Founders need to have realistic expectations post the downturn, Matrix Partners believes as it closes its largest-ever fund

Matrix Partners India team

Startup founders will adopt more rational valuations when they return to the market to raise funds after enduring a challenging fundraising period,
said partners at Matrix Partners India, one of the most active venture capital firms in the country, as they closed their largest-ever India-dedicated fund.

“In 2021, I think a lot of companies raised capital at very attractive valuations. Perhaps, one can argue, maybe a few years ahead of where the company’s actual performance was,” said Matrix India Managing Director Rajinder Balaraman in a virtual interview with Moneycontrol.

“In some ways, Indian founders were lucky because they had six months more time to react to the global macros. Most good companies have grown into their valuations or at least will grow into their valuations in the next 12 months and whenever they come back to the market to raise capital, they will have realistic expectations. I think Indian founders will navigate this cycle better,” Balaraman added.

Balaraman and Tarun Davda, Partner and Managing Director of Matrix Partners India, spoke to Moneycontrol after closing their fourth India-dedicated fund, raising $525 million. Along with General Partner Commitment and employee participation, the fund was closed at $550 million, the two partners said. This fund is the largest ever raised by the venture capital firm and will be used to invest in around 45-50 companies.

Matrix will be targeting companies in sectors like consumer technology, financial technology, B2B (business-to-business), and software-as-a-service (SaaS), which have been its focus. It will also target newer sectors like generative artificial intelligence (AI), semiconductors, and climate
tech, Davda said.

The VC plans to do about 15-20 deals a year. Davda and Balaraman said that the VC closed around 15-20 deals in the last 12 months and was one of the most active VC firms. The two partners also mentioned that this year the VC has participated in investments through the new fund, but it has not yet announced any of the deals.

Moneycontrol reported earlier this week that Matrix increased the size of its fund and is also raising a sidecar fund of $14.75 million, according to its regulatory filings with the Securities and Exchange Commission.

To be sure, Matrix had set its sights on raising funds, starting at $450 million, from May 2022 onwards. The first close of the fund took place in the first half of 2022 itself, according to the two partners.

But the fund expanded in size and added new Limited Partners (LPs) on board, which led to some regulatory requirements. This, along with the worsening macroeconomic environment, slowed the process for the final close of the fund, according to the two partners.

Matrix onboarded a few sovereign funds from Asia and the Middle East, the two partners said, without divulging any details. They said that the fund garnered a lot of interest from regions outside of the US, unlike its previous three funds.

Matrix Partners, a Seed to Series A stage investor in India, has as many as five unicorns valued at over $5 billion on its portfolio, including Ola, Razorpay, Dailyhunt, and Josh parent VerSe Innovation. The VC has also seen five of its portfolio companies go public, including Five Star Finance and Zomato. In 2021, Moneycontrol reported that Matrix's exits were far less than those of some of its peers, such as Nexus Venture Partners, Sequoia, and Accel.

Davda and Balraman, however, said that the VC has been taking some secondaries in some of its portfolio companies ahead of future IPOs. The two partners however did not disclose many details on the rate of return.

“We have done partial secondary stake sales in some of our large companies where funds were looking to buy additional stakes. But the important thing here to note is you have to be profitable at scale” Davda said.

Davda and Balaraman also said that the IPO market will may open up again by the end of this year or early next year, which will be a lucrative option for exits again. The two were confident that their larger portfolio companies would be getting listed soon. Without taking names of the companies, they said they were aware of the startups that were “in the pipeline for IPO”

Matrix's new fund comes at a time when many early-stage VC firms, including some of the most aggressive ones such as Sequoia Capital, Elevation Partners, and Accel, among others, have raised large India-dedicated funds but are waiting for the investment floodgates to open amid uncertainty in the global macroeconomic environment.

With a majority of VCs staying out of the market, funding to the startup ecosystem has dropped substantially, particularly since the second half of 2022. Just as Balaraman said, valuations of companies have also faced a reality check. According to him, down rounds have happened in the ecosystem and will continue to happen going forward. He mentioned that while none of Matrix Partners’ companies have undergone a down round yet, the companies that need to raise cash in the near future may opt for down or flat rounds.

Corroborating Balaraman’s remarks, Davda said,“Some of the assets were overpriced post-Covid. The companies that managed to grow into these prices will raise at higher prices. But the companies that were unable to grow into those prices and are in the market to raise funds, might have to take a down round. But it's okay, companies should be prepared to take a down round and move forward.

Matrix was founded by Avnish Bajaj and Rishi Navani in 2006. Bajaj was the co-founder and CEO of Baazee, which was later acquired and became Ebay India, while Navani was a former McKinsey executive and an investor with Westbridge Capital. Matrix raised a $300 million first fund in 2006, and another $300 million in 2011. In 2016 it raised $110 million to top up its second fund, and raised a full third fund of $300 million in 2019. However, in 2015, co-founder Navani left to start his own firm, Epiq Capital.

Besides Bajaj, Matrix India’s current leadership has three managing directors- Vikram Vaidyanathan, Tarun Davda, and Rajat Agarwal.