The consultancy firm said that the trend lines pointed to a “sharp reset for the PE-VC landscape,” which has battled a so-called “funding winter” as risk capital inflow to India had dried up from the latter half of 2022.
This downturn had followed a boom in private equity and venture capital investment witnessed in 2021 and early part of 2022 when Indian startups received a record inflow of capital. The subsequent downward trend in risk capital investments has changed in the three-month period ended June 2023, the data revealed. PE and VC investments reached $13 billion in the period, clocking 60% growth over January-March, propelled by large deals concentrated in the second quarter.
ETtechDev Khare, partner, Lightspeed Venture Partners told ET that following the imbalance witnessed in the last few years, the investment ecosystem has become healthier and has more depth in terms of experienced founders starting up.
“If you compare it with 12 months ago, it’s a funding winter but overall if you look at 2018, 2019, it’s more now than it was before,” he said.
Discover the stories of your interest
Pointing to “little bit of imbalance in the middle,” Khare said it is “healthy right now.”
“We’ve made a record number of investments as Lightspeed this year itself. We’ve made seed, Series A and Series B investments and we’ve signed growth investments as well,” he added.
To be sure, the Bain report pointed out that while PE investments grew in the first half of 2023 over second half of last year, VC investments fell by 25%. Notably, in the January-June period, investments in Walmart-owned fintech company PhonePe and omnichannel retailer Lenskart accounted for 30% of VC funding, it added.
Venture investors are now taking a harder look at business models of potential portfolio companies.
The Bain report noted that the share of investments in segments such as banking, financial services, and insurance (BFSI), healthcare, energy, and consumer and retail is back to pre-Covid levels of approximately 75%. This is a reversal of the share taken over by IT, software as a service (SaaS) and consumer tech companies during the frenzy of 2021-22.
IT, SaaS and consumer tech investments had contributed to over 70% of all deal value during that period.
Some of these deals include acquisition of HDFC Credila Financial Services (the education loans vertical of the HDFC group) by a consortium led by BPEA EQT group (formerly Baring Private Equity Asia) for Rs 10,350 crore, and the Rs 800 crore investment in another education focused non-banking financial company Avanse Financial Services by homegrown PE firm Kedaara Capital.
PE vs VC
Bain pointed out that dealmaking on the private equity end continued to remain robust while venture capital and growth equity contracted. While private equity investments in the January-June period grew 10% – compared with July-December 2022 – to $16.5 billion, venture bets contracted 25% during the same period to around $5 billion.
Bain & Company’s partner, private equity practice, Prabhav Kashyap said, “VC investors are now asking the questions that they used to 18-24 months ago – is this a good business that was not just growing rapidly but also is it doing it sustainably with a right kind of business model, which even if not profitable today, has a very clear path”.
“On the private equity side, people have gone back to the fundamentals in many ways, asking where the big consumption patterns are going to happen from an India, middle class growth story perspective,” he added.
Investors poured money, over multiple rounds, into two assets that contributed around 30% of VC and growth deal value, PhonePe and Lenskart, revealing an intent to deploy capital in marquee assets, with investors still flush with fresh dry powder,” the Bain report said.
Tough investors
Of the $600 million round that omnichannel eyewear retailer Lenskart closed in June, around $450 million was in secondary sales. In a secondary share sale, existing investors sell their shares to new investors and the funds are not injected into the company’s balance sheet.
In addition to Lenskart, new-age logistics firm Xpressbees saw its existing investor Elevation Capital diluting its stake further in the Pune-based firm and selling to Malaysia’s Khazanah Nasional.
Bain’s Kashyap pointed out that investors will continue to double down on the bets they’ve already taken, after clearing the picture on growth and profitability.
Aadit Palicha, cofounder and chief executive of quick commerce platform Zepto – which raised $200 million earlier this month at a $1.4 billion ending India’s almost year-long unicorn drought – told ET in an interview that profitability emerged as a key ask during the startup’s conversations with investors.
ET reported on Monday, citing SoftBank Investment Advisers managing partner, India & EMEA (Europe, Middle East and Africa) Sumer Juneja, that Indian late-stage startups with adequate capital are still sticking to their 2021 valuations, unlike their global counterparts which have undertaken significant cuts, deterring investors from deploying fresh funds in this market.
In addition to discussions on valuations, investors are also learnt to be doing additional due diligence on companies they are looking to back. ET had also reported earlier that the funding slowdown by VC investors is happening despite fund houses raising record capital.