seen limited innovation of basic technical infrastructure. Most of the opportunity tends to be at the application level – for consumers and businesses. There are many reasons for this, including market dynamics and the investor community, where we have few technically strong investors…..so it’s a bit of chicken and egg,” he added.
Lightspeed partner Hemant Mohapatra focuses on deep technology and has backed startups such as Rephrase, one of the first AI startups, and large language model AI startup Sarvam.
Mohapatra agreed that access to top AI talent is limited globally. But similar to the cloud computing shakeout, he predicted consolidation around some technology and business AI standards once the current hype dies down. Given the strength of India’s engineering bench, targeted AI opportunities could continue to emerge locally even if Silicon Valley maintains its overall dominance of innovators, he said.
The chapter of patients
Lightspeed’s Anuj Bhargava and Rahul Taneja with Darwinbox founder Jayant Paleti. (Image: Lightspeed)
A concern held by many investors in India is that several startups continue to push for bullish rounds, exhausting their runways before accepting the post-recession reality.
Anuj Bhargava, Lightspeed’s MD and India Head of Corporate Development, told TechCrunch that he sees progress towards aligning with public markets. “I think this is the year that the financing that will be done will be more in sync with the public markets. For growth companies, private buyouts have been slow. But for the names that have really improved their PnLs, cut through the kinks and are in sustainable financial units, I think the public markets offer a great opportunity,” he said.
India has also attracted increasing interest from sovereign wealth funds in the past three years on a scale never seen before, he said, adding that he is optimistic that they will invest in many startups. “We had a lot of funds that were not based in India but were investing in India because of the opportunity that the country offered them outside their own. Many companies ended up raising money that didn’t justify their scale or progress. In recent years, some of the momentum investors have not invested as much in India, creating a gap,” he said.
“That gap has been filled by patient funds – sovereign funds have been very quiet in 2020 and 2021. pension funds that have either been quiet and probably haven’t invested much in India earlier. and the growth arms of private equity funds, many of which previously did not invest much in technology. So these three pockets of capital are mature, long-term and patient, and I expect we’ll see more activity from them going forward.”
While early-stage funding remains very limited, some investors see bright spots in India’s early-stage ecosystem. Peak XV, Lightspeed, Elevation, Accel and Nexus signed more than a dozen early-stage deals in January alone, according to a person familiar with the matter.
“While many in the ecosystem are busy guessing when winter will end, we believe there’s no time like the present to build (and invest),” said Lightspeed partner Rahul Taneja.
Specialized talent and willing capital remain accessible in the early stages, he said. “The quality of founders is much better – people who quit their jobs really believe in their ideas and are willing to take the plunge in what most would call a ‘slow year’. Access to high quality talent is much better and fund allocators expected to make bolder bets. Every day, we meet great founders in the early stages of venture creation – and realize how lucky we are to be able to support the digital growth of India and Southeast Asia.”
