Venture Capital Financing: Venture capital firms are tightening the tap to fund Indian start-ups

Bengaluru: The influx of venture capital directed to Indian start-ups in recent years has been drying up even as a stream of global investors, including the likes of Sequoia Capital, are warning entrepreneurs of turbulent financial markets. Big ticket funding rounds have taken a hit in the past couple of months, suggesting these investors are reluctant to write big checks.

From April 1 to May 16, 2022, there were just nine funding rounds of more than $100 million, totaling just over $2 billion, compared to 27 such deals in January-March this year, according to for the data obtained. From New York-based CB Insights analytics platform.

The unicorn rounds that catapulted 42 companies to the once-elusive club in 2021 have also been halted. So far, only 15 startups valued at more than $1 billion have been created this year, and April and May saw only five such deals.

In addition, the total capital raised by Indian companies decreased significantly in the past two months by $3.82 billion during the period from April 1 to May 16, 2022 through 268 deals compared to $9.93 billion in the January-March period, according to CB Insights, as a negative. Macroeconomic conditions, especially the US Federal Reserve’s hike in interest rates and the defeat of tech stocks in public markets around the world, deteriorated sentiment.

A slowdown in late-stage financing
In contrast, during the period from April 1 to May 2021, nearly $4 billion was raised via 227 deals in India.

“Big deals get stuck or delayed because investors are in no hurry to commit capital when there is no competition for deals,” said people familiar with the matter.

Multiple sources familiar with the matter said that M&A discussions such as “Razorpay’s potential acquisition of payment solutions platform Ezetap may have taken much longer to close due to shifting sentiment,” while there were “no other deals worth more than $500 million this year” except for the amount of $805 million for Dailyhunt funding round and $800 million Byju financing,

“Late-stage funding is where we’ve seen a bit of a pause, and most of the total dollar value of the ecosystem comes from late-stage deals. And if late-stage money slows, the ecosystem appears to be slowing,” said Rahul Taneja, partner at Lightspeed Venture Partners, who He sees that the ecosystem (finance) in the early stage has not changed much.

“Public markets in the US have been rocketing over the last couple of years and are now re-priced, and that has also corrected prices in private deals as well,” Taneja noted, “Investors want to make sure that companies are now transitioning to a fundamentally healthy business model that will provide cash flows. Free cash for the long term.”

A slowdown in last-stage funding was expected as early as December 2021 when US technology stocks were declining. Typically, private valuations are rearranged after a lag period of four to six months after the public markets.

Speaking to ET in March, Rajiv Misra, CEO of SoftBank Vision Fund, said the power of capital has shifted once again to the capital provider after the euphoria of the past two years.

Misra said at the time, “…if the company is trying to raise $250 or $500 million, it is struggling to find the lead investor who will come in with $100-150 million.” According to him, the fund has witnessed in the private markets the retreat of some investors after verbal commitments regarding deals.

Since then, the environment has only worsened.

M&A takes longer to close deals

According to a businessman at one of the most valuable startups in the country, the liquidity situation in India will become more difficult in the future and added that the situation is relatively worrying in the United States currently.

“This (Ezetap deal), for example, has been in the works for several months and will eventually close, but they (Razorpay) are now doing their due diligence (DD) as there is no rush to close these acquisitions in the current market scenario,” said a person familiar with the matter. . He added that unlike last year, companies do not have multiple term papers for investments or mergers and acquisitions.

E-commerce company Meesho was among the companies looking to raise at least $500 million at a valuation of nearly $8 billion – 60% higher than the previous valuation last September. People briefed on the fundraising process said it’s unlikely that a new round will be wrapping up anytime soon.

So what’s next?

The founders have already changed their stance and are focused on maintaining cash even if they recently closed a funding round.

“We knew the collapse was coming but we didn’t know exactly when… the rainy day we talked about here now. Even for the people who are lifting the tours now, we tell them to treat this as your last tour and think of a plan B,” said Sanjeev Bekhchandani. , Founder

and the number one investor in Policybazaar, which went public last year, adding that “companies that have the right unit economies and those that are well capitalized and that are growing well, will survive this[slow cycle]but startups that need capital and fail to… Increasing it will have difficulty.”

He also noted that “as long as inflation in the US remains high, the Fed will raise interest rates and that will affect funding in general.”

Inflation and interest rates in the US are critical factors for financing Indian startups because large investment deals are led by foreign investors with a large pool of capital. In the past year, India has also seen cross-border investors betting on Indian startups in their late stages. These funds fall back on writing strict checks. Tiger Global posted a loss of $17 billion according to the Financial Times, while SoftBank President Masayoshi Son announced earlier this month that it would cut investments significantly this year. These two people are among the biggest creators of unicorns in India and globally as well.

“Right now, all of the companies that have been aiming for an IPO on the 18-36-month schedule are under extreme pressure to cut costs and make course corrections. For many, the answer is to reduce staff cost. Even existing investors are pushing their portfolio to the road,” he said. Amarjit Singh, Partner and National Leader, Giants and Startups, KPMG India, “Profitability and Cost Control”.