Successful tech IPOs revive VCs' optimism; AI attracts key investments: Stellaris Venture Partners

The surge in IPOs has also forced founders to focus on building more sustainable businesses

In a freewheeling interaction with Moneycontrol, Rahul Chowdhri, Partner, Stellaris Venture Partners, an early stage venture capital (VC) firm, shared the company's perspective about the evolving Indian start-up ecosystem. Chowdhri shed light on the renewed optimism in the start-up sector this year in light of successful listing of several tech initial public offerings (IPOs). His optimism stems from Stellaris's experience of navigating fluctuating market cycles for more than a decade. He highlighted the importance of long-term investment strategies, especially in early-stage start-ups.

Chowdhri  held forth on key learnings from the 2022-23 cycle, shifting investor priorities towards sustainable growth and the influx of global capital into India. He also drew attention to the VC's standout portfolio successes such as Mamaearth and emerging investments in diverse vectors of growth, including artificial intelligence (AI), electric vehicles (EVs) and fintech.

Edited excerpts from the interview:

Q. Following a couple of years of negativity, this year has brought renewed optimism, fuelled by successful tech IPOs. What's your take on the current start-up landscape, particularly for early-stage growth and how do you see things unfolding going ahead?

Chowdhri: One key lesson we’ve learned, having been in the investment space for a long time, is that market cycles come and go. When we started Stellaris, we were clear that we wouldn't be swayed by these cycles, especially since our investment horizon is typically between seven and 10 years. You can't get overly excited during good times or, for that matter, too discouraged during downturns. Having witnessed four crests and troughs since 2007, we’ve realised that challenging times often present great investment opportunities.

Our fund strategy is built around this principle. We don’t alter our pace of investing based on short-term market sentiment. For example, in 2021, we made eight investments. In 2022, we increased our investments to nine, even when the broader market was more pessimistic. Our focus remains on the fundamental question of whether India’s economy will grow, consumer demand will rise and technology will continue to advance. If we’ve got that focus wrong, then our business model wouldn't hold.  We believe that over a seven to 10-year horizon, the necessary ingredients such as talent, capital and demand will drive growth.

Regarding tech IPOs, starting with Mamaearth a year ago, we’re now seeing more public listings in just the last few weeks, with several more lined up. This is important for global investors, as it shows India can deliver public market outcomes. Many of these IPOs are from venture-backed companies, addressing concerns that arose after the Zomato, Paytm, and Nykaa era, where there was a lull in IPO activity.

The surge in IPOs has also forced founders to focus on building more sustainable businesses. You can’t just chase growth; you also need to show strong margins, especially when going public.

Q. What are the key takeaways for investors from the cycle of 2022-23 and how will these inform their strategies moving forward?

Chowdhri: In early-stage VC investing, the entry price within a reasonable range is less significant. If a company succeeds, the return is substantial — whether it’s 30x or 31x doesn’t depend heavily on the entry point. However, in growth-stage investing, the entry price becomes critical. Here, you're targeting a 3x return, so overpaying, even for a well-performing company, can reduce returns. A key takeaway from 2022 is that many growth investors overpaid in 2021, resulting in less-than-ideal outcomes.

By 2022 and 2023, investors have become more cautious, prioritising not just top-line growth or market leadership, but also margins and sustainable business models. By the time a company reaches Series C or D round of funding, profitability becomes a central focus. Valuations have also become more in line with public market expectations — slightly elevated due to growth potential, but no longer excessively high.

Despite these changes, there remains ample capital available for investment in India. Though growth capital hasn't exited the market, investors are increasingly focused on metrics and a realistic valuation.

Q. Given the global macro-economic scenario, are you seeing limited partners (LPs) divert money from a bigger Asian economy such as China towards India?

Chowdhri: Today, if you consider global institutional pools of capital, particularly in the US and Europe, China is largely off the table for a variety of reasons. As a result, there has been a noticeable outflow of capital from China. That capital can certainly be deployed in the US, but for institutions seeking geographic diversity, there are limited attractive options in the venture asset class beyond India. While Japan and parts of Australia are considered, especially for buyouts, opportunities in the global venture space are relatively scarce outside India.

This positions India uniquely, attracting a lot of interest for investments in India-focused funds. However, LPs aren’t just interested in geographical diversification. They’re also looking for institutional-grade fund managers. These investors, particularly large pools of capital, are not just looking to invest in one-off funds. They want to partner with franchises where they can invest across multiple funds over time. Many LPs manage dozens of global managers and for them to add even one or two new ones, they need confidence that they won’t have to second-guess the next fund or the one after that.

Q. Mamaearth has been a big success for you. What are some of the other Stellaris bets that you think will drive strong returns for your funds?

Chowdhri: Mamaearth has been a standout success for us, representing more than double the size of our first fund, making it a significant exit. Beyond Mamaearth, we had another major exit with Slintel, sold to the US-based 6sense, as well as successful exits with Swiflearn (acquired by Unacademy), mfine, and Vogo. In 2019, we also had a partial exit in Whatfix through a small secondary sale.

We’ve delivered substantial returns to our LPs and a key metric is the number of market leaders we’ve helped create. Besides Mamaearth, Whatfix is a leading player in the software as a service (SaaS) space, and we continue to hold a significant stake there. Propelld, a top lending company in the education sector, is also doing well, alongside several other promising first-fund investments.

Our second fund, though still in its early stages, is showing exciting trends. A key focus area is AI. On the consumer side, we have DashToon, a US-based webcomic platform using generative AI to create content, which has been performing well. Another standout is Turno, a leader in EV financing, whose innovative tech tracks vehicle battery health in real-time, aiding in loan recovery and optimising resale pricing in the second-life battery market.

We've also invested in Kiwi, India's first UPI-based credit card, which is performing exceptionally well. Two brands from our second fund, Zouk and Nestasia, have crossed Rs100 crore in annual recurring revenue (ARR), while Orbitshift, an AI-driven SaaS company, is helping sales teams enhance account growth.

Q. What are the broad themes that you are looking to invest behind?

Chowdhri: Our investments are focused on six themes: core, AI-native companies, global SaaS, consumer; business to business (B2B) e-commerce; sustainability and fintech. In terms of our portfolio split, I’d say it's fairly balanced: about one-third is focused on enterprise, another third on consumer and the remaining third on micro, small and medium enterprise (MSME) and small and medium sized businesses.

We’re also seeing a few other interesting trends, particularly the global shift towards the "China plus one" sourcing strategy. In line with this, we invested in Cirkla, a sustainable packaging company, which is gaining good traction. We’re always on the lookout for more opportunities in this space and are actively exploring other businesses that align with these trends.