Slowing in startup funding is healthy, signals return to basics: Sanjeev Aggarwal of Fundamentum

The ongoing pause in startup funding is needed after the exuberance of easy money pumped in by central banks across the globe to mitigate the impact of the pandemic led assets to lose their correlation with basics in terms of valuations, said Sanjeev Aggarwal, cofounder of Fundamentum Partnership.

“Over the last two to three years, the financial markets have swung to the other extreme. Lots of businesses were getting term sheets after having raised money three months prior at double the valuations,” Aggarwal told Moneycontrol in an interview.

Aggarwal had previously founded Helion Venture Partners, a Mauritius-based venture capital firm that backed unicorns, or startups valued at over $1 billion, such as Byju’s, Ola, Paytm and Flipkart.

“So nothing was changing in the business but valuation was going up because of FOMO (fear of missing out) for VCs. So all the corrections that are happening are healthy,” he said.

Still, Aggarwal is optimistic about the consumer tech sector.

“Digital India is a secular theme. Even though India has 700 million internet subscribers, in most industries, the digital penetration is not even in double digits, other than travel, which means headroom for growth is very high.”

Aggarwal’s bullishness on the consumer tech sector in India comes when the Nandan Nilekani-backed Fundamentum raised funding of $227 million to invest in growth-stage technology startups in the country.

Right valuations

He said growth-stage funding is missing in the country because investors, especially local VC firms, tend to invest in the early stages (up to Series A) or the later stages (Series D onwards).

Until last year, growth-stage companies were funded by global VCs, which slowed their investments this year. This paves the way for Fundamentum to invest in companies at the right valuations.

To be sure, growth-stage funding slowed this year amid a correction in the broader markets. VC firms are increasingly asking startups to prioritise unit economics and profitability.

According to data by Tracxn Technologies, the average monthly Series B and Series C rounds for startups, typically called growth-stage rounds, has fallen 25 percent year to date.

“This time, the correction is from growth at any cost to growth along with unit economics or good long-term profitability. We are seeing that there is a return to fundamentals,” said Aggarwal.

“The financial markets always overshoot in one direction or the other. Either there is too much exuberance or too much discipline. But I feel that this is a good time to create companies to invest in sectors because you get time to do due diligence and you can pick your bets very judiciously.”

Aggarwal echoed Nilekani’s comments on unit economics. In a recent interview with Moneycontrol, Nilekani had underlined the importance of unit economics for startups and said companies should get unit economics right ‘very early in the game.’

Fundamentum Partnership, founded by Nilekani and Aggarwal in 2017, counts unicorns Spinny and Pharmeasy in its portfolio. The VC firm has invested in eight startups to date through its first fund of $100 million.

Fundamentum also counts soonicorns, or soon-to-be-unicorns, such as FarEye, a provider of low-code delivery management solutions, and Travel Triangle, an online marketplace for customised travel packages, in its portfolio.

Through a relatively new fund, Fundamentum will invest in consumer technology sectors such as healthcare. It will also look to invest in SaaS (software-as-a-service) companies and startups that build applications for rural India as the VC firm is bullish on the spread of digitisation in the country.