Taking a down round is not a big deal, startups have to move on: General Catalyst’s CEO Hemant Taneja

(L to R) Hemant Taneja, CEO of General Catalyst, Anand Chandrasekaran, Partner, General Catalyst

Startups in India and across the globe will have to come to terms with the market reality and accept the idea of going for down rounds for fundraising as this is common after every bubble burst, said Hemant Taneja, chief executive officer and managing director at Silicon Valley-based venture capital firm, General Catalyst.

Down rounds happen when startups raise fresh capital at a valuation that is lesser than their last fundraise. For example, in the first week of April, VC firm BlackRock cut the valuation of Byju’s ($22 billion) by nearly half to $11.5 billion.

“Valuations have come down, but it's because they had risen extraordinarily in the last three years. There's probably still more turbulence around it…I do think a lot of companies will end up taking down rounds, but that happens after every bubble. Google had a down round in its history. I think it's not a big deal, companies have to move on,” Taneja said.

His words come at a time when private equity and venture capital (PE/VC) funding to India’s startup ecosystem fell nearly 77 percent in February 2023 from a year earlier, as investors continued treading cautiously amidst macroeconomic uncertainties.

Taneja forecasts the slowdown in activity due to macro reasons like rising interest rates and normalisation of valuations in the startup ecosystem to happen in the next 9-12 months.

“We believe that things will settle out in the next 9-12 months, which may normalise valuations…Obviously, things are more favourable to investors today, and frankly, more reasonable. But even there, I would say, exactly how to value these companies, for how growth-oriented they are, is going to be unclear for a while,” he added.

Taneja also added that the due diligence processes are taking longer in the last couple of months even as the stringent checks on companies before investing remain the same.

“I think the due diligence processes have become longer because you have more time now than a year ago. We do like to do detailed financial reviews of businesses before investing,” he said.

One important factor that General Catalyst focuses on is having a solid team with a great Chief Financial Officer, Taneja added.

Betting big on the Indian market

The 22-year-old Cambridge, Massachusetts-based General Catalyst has Assets Under Management (AUM) of around $25 billion to date and has more than 10 general funds and two healthcare-specific funds.

In February 2022, the VC firm raised $4.6 billion for its 11th general fund, which will co-invest alongside the two healthcare funds of $600 million and $670 million each. The firm has so far raised $14.75 billion.

General Catalysts' interest areas in India include a few bets on Fintechs, ConsumerTech and Healthcare, along with Crypto and Web3. It counts Cred, Magma, Uni, CashFlo, FarMart, Loop Health and Orange Health in its portfolio.

Taneja said that the firm will look at investing around 10-20 percent of the 11th General Fund, with a total corpus of around $4.6 billion, in India.

“India is one of our core five themes, so that means probably around 10-20 percent of the total capital from our the Fund XI will be deployed in India,” Taneja said.

Exciting sectors for General Catalyst 

While the VC firm has remained sector-agnostic and also established focus funds for Healthcare, Taneja said that the firm will continue to invest in Fintechs and even explore Crypto and Web3.

“I think the promise of crypto has visibly risen…So, we've been incubating companies that uses decentralised technology and blockchain,” Taneja said.

“We do think that crypto and blockchain are going to come back. It's going to have a revival as the stacks mature and more industry use cases develop,” he added.

Talking specifically about gaming and Web3, Anand Chandrasekaran, Partner, General Catalyst, said that while first principles remain the same in accessing the companies, there is still a large scope for the segment.

“There will be some India-specific casual games that will get developed in the near future and some of them will have monetisation that's powered by traditional subscriptions and some will have the tokens, trading cards and NFTs,” Chandrasekaran added.

Outlook and roadmap for FY24 

Taneja said the long-term view of General Catalyst for India is very bullish and the market is going to see a lot of value-creation.

“It's not about this year or next year, all investments we do have a 10-year basis. And we're working backwards by seeing that companies that get started over the next couple of years can have a major role in the transformation that will come in the future. Just like what happened in China. This is India's China moment. And we want to be a part of it,” Taneja added.