India’s prime VCs face contemporary obstacles as startup funding plummets

Excessive-flying enterprise buyers in India managing a whole lot of hundreds of thousands of {dollars} are tempering expectations, making early-stage startup bets that in best-case eventualities they hope will return 3 to five occasions invested capital.

A number of main India buyers together with Peak XV Companions, Elevation Capital, Lightspeed, Nexus and Accel have raised $500 million-plus up to now two years, emboldened by earlier residence runs and huge market potential.

Nonetheless, the prevailing temper has shifted this 12 months. Traders more and more warning they battle to identify really fund-returning prospects — the most recent headache confronting the world’s most populous nation. (A VC with a just lately raised fund under $250 million asserted that funding companies wielding $500 million or extra in capital reserves face better problem deploying these belongings profitably.)

VC companies typically make between 20 to 30 investments per fund, betting on a choose few startups that may probably generate outsized returns to compensate for different losses. These companies goal to have 2-3 of their portfolio firms drive nearly all of a fund’s capital good points. This technique of pursuing high-risk, high-reward offers is very frequent amongst early-stage buyers who allocate most of their fund capital into younger startups in hopes of getting in early on the following huge factor.

The glut of capital has led India buyers to show abnormally cautious and picky, founders and buyers stated. Companies are scrutinizing offers at Sequence A and B phases for as much as 6 months now, stated an funding banker, when such offers as soon as took far much less diligence. India’s sovereign fund has been evaluating an funding in agritech startup WayCool for greater than six months at this level, in keeping with two folks acquainted with the matter. Gaming startup Loco has additionally held talks with buyers to boost about $80 million, however greater than six months later no deal has materialized.

Bessemer Enterprise Companions’ India crew has inked only one new internet deal this 12 months, in keeping with folks acquainted with the matter. One investor remarked that Bessemer is taking months and months in due diligence and sustaining a excessive degree of skepticism.

Anant Vidur Puri, a accomplice at Bessemer Enterprise Associate, confirmed the agency has solely finished one internet new funding in India this 12 months, saying the fund is “roadmap focused” that appears to construct a concentrated portfolio of high-quality investments and sometimes likes to double down on present backings.

“We are also stage agnostic so can come in at Seed, Series A, B or C and look to continue to back our investments over stages, consistent with the concentrated portfolio strategy. Some years we do 6-7 new deals and some years we do 0 as well which could depend on when we see attractive and compelling investments in the market, but on an average we don’t do more than a handful of new investments each year,” he informed me in a textual content message.

Mirroring the sluggish funding tempo in startup ecosystems globally, Indian startups have secured roughly $7 billion in capital in 2023, in keeping with market intelligence platform Tracxn, down from about $25 billion in 2022 and $37 billion in 2021. In actual fact, it’s the bottom since 2016. (Just one Indian startup — Zepto — entered the unicorn club this year.)

High VC markets, by quantity of funding in 2023. (Information: Pitchbook and Barclays)

Some buyers stated they’re taking extra precautions due to the dwindling worth of lots of the prime Indian startups, one thing they are saying has pressured them to rebuild their market thesis for India.

Prosus just lately slashed the valuation of Byju’s to below $3 billion. (Byju’s, which has raised over $5 billion to this point, was valued at $22 billion early final 12 months.) Pharmeasy, as soon as valued at $5.4 billion, just lately raised capital at a 90% discount. Vanguard has lower the valuation of ride-hailing large Ola by greater than 60%. Meals supply large Swiggy, service provider funds platform Pine Labs, and SaaS Gupshup have all additionally confronted write-downs this 12 months. Reliance and Google-backed Dunzo, which has raised greater than $500 million, is struggling to make payroll, and BNPL startup ZestMoney, which raised over $130 million, is shutting down.

India-focused buyers are additionally more and more rising bearish on Southeast Asia. In recent times, companies like Peak XV and Lightspeed expanded into the area, backing many early-stage startups, a few of which grew to become huge winners.

Nonetheless, some giant buyers now harbor apprehensions, saying an excessive amount of capital chases too few viable Southeast Asia offers, inflating valuations and diminishing potential returns. (In a latest interview, Peak XV stated it stays very bullish on Southeast Asia.)

Traders additionally query whether or not they have overestimated India’s SaaS alternative. “Everyone underwrote product risk, companies were able to build products. No one has been able to sell/scale revenue beyond a meaningful point,” a U.S.-based early-stage India investor stated, including that only a few firms have been in a position to break into American networks to promote to U.S. firms.

Dev Khare of Lightspeed Enterprise Companions India said there have been fewer than 100 transactions for Indian enterprise software program startups throughout seed by development in 2023. The market stays very centered on seed transactions, and the Sequence A spherical is the “chokepoint.”

“Hundreds of seeds done in India in 2021/2022 are finding it hard to break into enterprise budgets given contraction in budgets and/or many are me-too’s/light features,” he wrote.