VCs Make The Bull Case For Indian Startups


Is the India startup story losing momentum or is this just part of the maturity cycle?

A major debate has erupted on social media this week around global venture capital giants and their lack of returns from the Indian market, and the slew of troubled startups that have brought fresh questions for VCs.

The recent news around Sequoia hiving off its Indian investment arm into an independent entity — now called Peak XV Partners — seems to have crystallised the notion that perhaps international VCs just don’t get India. Pointing to the corporate governance, operational and financial issues at major Indian startups, several observers questioned these investments that perhaps it’s time for these VCs to revisit their Indian portfolio’s performance.

But investors tell us these hot takes miss the forest for the trees. The India story is still in the second act, they claim and this Sunday, that’s what we are trying to delve into.

Is the India startup story losing momentum or is this just part of the maturity cycle? Read on, but after these big stories from our newsroom this week:

Is The Indian Startup Story A Fairy Tale? Not Quite

It all started with Bejul Somaia’s tweet about India being a tough place to invest in, but how the experience of growing with the ecosystem is worth that challenge. Somaia, who is a partner at Silicon Valley-based Lightspeed Venture Partners, talked about how India has grown in the past decade and that even though there were problems, these are well within the range of expectations for VCs in India.

But this tweet seemed to ruffle quite a few feathers — many pointed out the problems within Lightspeed’s portfolio as well as other marquee VCs, and some even said that perhaps global VCs need to exit India given this downturn.

Of course, some of these were reactions based on the very real problems in the Indian startup ecosystem right now. We have seen corporate governance issues at major companies, IPOs being withdrawn due to financial and operational concerns and not just the market conditions, as well as a number of allegations of fraud against startup founders in the past year.

But even though the downturn and governance issues which started last year, VCs raised more than $18 Bn in 2022 for investments in India, which shows LPs still have faith in the India story.

Nothing But Growth Pains 

In hindsight, these are of course undeniably problems. When we look at BYJU’S and its problems with major lenders, or the number of edtech shutdowns, the lack of profitability of unicorns that have raised billions and continue to garner capital, many of these investments do feel misjudged.

But investors that we spoke to reckon these are growth pains being experienced by Indian startups at a moment when almost nothing is going right for the business or the tech economy at large. Most investors believe there is no reason to hit the panic button when it comes to the issues pointed out above, because these are typical teething problems that all tech economies go through.

Indeed, we have seen even mature economies face these challenges — the examples of FTX and Theranos in the US show this is not just an India problem.

“I was in the US when the telecom bubble burst in 2002-03. You would not believe the kind of companies that were going bust just because the market had moved on. Companies that had raised hundreds of millions of dollars had to shut shop. This is what happens when the market turns,” Naganand Doraswamy, managing partner and founder of Ideaspring Capital told Inc42.

While agreeing that perhaps VCs have not seen returns from the Indian market that are commensurate with the scale and growth of the past decade, Doraswamy also believes that this is very early in the India story to be counting the chickens.

There was also a consensus among VCs that we spoke to that value cannot be unlocked in a hastened manner, not sustainably, at least.

“With deep capital markets, a thriving corporate sector as well as a strong interest in MNCs to enter or expand their India footprint, we see both IPO and M&A activities increasing over the next few years and providing exit options for risk-capital represented by the venture and PE ecosystem,” Unitus Ventures managing partner Surya Mantha added.

‘The Momentum Is With India’

Mantha also believes that the momentum is with India when you look at the global macroeconomic factors and how severely China and the US have been impacted. India is relatively better off in that sense.

“Several factors underpin this view: the young population, the digital public infrastructure that not only enables 100’s of millions to participate in the country’s economic life but also enables business innovation, a large and growing consumer economy as well as relatively stable macroeconomic conditions,” he added.

Other investors pointed to the favourable global environment where India is seen as a veritable challenger to China. The so-called ‘China + One’ movement gives India a unique opportunity to grow its tech muscle and create high-paying jobs.

India saw 3X the number of unicorns as China in 2022, and this week’s Startup Genome report states that Indian startup hubs have outshone their Chinese counterparts.

