Domestic venture capital (VC) funds will have a competitive advantage over global peers for the first time, especially in early-stage deal-making, as overseas investments into India slow, fund managers and partners told FE.
Data from Tracxn showed that large global VCs and hedge funds, including Tiger Global, Prosus Ventures, Sequoia Capital, Accel, SoftBank and Canada Pension Plan Investment Board, halved their investments into the country in CY2022 compared to CY2021.
Japanese conglomerate SoftBank, which is known for backing and creating new unicorns such as Lenskart, Ola and Oyo in India, slashed its investment by at least 97% in CY2022. It made investments worth around $8.8 billion across 16 deals in CY2021 during the funding rush, which dropped drastically to just $570 million across three deals in CY2022.
New York-based investment firm Tiger Global, which is also an active investor in unicorns in India, also cut its funding deployment into the country’s tech startups by around 70% in CY2022. The fund had made a record investments of around $12.3 billion across 61 rounds in CY2021, which dropped to $3.6 billion in CY2022, according to Tracxn data.
On the other hand, Bengaluru-based Elevation Capital, which is domiciled in India, increased its funding outflow by at least 92% in 2022. The company, which has around 126 investments in India and overseas, made investments worth $1 billion across 26 deals in CY2022 into the country’s tech startups, compared to $527 million across 38 deals in CY2021.
Fund managers and analysts predict the downward trend to continue for global VCs and PEs, especially since plenty of their investments in China have started to backfire due to the Chinese Communist Party’s (CCP) regulatory crackdown on tech firms. The CCP tightened antitrust and competition rules in 2021, which hit large tech firms like Alibaba, Baidu, ByteDance and JD.com with allegations of abuse of dominance, among others. China’s $70-billion edtech industry also suffered a major setback after the government invoked censorship over course content, and slapped hefty fines for allegations of misleading ads and for hidden charges in courses.
Abhishek Goyal, co-founder, Tracxn, and an independent angel investor, told FE that in 2021, these global VC funds had a major bull-run with public tech stocks and private investments exits, but by 2022 they lost a good chunk of the capital in the tech stock crash at the NYSE and Nasdaq since they had exposure to public markets as well, Goyal pointed out.
“These US-based funds are now rushing to buy government bonds and treasure funds with attractive coupon rates to hedge their investments. Hence, obviously, domestic VCs and investors will have a field run in India since there is going to be less competitive aggression from global VCs,” added Goyal.
He also pointed out that domestic VCs in India now also stand to attract capital from foreign limited partners (LPs) and investors such as endowment funds and pension funds as their global VC counterparts turn conservative. Experts also indicate that economic downturns occasionally give rise to startups with better unit economics and fundamentals as firms look to cut cash burn and stay away from fundraising unless there is a large expansion involved. Goyal predicts that in 2-3 years, domestic VC funds can generate very good returns for their investors.
Overall, Tracxn’s data showed that 2021 was an anomaly with at least 1,242 VC funds having participated in funding rounds into Indian tech startups. This was much higher than the 583 and 668 individual VC funds that participated in various funding rounds in 2019 and 2020, respectively. With the slowdown in 2022, this number dropped to just around 953 VC funds. However, fund managers still expect 2023 to be a good year, especially for early-stage startups.
There is still going to be a large vacuum for deals in the late-stage ecosystem in 2023 forcing Indian tech startups to accept down rounds or go for consolidation, experts warned. Sanjay Swamy, managing partner, Prime Venture Partners, said that the ongoing funding slowdown will spill over to 2023 as well as investors will turn selective in the companies they choose. He also expects seed-stage investors to have more activity compared to all other categories since the cost of funding new seed-stage companies is much lower now due to lower asking valuations.“Deals above the Series B stages will become more selective since investor expectations from these startups will be much higher on revenue and unit economics. Hence fewer companies will make the bar right,” Swamy added.