Dispatch from Bangalore, end of 2022 edition

In 2014, Prayank Swaroop made a pitch to the storied venture firm Accel, where he worked as an associate, about future marketplaces in India.

At the time, Flipkart was the only e-commerce startup in India to have achieved some scale. Swaroop argued that Indians will be more online and there will be opportunities in food delivery, warehousing and road freight, as well as other areas such social commerce.

Swaroop is now a partner in the firm. Urban Company, which operates in the domestic help sector, is valued at over $2 billion; Zomato and Swiggy are delivering food to millions of customers each month; Spinny and Cars24 are selling hundreds of thousands of cars each quarter; social commerce startup DealShare is valued at over $2 billion and Meesho just short of $5 billion.

Hundreds of millions of Indians have come online in the past decade and over 100 million are making online transactions and purchases each month. India, which has doubled its pool of unicorns to over 100 in the past two years, has attracted over $75 billion in investments from tech giants Google, Meta and Amazon and venture funds Sequoia, Tiger Global, SoftBank, Alpha Wave, Lightspeed and Accel in the past half decade.

Swaroop’s presentation from 2014. (Image credits: Accel)

As the local startup ecosystem closes down one of its most difficult years, it now faces another question that it has long been able ignore as benign: exits.

Around half a dozen Indian consumer tech startups have gone public over the past year and half. All of them are performing poorly at the local stock exchanges. Paytm is down 60% this year, Zomato 58%, Nykaa 56%, Policy Bazaar 52%, and Delhivery 38%.

This is despite the Indian stocks outperforming the S&P 500 Index and China’s CSI 300 this year. India’s Sensex — the local stock benchmark — remains up 3.4% this year, compared to fall of 19. 75% in S&P 500 and 21% in China’s CSI 300.

Many Indian startups, including Snapdeal and MobiKwik, have postponed their listing plans due to market changes this year. According to two people familiar, Oyo, which had planned to list in January next, is unlikely to go ahead with that plan.

Flipkart, valued at $37.6 billion and majority owned by Walmart, doesn’t plan to list until at least 2024, according to a person familiar with the matter. Byju’s, India’s most valuable startup, doesn’t plan to list in 2023 and is instead moving ahead with a plan to list one of its subsidiaries, Aakash, next year, TechCrunch previously reported.

Those who want to move forward with plans to go public face another obstacle: Several public funds, including Invesco, that ardently finance pre-IPO rounds are withdrawing from India after being hammered in China this year, according people familiar with the matter.

LPs have expressed concern about India’s inability to deliver exits. The early-attempts made by the industry in the past two year seem nothing to be proud of.

Indian Venture Funds have historically gotten the most exits through mergers and acquisitions. However, even these exits are becoming harder to find.

An analyst at one of the top venture funds in India said that for a long time VCs who backed early-stage SaaS startups at sub-$25 million valuation stood a chance of making good exits. But as we have seen in some cases in recent months, the exit itself values the startup at sub-$25 million, making it difficult for SaaS investors to turn a profit.

II.

A few dozen industry leaders met at a private dinner at a five-star hotel in Bengaluru to exchange notes on deals they were evaluating. Partners complained that startups are not as good as they used to be, despite the increase in pitches.

Two prominent venture funds, which run reputable accelerators or cohort programs of early stage investments, are having difficulty finding enough qualified candidates for their next batches. This is according to people familiar with the matter.

I will argue that it’s more than just the quality of new startups that has suffered, but also the investors’ appetites and mental models for what the future may hold.

Take crypto, for example. The vast majority Indian investors did not make investments in the web3 space until too late. (You won’t find many Indian names on the cap tables of local exchanges CoinSwitch Kuber or CoinDCX. Until recently, there was also blockchain scaling firm Polygon. I was recently pointed out by Polygon as a prominent VC at the largest crypto VC funds in the world. )

Many Indian firms that had employed a lot of crypto analysts and associates last fiscal year are now withdrawing from the web3 market. According to people familiar with this matter, staff have been asked to focus on other sectors.

Fintech are another area of concern. India’s central bank this year pushed a series of stringent changes to how fintechs lend to borrowers. The Reserve Bank of India is also increasingly scrutinizing who gets the license to operate non-banking financial companies in the country in moves that has sent a shockwave to investors.

Many venture investors are now more interested in backing banks than venture capitalists. Quona and Accel recently supported Shivalik Small Finance Bank. Many are deliberating an investment in SBM Bank India, one of the banks that has aggressively partnered with fintechs in the South Asian market, TechCrunch reported earlier this month.

An investor described the trend to be a “hedge” against fintech exposure.

Edtech investors’ enthusiasm has also cooled after the re-opening schools that toppled Vedantu, Unacademy, and Byju’s giants.

Indian startups raised $24.7 billion this year, down from $37 billion last year, according to market intelligence firm Tracxn. The funding crunch and the market dynamics prompted startups to let go of as many as 20,000 employees this year.

Around a dozen investors that I spoke to believe that the funding crunch will continue until at least Q3 next year, despite investors chasing India sitting on record amounts dry powder.

As we enter the new year some investors will be reviewing their convictions. Many are convinced that there are several down rounds for major startups. Many star unicorn founders don’t want to see their valuations drop, partly because they fear that it will drive away some talent. According to two people familiar, PharmEasy was valued at $5.6billion and was offered new capital at a valuation lower than $3billion this year. (PharmEasy didn’t respond to a request to comment. )

“2022 started off strongly, and it seemed for a while that the Indian venture funding market would be subject to different gravitational forces than U.S. and China, which were seeing dramatic declines, but this was not to be. According to Sajith Pai, an investor in Blume Ventures, the Indian market eventually became subject to the same macro headwinds that the U.S. and China Venture Market.”

Pai said that growth-stage deals accounted for the majority of funding last year and saw anywhere from a 40-50% drop this year. “The decline was primarily due to growth funds pausing investments, because the multiples of private markets were richer than their public peers and the weak unit economics for the growth stage companies .”