Dispatch From Bangalore, 2022 Edition

In 2014, Prayank Swaroop pitched the famed venture firm Accel about India’s future markets. He was an associate at Accel.

Snapdeal and Flipkart were the only e-commerce companies in India at the time that showed any signs of scale. Swaroop said that Indians will increasingly be able to shop online for food delivery and other services such as warehousing, road freight, and e-commerce.

Swaroop, now a Partner at the Firm, was right. Urban Company, which is in the domestic assistance sector, is valued over $2B; Zomato, Swiggy, and Cars24 deliver food to millions of people each month; Spinny, Cars24, and Cars24 sell hundreds of thousands of vehicles each quarter; DealShare, a social commerce startup, is valued over $2B and Meesho is just shy of $5 billion.

In the last decade, hundreds of millions of Indians went online. Each month, more than 100 million make online purchases and transactions. India has seen its unicorn pool double to more than 100 over the past two decades. In the last five years, it has received investments of over $75 billion from tech giants Google and Amazon, as well as venture funds Sequoia and Tiger Global, SoftBank and Alpha Wave, Lightspeed, and Accel.

Swaroop’s presentation starting in 2014. (Image credits: Accel)

But as the local startup ecosystem closes one of its toughest years, it’s now staring at another question that it has long been able to brush off as benign: exits.

In the last year and half, about half a dozen Indian consumer tech startups went public. All of them are doing poorly on local stock exchanges. Paytm is down 60%, Zomato 58% and Nykaa 56% respectively, Policy Bazaar 52% and Delhivery 38%.

This is despite the Indian stocks outperforming the S&P 500 Index and China’s CSI 300 this year. India’s Sensex — the local stock benchmark — remains up 3.4% this year, compared to fall of 19.75% in S&P 500 and 21% in China’s CSI 300.

Many Indian startups, including Snapdeal and MobiKwik, have postponed their plans to list as the market changed direction. Two people familiar with Oyo’s plans to list next January are not optimistic.

Flipkart, valued at $37.6 billion and majority owned by Walmart, doesn’t plan to list until at least 2024, according to a person familiar with the matter. Byju’s, India’s most valuable startup, doesn’t plan to list in 2023 and is instead moving ahead with a plan to list one of its subsidiaries, Aakash, next year, TechCrunch previously reported.

People familiar with this matter claim that people who are looking to make public plans will encounter another obstacle. Several global public fund, including Invesco, which finance pre-IPO rounds, are pulling out of India’s market because they were beaten in China and other emerging markets.

Long-standing concerns have been voiced by LPs about India’s inability to deliver exits. The industry’s early attempts in the last two years seem little to cheer about.

Indian venture funds tend to get the majority of exits via mergers or acquisitions. However, even these exits are becoming more difficult to find.

One of India’s top venture funds stated that VCs who backed SaaS startups in the early stages at a valuation below $25 million had a better chance of exiting. We have seen that the startup exit is valued at less than $25 million making it more difficult for SaaS investors and entrepreneurs to make a profit.

II

On a recent evening at a private gathering of a few dozen industry figures at a five star hotel in Bengaluru, many investors were exchanging notes about the deals they had been evaluating. Partner complained that the quality and quantity of pitches have declined, even though they were getting more.

People familiar with the matter say that two prominent venture funds, which run successful cohort programmes or accelerators for early stage investments, are having difficulty finding enough qualified candidates for their next batch.

I will argue that it’s not just that the quality of startups that are emerging has taken a hit, it’s also investors’ appetite and mental models for what they think may work in the future.

Let’s take crypto as an example. The majority of Indian investors didn’t make investments in web3 until too late. (You won’t see many Indian names in the caps of CoinSwitch Kuber and CoinDCX, and, until recently, the blockchain scaling firm Polygon. This was a notable VC at one the most important crypto VC funds.

According to sources familiar with the matter, many Indian firms that hired crypto analysts and associates last ye have now stopped hiring them and asked their staff to concentrate on other sectors.

Another area of concern is Fintech. India’s central bank this year pushed a series of stringent changes How fintechs lend to borrowers. The Reserve Bank of India has also been growing in importance scrutinizing who gets the license In order to open non-banking financial institutions in the country, in moves that have sent a shockwave to investorsThey are now extremely concerned about how much conviction they have and the level of underwriting confidence they have for the sector.

Venture investors are increasingly looking for opportunities to invest in banks. Quona and Accel have recently invested in Shivalik Small Finance Bank. Many are deliberating an investment in SMB Bank India, one of the banks that has aggressively partnered with fintechs in the South Asian market, TechCrunch reported earlier this month.

Investors’ enthusiasm in the edtech market has also cooled off after re-opening of schools toppled the giants Byju’s, Unacademy and Vedantu.

According to Tracxn, Indian startups raised $24.7billion this year, a drop of $37 billion from last year. Due to market dynamics and the funding crunch, startups had to fire as many as 22,000 employees in this year’s fiscal year.

Over a dozen investors I spoke with believe that the funding crunch won’t go away until at least Q3 of next year even as most investors chasing India are sitting on record amounts of dry powder.

As we approach the new year, investors will be questioning their convictions. Many believe that several down rounds are possible for major startups. Meesho refused to raise money at a lower value earlier in the year. According to two people familiar, PharmEasy was valued at $5.6billion and received new capital at a valuation lower than $3billion this year. (PharmEasy didn’t respond to a request to comment.

“2022 was a strong start, and it seemed that the Indian market for venture capital would be subject to different gravitational influences than the U.S. and China which were suffering dramatic declines. However, this was not to be. Blume Ventures investor Sajith Pa said that eventually, the Indian market faced the same macro headwinds than the U.S. or China venture market.

Pai said that growth-stage deals accounted for the majority of funding last year and saw anywhere from a 40-50% drop this year. “The decline was mainly due to growth funds pausing investments, because the multiples on private markets were richer than their public peers and the weak unit economies of growth stage companies.