A reset in the venture investment industry after the 2021 exuberance is bringing the sector back to basics, with companies having compelling business models, customer value propositions and good corporate governance growing fast and getting investor attention, Mukul Arora, co-managing partner at Elevation Capital, told ET in an interview.
“Because of capital availability in 2021 and early 2022, a lot of fundamental assumptions were getting challenged … Now, this consolidation has brought us all back to the basics … to say that all of those laws hold and it’s just that it was temporary,” he said, adding that the longer the 2021 window would have lasted, the more capital would have gone to companies not meeting basic criteria of business models and good governance.
An alumnus of IIM-Lucknow, Arora, who has risen from being an associate to a co-managing partner at Elevation Capital (formerly SAIF Partners), has cut cheques for some of the most valuable consumer internet startups in India, including omnichannel retailer FirstCry, public markets-bound food- and grocery-delivery firm Swiggy, edtech company Unacademy and used-car sales platform Spinny.
Arora was adjudged winner of the coveted Midas Touch category for best investor in the ET Startup Awards 2024. The elite jury of the awards praised Arora’s investment acumen based on his bets on a wide range of sectors, in addition to the ability to make exits at the right time.
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“People are now seeing where great businesses are being built and for us as an ecosystem that’s great news. From an investor’s perspective … people look at India and say how much capital has gone in, and how much have we gotten out. This correction is making sure that most of the incremental capital and talent is going to high-quality companies. This is a big blessing for us,” he said.
In a year when exits by VCs have been in strong focus, Arora said — in terms of timing of exits — it was better to be in a position where an investor makes an exit and the company keeps doing well rather than it going down soon after an exit.
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“Our overall philosophy is if we’re investing in the right companies … whenever we exit, we’ll look bad 2-3 years out because by definition those are high-quality companies,” he said. “If we exit, and those companies go down … we don’t want to be in those situations … and we’ve seen that in India. Our thinking is that we would rather look bad 3-5 years later because those companies continue to do well,” he added.
Arora has made partial exits from companies such as Swiggy, FirstCry, Unacademy and Xpressbees. Elevation Capital is also participating in the offer-for-sale component of Swiggy’s upcoming initial public offering.
Large outcomes
Over the last 12-15 years, as the Indian venture capital ecosystem has matured, the focus has increasingly shifted towards the ability of realising large returns from the bets placed by these risk capital investors.
Asked how he looked at the performance of the venture investment industry, Arora said: “Overall, the venture ecosystem in India is still very early. Therefore, if I look at the entire industry performance, I think it’s been OK and not great. But as I said, we’re still in early innings.”
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He underscored that the country is hitting an inflection point and the multiple new-economy IPOs that have hit the markets since 2021 “have been very important”.
“Some of these, which are performing well, will set a very strong path for a bunch of other companies over the next few years,” Arora said.
“You can’t fast forward or accelerate some of these things artificially. Zomato today is a $30 billion company … we couldn’t have imagined these outcomes earlier. So, the ecosystem is getting there,” he said, adding that the boom of 2021 resulted in the global tech system getting overcapitalised, leading to outcomes not being commensurate.
“If the input is in line with the ecosystem’s maturity, then I think the returns will be better. If input runs way ahead like it did in 2021, then obviously returns on that capital will not be great,” he said.
Public markets exuberance
While expressing concern over the valuation multiples in the overall public markets – which in India have been in a bull run, also leading to new-age companies making a beeline for IPOs – Arora said the better part of the money coming into startups through IPOs was coming into high-quality companies.
“If I look at fundamentals for India, we are very sweetly placed – whether it is our growth rates among all large economies, our stable currency, low inflation, stable government…there are a lot of things going for us, which is driving investor interest. At the same time, valuations are also rich,” he said.
“In terms of IPOs specifically, the higher dollar share is going in high-quality companies so I’m not too worried about that. But I doubt if the valuation multiples today for the overall market can sustain over the longer term,” he added.
Investors across the board have also flagged the frenzy in stock markets with startups even in the growth stage preferring to approach the public markets in the chase for higher valuations than what they are getting through private investments.