Dispatch from Bangalore, end of 2022 edition

Dispatch from Bangalore, end of 2022 edition

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

Snapdeal and Flipkart were the only e-commerce startups that had achieved some scale at the time. Swaroop argued that Indians will be more likely to go online for food delivery, warehousing, warehousing, warehousing, and road freight, among other areas.

Swaroop, who is now a partner in the firm, proved to be right. Urban Company, which is in the domestic assistance sector, is valued over $2B; Zomato, Swiggy, and Cars24 deliver food to millions of customers every month; Spinny, Cars24, and Cars24 sell hundreds of thousands of cars each quarter. DealShare, a social commerce startup, is valued over $2B; and Meesho, just short of $5B.

In the last decade, hundreds of millions of Indians have gone online. Each month, over 100 million make online purchases and transactions. India has seen its unicorn pool double to more than 100 over the past two years. In the past half decade, it has attracted 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, Accel and Venture Funds Sequoia and Tiger Global.

Swaroop’s presentation starting in 2014. Image Credits Accel

As the local startup ecosystem closes down one of its most difficult years, it now faces another question that it has been able to ignore for so long: exits.

In the last year and a quarter, 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, while Policy Bazaar 52%, Policy Bazaar 52%, Delhivery 38%, and Nykaa 56% are all down.

Despite Indian stocks outperforming both the S&P 500 Index (China) and China’s CSI 300 (India), this is still a significant improvement on last year. The Sensex in India — the local stock benchmark — is up 3.4% this year compared to the falls of 19.75% 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 this year. According to two people familiar, Oyo, which had planned to list in January 2023 is unlikely to go ahead with that plan.

According to a source familiar with the matter, Flipkart, which is valued at $37.6billion and majority owned by Walmart, won’t list until at least 2024. India’s most valued startup, Byju’s, has no plans to list in 2023. Instead, they are moving forward with a Aakash will list one of its subsidiariesTechCrunch reported that next year.

People familiar with the matter say that those who want to push ahead with plans to go public will encounter another obstacle: Several global public fund, including Invesco, which ardently finance pre-IPO rounds, are withdrawing from India after being hammered in China this year.

LPs have expressed concerns for India’s inability to deliver exits. The early attempts made by the industry in the past two year seem nothing to be proud of.

Indian venture funds have historically been the most successful in obtaining exits through mergers and acquisitions. However, even these exits are becoming harder to find.

One of India’s top venture funds stated that VCs who backed SaaS startups in the early stages at a valuation of less than $25 million had a better chance of exiting. As we have seen, the startup’s exit value is sub-$25million, making it difficult to make a profit for SaaS investors.

A few dozen business leaders met at a private dinner at a five-star hotel in Bengaluru to exchange notes on deals they were evaluating. Partners complained that startups are not as good as they used to be, despite the increase in pitches.

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

I’ll argue that it’s not just the quality of startups that has suffered, but also investors’ appetites and mental models for what the future may hold.

Crypto is one example. The vast majority Indian investors did not make investments in the web3 space until too late. (You won’t find many Indian names on the cap tables of local exchanges CoinSwitch Kuber or CoinDCX, and, until recently, the blockchain-scaling company Polygon. This was recently highlighted to me by a prominent VC at the largest crypto VC funds in the world.

According to sources familiar with the matter, many Indian firms that had employed a number crypto analysts and associates last fiscal year are now withdrawing from the market and asking staff to concentrate on other sectors.

Another area of concern is Fintech. India’s central bank pushed this year for a Several stringent changes How fintechs lend to borrowers. The Reserve Bank of India is also becoming more prominent. Examining who gets the license To operate non-banking financial businesses in the country in moves Investors were shocked by the shockwaves.

Venture investors are increasingly looking for opportunities to invest in banks. Quona and Accel recently supported Shivalik Small Finance Bank. Many are considering investing in SBM Bank India, which is one of the banks that has partnered aggressively with fintechs in South Asia, TechCrunch reports. This was reported earlier in the month.

An investor described the trend to be a “hedge” against fintech exposure.

Investor enthusiasm for the edtech sector has also dropped after the reopening schools that toppled Vedantu, Unacademy, and Byju’s giants.

According to Tracxn, Indian startups raised $24.7billion this year, a drop of $37billion from last year. Startups were forced to lay off as many as 20,000 employees due to the market dynamics and the funding crunch.

I spoke to more than a dozen investors who believe the funding crunch will not end until at least Q3 next year, despite investors chasing India sitting on record amounts dry powder.

As we enter the new decade, investors will be reviewing their convictions. Many are convinced that there are several down rounds for major startups. Star unicorn founders are not willing to accept a cut in their valuations because they believe it will drive some talent away. According to two people familiar, PharmEasy was valued at $5.6billion and was offered new capital at a valuation lower than $3billion this year. (PharmEasy didn’t respond to a request to comment.)

“2022 started strongly and it appeared for a while the Indian venture financing market would be subjected to different gravitational factors than the U.S. and China which were experiencing dramatic declines. But this was not to be. According to Sajith Pai, an investor in Blume Ventures, the Indian market eventually became subject to the same macro headwinds that the U.S. and China Venture Market.

Pai stated that growth-stage deals accounted the majority of funding last fiscal year and saw anywhere between a 40%-50% drop in funding this year. “The decline was primarily due to growth funds pausing investments, because the multiples in the private markets were richer than their public peers and the weak unit economies of the growth-stage businesses.”

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