Good news is often rare and the recent episode involving the rescue of 41 miners trapped in the Silkyara Uttarkashi tunnel through a combination of human ingenuity, collaborative effort as well as sheer persistence brought quite a cheer to our country. As an economy and country, we have faced innumerable challenges but there is a consistent, steady push for growth and improvement. The same applies to the startup ecosystem as well.
We have seen three micro phases within the new wave of the Indian innovation economy where the first phase up to 2013 was quite the infancy for our ecosystem. In 2014-15 we witnessed a burst of liquidity on the back of unexpected political stability which resulted in a feeding frenzy in the startup world. Subsequently, we saw a pause and then a period of stabilisation where the country witnessed $5-8 billion of annual VC flows at a healthy clip but domestic capital was hardly to be seen. Founders were pushed to rely on improving their unit economics (yes, this phrase was in vogue then as well) and valuations were seen to be reasonable for the accompanying growth and fundamental strength of businesses. As a venture destination, India was among the top 5 global hotspots but there was a wide gap beyond US and China.
COVID-19 saw a phase which positively boosted India towards the digital world. Online Discovery, Sales, Payments and Credit took off which also resulted in a collateral fillip to segments like logistics, Rural & Agri supply chains, B2B platforms and Internet services. The liquidity explosion in 2021 till early 2022 was largely led by foreign capital pushing various startups into astronomical valuation zones with a lot of catching up to be done. Over the last 18 months, there has been a pronounced funding winter and the chills have cut across sectors not just in India but globally as well. Founders and fund managers who raised capital just prior also found this to be an opportunity for strategic expansion and an excellent vintage for new investments. Of course, the legacy portfolios had to be shepherded safely as well.
Retaining Valuation
However, there is a slow but steady structural shift which is in play currently. While valuation multiples have compressed and there is no patience for most companies with high burn, there has been a secular reduction in burn and improvement in unit economics (again, this phrase!). Founders have realised that they would rather have more control of their own destinies which implies they need significantly long runways. Discussions earlier used to entail average timeframes of 12-18 months between rounds but founders today are buffering up for 24-36 months in most cases. While they may end up raising capital in the interim, it will not be driven by necessity. Hence the outcome is – several companies have scaled efficiently through organic growth (and in some cases acquisitions as well) with better profit pools and have inevitably grown into their early valuations (even with compressed multiples) and in many cases are looking like outstripping them. Founders had to take a difficult decision this year on down rounds which sometimes manifested as convertible notes or structured rounds with complex formulae to protect valuation. Having an 18-month funding winter has pushed a lot of companies to become healthy and wise and maybe now it’s time to look at wealthy.
Startups Attracting Investors
Another structural aspect is the availability of capital. India currently has its all-time highest quantum of dry powder focused on domestic startup investments with a slew of fundraises recently. These include Accel, Matrix, Lightspeed, Peak XV, Nexus etc among global brands and A91, Ivycap, Fireside, Stellaris, Blume etc on the domestic front. Many of these investors have set aside a chunk of capital for growth investments ($15-25 million cheques) and their clock has been running for the last 12 months. These firms typically have a commitment horizon of 4-5 years so there is a growing backlog to be cleared in 2024/25. While there has been volatility in traditionally active players like Tiger Global recently, there has been a resurgence of interest from several sovereign investors especially from the Middle East thanks to improved geopolitical relations as well. Late stage investors typically pause when there is a substantial binary event like the National elections next summer and hence flows are likely to increase in H2 2024, assuming there is no volatility on this outcome. The medium term outlook on rates globally is favourable for an increased allocation to private capital with 50-100 bps of reduction in Interest rates expected in 2024.
Rise In Domestic Capital
The final variable to feel most optimistic about is domestic capital. The Indian family office segment has been getting increasingly active and also has the ability to take independent decisions. Indian investors have an innate understanding of risk and the increasing allocation to alternates is expected to manifest in a fresh source of sustained capital without the bogey of currency volatility. These investors started off by investing in funds as Limited Partners and now have the motivation and resources to invest directly into startups with their own diligence. Having co-investment opportunities through their investee funds has also accelerated this process. As an ecosystem we have been adept at celebrating success stories but we are also learning to respect failure and the effort behind startup journeys which is the real crucible for long term sustainable growth.
Read | Startup success: The real challenges and key factors beyond ‘the idea’
Great founder quality, deep management teams, stable and growing domestic market, improved positioning of India globally, strong availability of capital focused on this market, rationalisation of expectations on valuation and political stability (which hopefully does not get disturbed in 2024). These are all the reasons to feel optimistic about 2024 and maybe winning the World T20 on June 30, 2024 will just be the cherry on top!
Vinod Murali is Cofounder and Managing Partner of Alteria Capital, India’s largest Venture Debt platform. Views are personal and do not represent the stand of this publication.
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