In 2014, Prayank Swaroop pitched to legendary venture firm Accel, where he worked as an associate, about future marketplaces in India.
At the time, Flipkart and Snapdeal were the only two e-commerce startups in India that had shown any semblance of scale. Swaroop argued that as more Indians come online, opportunities will arise in food delivery, automotive aftermarket, warehousing, road transport and social commerce among many other market areas.
Swaroop, now a partner at the firm, turned out to be right. Urban Company, operating in the domestic help sector, is valued at more than $2 billion; Zomato and Swiggy deliver food to millions of customers every month; Spinny and Cars24 sell hundreds of thousands of cars every quarter; social commerce startup DealShare is valued at over $2 billion and Meesho just shy of $5 billion.
Hundreds of millions of Indians have come online in the last decade and more than 100 million make online transactions and purchases every month. India, which has doubled its pool of unicorns to more than 100 in the past two years, has attracted more than $75 billion in investment from tech giants Google, Meta and Amazon and venture capital funds Sequoia, Tiger Global, SoftBank, Alpha Wave, Lightspeed and Accel in the past five years.
Swaroop’s 2014 presentation. (Image credit: Accel)
But as the local startup ecosystem wraps up one of its toughest years, it now stares at another question it has long brushed aside as benign: exits.
About half a dozen Indian consumer technology startups have gone public in the past year and a half, and all are underperforming on the local exchanges. Paytm is down 60% this year, Zomato 58%, Nykaa 56%, Policy Bazaar 52% and Delhivery 38%.
This is despite Indian stocks outperforming the S&P 500 Index and China’s CSI 300 this year. India’s Sensex – the local stock benchmark – continues to rise 3.4% this year, compared to a 19.75% decline in S&P 500 and 21% in China’s CSI 300.
As the market changed direction this year, many Indian startups, including MobiKwik and Snapdeal, have postponed their listing plans. Oyo, which planned to be listed in January next year, is unlikely to move forward with that plan, according to two people familiar with the matter.
Flipkart, valued at $37.6 billion and majority owned by Walmart, has no plans to be on the list at least by 2024, according to a person familiar with the matter. Byju’s, India’s most valuable startup, has no plans to be listed in 2023 and is instead moving ahead with a plan to list one of its subsidiaries, Aakash, next year, businessroundups.org reported earlier.
Those who want to push ahead with their plans to go public will face another obstacle: several global public funds, including Invesco, which are ardently funding the pre-IPO rounds, are pulling out of the Indian market after going into hiatus this year. China and other emerging markets were hammered, according to people familiar with the matter.
LPs have long expressed concern that India is not making exits and the industry’s early attempts over the past two years seem nothing to write home about.
Indian venture capital funds have historically obtained the most exits through mergers and acquisitions. But even these exits are getting harder and harder to find.
An analyst at one of India’s top venture capital funds said VCs backing early-stage SaaS startups at a valuation of less than $25 million stood a chance of making good exits. But as we’ve seen in some cases in recent months, the exit itself values the startup at less than $25 million, making it difficult for SaaS investors to make a profit.
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On a recent evening at a private meeting of a few dozen industry figures at a five-star hotel in Bengaluru, many investors exchanged notes about the deals they had been evaluating. The partners complained that the quality of startups has dropped while the number of pitches has increased.
Two prominent venture capital funds that run reputable accelerators or cohort programs of early-stage investments are struggling to find enough good candidates for their next batches, people familiar with the matter said.
I will argue that it’s not just the quality of emerging startups that has taken a dent, it’s investors’ appetites and mental models for what they think might work in the future.
Take cryptocurrency, for example. The vast majority of Indian investors were too late to invest in the web3 space. (You will find very few Indian names in the cap tables of local exchanges CoinSwitch Kuber and CoinDCX and until recently, blockchain scaling company Polygon, as a prominent VC at one of the world’s largest crypto VC funds recently pointed to me .)
Now, many companies in India who hired a number of crypto analysts and employees last year are pulling out of the web3 market and have asked staff to focus on different sectors, according to people familiar with the matter.
Fintech is another concern for investors. India’s central bank has made a series of sweeping changes this year to how fintechs lend to borrowers. The Reserve Bank of India is also increasing find out who gets the permit to operate non-bank financial firms in the country in moves that have sent a shock wave to investors.
Many venture investors are now increasingly chasing opportunities to support banks. Accel and Quona recently backed Shivalik Small Finance Bank. Many are considering an investment in SBM Bank India, one of the banks aggressively partnering with fintechs in the South Asian market, businessroundups.org reported earlier this month.
Investor enthusiasm in the edtech market has also cooled after the reopening of schools toppled giants Byju’s, Unacademy and Vedantu.
According to market research firm Tracxn, Indian startups raised $24.7 billion this year, up from $37 billion last year. The financing crisis and market dynamics prompted startups to lay off no fewer than 20,000 employees this year.
More than a dozen investors I spoke to believe the funding crisis won’t subside until the third quarter of next year, despite most investors chasing India as they sit on record amounts of dry powder.
As we enter the new year, some investors will be reevaluating their beliefs and many are convinced that several downturns for major startups lie ahead. But many star unicorn founders aren’t willing to give their ratings a haircut, in part because they think doing so will drive out any talent. PharmEasy, valued at $5.6 billion, was offered new capital this year at a value of less than $3 billion, according to two people familiar with the matter. (PharmEasy did not respond to a request for comment.)
“2022 started off strong, and for a while it seemed that the Indian venture capital market would be subject to different gravitational forces than the US and China, who saw dramatic declines, but it was not to be. The Indian market ultimately proved to be subject to the same macroeconomic headwinds as the US and Chinese venture markets,” said Sajith Pai, an investor at Blume Ventures.
Pai said growth stage deals accounted for the bulk of funding last year and saw a 40-50% drop this year. “The decline was driven primarily by growth funds halting investment as private market multiples were rich compared to their public counterparts, and by the weak economics per unit of growth stage companies.”
