State of Venture Investment in India

more than 150 investorsVenture firms including Singapore’s sovereign fund Temasek and Malaysia’s Khazanah gathered at the five-star Trident Oberoi hotel in Mumbai on Friday for Lightspeed India Partners’ “Lift Off” summit.

Karthik Reddy, co-founder of Bloom Ventures, explained that the two-day event aims to foster partnerships by enabling “the sharing of multiple ideas, thoughts and investments across NC2 connections (in every permutation and combination), in a short window.” “

The event builds on the success of last year’s inaugural Lift Off, which helped foster deals and networking, including paving the way for Singapore sovereign fund GIC’s investment in business-to-business marketplace Wegrow later in the year Is.

This year’s upbeat atmosphere reflects India’s comeback in startup funding in the last three to four months. But the lavish setting couldn’t hide the serious questions still facing the industry.

Byju’s, once India’s most valuable startup at a valuation of $22 billion, is looking for fresh capital through a rights issue. Its valuation was reduced by a whopping 99%, Paytm, once the poster child of India’s startup dreams, which went public in 2021 at a valuation of $20 billion, has Market cap fell below $3 billion Amidst the tech market carnage and regulatory turmoil.

Many late stage startups still remain Commit to your ultimate 2021 evaluation, And many highly valued 2021 seed deals are failing without follow-on funding. At the same time, Indian VC is currently sitting on the record $20 billion in dry powderDoubts are rising among many investors about the additional fundraising.

on vc fund size

When Lightspeed partner Bejul Somaiya was asked whether Indian VC firms have overinvested, he replied, “Sitting here in early 2024, 2023 will be looking at the level of investment activity as well as the pace of start-up creation. With the benefit of hindsight, I think the answer is yes.” , are collecting more money than they can responsibly deploy.

“The current type of funding was raised 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 this number was 9 billion dollars. So we have to be mindful that the funds raised in 2021/2022 were for an opportunity that reflected the times,” he explained.

“If you look at the number of investments, in 2021 the number was 2,200 and in 2023 it is almost half that. Now this does not mean that the market will not rally again in two-three years… There are market cycles. So even 2023 does not necessarily reflect the enterprise market opportunity in India,” he said.

Lightspeed Venture Partners India – which had More than $1 billion returned to LPs by the middle of last year — was unusually restrained during the hyper-exuberance period of 2021 when deals closed in a matter of days with inflated valuations and unfair founder-friendly terms — a frenzy Somaiya hopes the market will never see again .

“Circumstances like 2021 worry me a lot. Investment opportunities move faster and at higher prices… and development, promotion and sales skills start to matter more than building sustainable companies. Even though our mark-to-market performance looked incredible, this was probably one of the few years at Lightspeed when I was most concerned. On the one hand, these valuations were determined by the market, on the other they were not in line with our assessment of the business,” he said.

“So how do you know who is right? Does the market know something we don’t? “Fortunately we held on to our convictions for most of that time.”

Over the past three years, several India-focused venture capital firms have raised substantial new funds that are less than their previous vehicles – Peak XV Raised $2.5 billion for the region In recent closings, while Nexus Venture Partners raised $700 million, Elevation raised $670 million, and Accel earned 650 million dollars, Lightspeed, which started investing in India 15 years ago and later created a dedicated fund for the country, $500 million fund unveiledThis is the fourth for India in 2022.

“With respect to Lightspeed India’s most recent fund, I believe its size is on the lower end of our competitors. This size has been chosen thoughtfully,” Somaiya said. “That said, our peers may see an opportunity that we don’t, or they may have a more detailed investment strategy – and we’re always eager to learn. But we want to avoid the risk of too much capital resulting in the strategy going astray.

Somaiya said he expects many companies, including Lightspeed, to take three to four years to deploy their funds instead of the usual cycle of two and a half to three years. “We need to deliver top-tier returns to our LPs, who have become accustomed to a certain type of returns from a firm like Lightspeed. We will never compromise to put money to work,” he said.

India in the global AI race

As AI progress increases in Western centres, India is following suit lagging behind in basic research Because its very few startups attempting to build large language models.

Lightspeed sees parallels to the firm’s early investment in an Indian energy exchange – the creation of a power trading platform whose analogue did not exist in Western markets. “My perspective is that right now we are in a phase with AI where a lot of the infrastructure and some tooling is being built. This is happening mainly in Silicon Valley. It’s really a reminder that the concentration of tech talent in Silicon Valley is unparalleled,” Somia said.

“Since we have been investing in India, we have seen limited core technology infrastructure innovation. Most of the opportunities lie at the application level for consumer and enterprise. There are a number of reasons for this, including market dynamics and the investor community, where we have some technically strong investors… so it’s a bit of a chicken and egg thing,” he said.

Lightspeed’s partner, Hemant Mahapatra, focuses on deeptech and has backed startups like Rephrase, one of the early generative AI startups, and Large language model AI startup Sarvam,

Mohapatra agreed that access to top-tier AI talent is hindered globally. But similar to the cloud computing shakeout, he predicted consolidation around some AI technology and business paradigms once the current hype subsides. Given India’s engineering bench strength, targeted AI opportunities may still emerge locally, he said, even if Silicon Valley retains its usual innovator dominance.

patient capital

The concern among many investors in India is that many late-stage startups keep pushing for upside, exhausting their runway before accepting the post-recession realities.

Anuj Bhargava, MD and head of India corporate development at Lightspeed, told TechCrunch that he is seeing progress towards aligning with the public markets. “I think this is the year where the financing that happens will be more in sync with the public markets. For growth companies, private markets have been slow. But for those names that have really improved their PNL, mitigated distress and are on sustainable unit economics, I think the public markets provide a great opportunity,” he said.

India has attracted interest from sovereign funds in the last three years on a scale that has never happened before, he said, adding that he is optimistic that they will invest in many late-stage startups. “We had a lot of funds that were not in India but were investing in India because the country provided them opportunities outside their country. Many companies raised money that was not commensurate with their scale or growth. Over the past few years, some active investors have not been investing as much in India, creating a void,” he said.

“That void has been filled by patient capital – sovereign funds were very quiet in 2020 and 2021; Pension funds that were either quiet and perhaps had not invested much in India before; and growth arms of private equity funds, many of which were not investing much in technology before. So these three pieces of capital are mature, long-term and patient and I expect we will see more activity in them going forward.”

While late-stage funding remains tight, 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 the month of January alone, according to a person familiar with the matter.

Lightspeed Partner Rahul Taneja said, “While many in the ecosystem are busy speculating when winter will end, we believe there is no time like now to build (and for us to invest). “

He said that skilled talent and eager capital remain accessible at the initial stage itself. “The quality of founders is much better – the people who are leaving their jobs really believe in their ideas, and are willing to take the plunge into what most people would call ‘slow years.’ Access to high-quality talent is much greater.” is better, and capital allocators are waiting to make bold bets. Every day, we meet extraordinary founders in the early stages of venture building – and realize that we are positioned to support the digital growth of India and Southeast Asia. How lucky I am.