Funding is back, with a catch: Secondary share sales fuel $100 million rounds in Indian startups

In a primary round the money goes directly into the firm’s bank accounts and in a secondary transaction company shares are just transferred from one investor to another. Nothing goes into the company’s coffers.

After a drought of about one-and-a-half years, large deals, ones that are over $100 million in size, are making a steady comeback in the Indian startup ecosystem.

Over the last few weeks, Moneycontrol reported that several startups such as Dhan, Rebel Foods and Eruditus are all negotiating cheques that are over $100 million in size. While those deals are currently underway, several companies like Zepto, Meesho, Rapido, Pocket FM and others have already bagged large amounts in 2024. Of these, Zepto is the largest so far this year as it prepares to close $1 billion in a span of two months, as investors swarm towards quick commerce.

While the rounds go to show that there is increased investor interest and large ticket rounds are back in the Indian startup ecosystem, similar to what was seen in 2021, there has been a shift in how fundraising was done earlier versus how it is done now. A significant number of companies, that have closed rounds or are in the process of finalising deals this year, are doing more secondaries than they did earlier which has sparked large deals.

In fact, most large deals that have materialised this year – barring that of Zepto – have a significant secondary component in them, along with primary capital infusion.

In a primary round the money goes directly into the firm’s bank accounts and in a secondary transaction company shares are just transferred from one investor to another. Nothing goes into the company’s coffers.

Take for instance, Rebel Foods, a cloud kitchen startup that is raising $120 million, will have 50 percent of the total corpus be in secondary share sales, as Moneycontrol first reported.

Similarly, around 70 percent of Purplle’s $120 million round is a secondary share sale. Even Meesho’s planned $550-600 million round will have a $275-$325 million secondaries component, as reported by Moneycontrol. Lenskart’s recent $200 million round was all about Singapore’s Tamasek and Fidelity increasing their stakes by buying more shares of the company. Fintech SaaS platform Perfios too turned a unicorn after closing a round that was a mix of primary capital and secondary transactions, its second such arrangement in a span of 12 months. The list goes on.

“In 2021, deals were mostly fully primary in nature but now the default is a blended deal where there is a portion of primary capital infusion but also a secondaries component. This creates exit opportunities for early backers and delivers a better blended price for the incoming investor. Combined with the right entry price, this makes the deal work well for all stakeholders,” said Rahul Taneja, Partner, Lightspeed, which has backed Zepto and Pocket FM among other notable deals this year.

In Rebel’s case, the company was valued at around $1.3 billion in the primary market but investors like Coatue and Lightbox are looking to offload shares at a valuation of $700-800 million. That works out at a blended valuation of about $1 billion which sweetens the deal a tad for an incoming investor like Temasek.

“There are three factors - investors who came in the 2015-18 period are looking for exits as they need to make distributions back to their LPs (limited partners who invest in venture capital funds). And these rounds can only happen in large and successful companies," said Abhay Pandey, General Partner, A91 Partners.

“Secondly, pricing wise, it looks attractive for an incoming investor, as many of these firms are close to profitability and have plans for a public listing in a year or two. And finally, secondaries at a discount while holding the primary price valuation at previous round can make the round more palatable for the incoming investor," Pandey added.

In fact, the secondaries market is so hot in India that veteran fund managers are quitting jobs to set up their own secondaries fund. 

Startup deals of $100 million and more

“A large portion of deals that are happening currently is a mix of primary and secondary. The remaining are primary only or secondary only deals. Companies do not want to go to the market once for primary capital infusion and then again in six months for secondaries – so they’re timing the fund raise and clubbing both to make the process much more efficient,” said Neeraj Shrimali, Managing Director and Co-head, Digital & Technology Investment Banking, Avendus Capital.

Companies are also facilitating secondaries themselves because new investors want an in. Startups like Porter was valued at around $550 million during its primary fundraise in 2021 but the logistics provider has done two internal rounds (friends and family) which has propelled its valuation to $1 billion, Moneycontrol had previously reported.

Both Taneja and Shrimali said that the deal pipeline is strong, too. While Shrimali said there are more than 20 deals that are over $50 million in size underway, Taneja expects a further pickup in deal activity as many companies have been waiting and watching from the sidelines for the last two years.

The increase in deal activity is despite rounds taking longer to close, from about 2-3 months in 2021 to 6-8 months now. That is because investors are placing  a premium on companies that not only scale quickly but also work towards profitability. Meesho for instance has cut its monthly cash burn from around $40-45 million in peak 2021 has now turned profitable on a profit after tax (PAT) basis. Similarly, Zepto which was burning around Rs 90 crore in September 2022 is talking about turning profitable in a few months from now.

“We were able to raise this ($665 million) round because we were able to multiply gross merchandise value (GMV) to a north of $1 billion in around 2.5 years, the fastest internet company in the world to do so. We’re growing by over 100 percent year-on-year," Aadit Palicha, co-founder and CEO, Zepto, had said in an earlier interview.

"While doing that, we were able to turn 75 percent of our markets fully EBITDA positive. So, if we hadn’t executed and delivered on those numbers, it would have been very difficult to raise. But because we did it, it was actually quite easy for us to raise the kind of capital we did,” he added.

However, even as public markets turn more favourable for new-age tech companies and there is capital available to deploy, not all investors are jumping right in.

SoftBank, for instance, one of the most prolific investors in the world, is yet to make a fresh investment in India as it waits for the quality of founders to improve.

The Japanese investor is instead doubling down on older bets, like Meesho and SaaS startup Whatfix.

“We’re still looking for the next Harsha (Swiggy chief Sriharsha Majety), the next Sahil (Delhivery chief Sahil Barua)...we’re looking hard, but have not found them and that’s why we haven’t started reinvesting yet. We’re at a $5.5-trillion market cap on the National Stock Exchange (NSE) now, and 25 percent of that should be tech in five years from now. For that we need a lot of that (founder) pipeline to come through,” Juneja said while speaking at the Moneycontrol Startup Conclave in Bengaluru on August 9.