“The GSER 2022 outlined the decline of China’s dominance and the growth of India. This trend continues, with Beijing and Shanghai both declining in the rankings (down two places and one, respectively) and Bengaluru-Karnataka, Delhi, and Mumbai each moving up (up two places, two places, and five places, respectively),” the report said.

Interestingly, investors also believe that the growth pains of the past year will serve Indian startups well in the future and they are likely to emerge stronger.

“The fact that innovation needs to make money by itself and hence self-sustaining is now very clear for founders and investors alike. Neither M&A or public markets will pay for unprofitable growth. This is the best time to do conviction-based investing at the right value,” PeerCapital managing partner Ankur Pahwa said.

‘It’s Not Easy Being VCs’

Given the slew of problems and the downturn in general, there is definitely a heightened scrutiny on how VCs invested during the funding boom of 2021 and early 2022. The questions being asked are why was this not foreseen, why were some of the operational problems ignored or even why can’t you control the founders?

“I would like to take this moment to point out that it’s not easy being a VC. You have so many unknowns going into any deal or when raising a new fund. The founder unknowns, the LP unknowns, the exit unknowns and the market unknowns. There’s no way any VC can predict how these will turn out,” said the founder of a Bengaluru-based early-stage enterprise tech VC fund.

He added that while this is a period of introspection for many funds, one thing that won’t change is that VCs won’t look to control founders. They may put processes in place to ensure that their investments don’t tank badly, but it’s not possible to replace an operator.

The irony is that the general public notion is that investors should not interfere with a company or the independence of founders, but when issues crop up the same investors are also asked why they did not know about what’s happening in the company.

PeerCapital’s Pahwa had another take about how this downturn might prove to be a blessing in disguise for both VCs and founders.

“With valuations being more reasonable, founder resilience and mindset are now highly differentiated propositions. I think the eyes wide shut moment of growth at all cost is now behind us and with investors and founders both driving towards building right and for the right reasons, the vulnerability to market cycles of funding will certainly go down significantly,” Pahwa said.

Of course, while investor confidence in the India story is one thing, we know that the very real problems within some Indian startups cannot be ignored. From reckless market expansion and overspending to disastrous business models and layoffs, we know there have been plenty of issues that have dampened the startup ecosystem’s enthusiasm after the highs of 2021.

But the clear message from some of the most active VCs is that India’s digital economy has no place to go but up. We cannot walk back the march of tech, because India crossed that rubicon long ago.

Startup Spotlight: Done Deal’s Bumble-Like App For M&As

What if finding the right acquisition deal for your startup was as easy as swiping on a dating app? That’s the proposition for Done Deal, which has been designed to disrupt and overhaul the M&A space.

Founded in March 2023 by Rohit Raj (who sold two startups in the past), Aneesh Sivakumar and Ankur Jain, the startup is looking to disrupt the M&A space by considerably reducing the time for deal completion — from 12 months to under 60 days.

With over 400 startups listed, Done Deal plays the role of a tech-driven bookkeeper and gets a fee for any transaction on the platform between two parties in the next 24 months.

Here’s The Full Done Deal Story

Sunday Roundup: Startup Funding, Tech Stocks & More

  • Funding Sees Minor Bump: Indian startups collectively raised $190 Mn across 21 deals in the past week, 44% higher than the previous week, though deal flow remains tight amid the funding winter
  • SoftBank Looks To Cash In: Following the rally for Paytm and Zomato shares in recent weeks, SoftBank is reportedly planning to book profits by offloading some of its shares in the listed unicorns

  • Workers Vs Urban Company: Protests erupted at Urban Company’s office over the deplatforming of certain gig workers, with many workers alleging that the company was cancelling IDs without adequate reason
  • PhonePe’s Latest Product: On its journey to becoming a super app, PhonePe has  has launched a payment gateway product and is also eschewing the onboarding fees to woo merchants
  • Tiger Falls Short: US-based hedge fund giant Tiger Global has raised $2.7 Bn for its new fund, which is a whopping 55% lower than the set target of $6 Bn for this fund. Another sign of tough times for VCs globally

That’s all for this week. We will see you next Sunday with another weekly roundup, and till then you can follow Inc42 on Instagram, Twitter and LinkedIn for the latest news as it happens.

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