Startup funding: Startups sync and swim with new investors

As green shoots begin to appear in startup investing after two years of downturn, a shift is underway in how founders and dealmakers look at potential transactions, multiple entrepreneurs, venture capitalists and investment bankers told ET.

Capital pools have diversified, with large global, crossover and hedge funds mostly staying away from cutting cheques.

On the other hand, domestic firms and family offices — such as those run by Zerodha cofounder Nikhil Kamath and Manipal Group chairman Ranjan Pai — along with other investors not part of the previous funding cycles, have become active and relevant.

These include public market investors such as ValueQuest, which recently backed Wow Momos; ace investor Ashish Kacholia’s Lucky Securities, which pumped Rs 70-80 crore into homegrown burger chain Jumboking; and Singularity Ventures, run by Yash Kela and CaratLane’s Mithun Sacheti, which has funded a clutch of startups including skincare brand Mcaffeine and battery material maker Lohum.

Expediting Deals
Bankers said investors that typically focused on public markets are now finding value in venture-backed private assets and contributing to the growing domestic pool of capital.

“Technology-focused growth funds and global crossovers that drove the market have disappeared,” said Kashyap Chanchani, managing partner at The Rainmaker Group, a Mumbai-based investment bank. “Indian public market investors and family offices are now supplementing private equity firms and sovereign funds as active investor pools.”

The latter have been closing bigger deals over the last year. Sovereign wealth funds such as Abu Dhabi Investment Authority and Temasek, as well as private equity firms including TPG Growth and ChrysCapital, invested in the likes of Lenskart, Shadowfax, Xpressbees and Kreditbee.

This coincides with a significant spurt in growth- to late-stage funding, most of it in secondary deals. Online audio streaming platform PocketFM, education financing platform Avanse, ecommerce player Meesho, wearable devices maker Ultrahuman and others have closed new rounds. ET reported on secondary stake sales on March 21.

ET reported on April 4 that strong, fast-growing and profit-focused businesses such as Lenskart, Purplle, Healthkart, Rapido and Zepto are snagging over $100-million deals.

From the Other Side
Founders are also increasingly turning to investment banks, as against during the funding boom, when entrepreneurs would close deals independently.

“Companies that haven’t seen a round in the past few years are seeing $20-30 million primary rounds, and those closer to an IPO (public listing) or an M&A, are seeing secondary interest,” said The Rainmaker Group’s Chanchani. Banker-led deals have increased substantially also because assistance is needed for secondary processes and the pools of capital are seeing rapid churn, he said.

Chanchani said January-March was Rainmaker’s best quarter, when it closed seven deals, following a standstill in the previous four to five months.

Shivakumar Ramaswami, founder and director of IndigoEdge, said the investment banking firm facilitated four deals in the previous quarter and three in the December quarter. “What has changed is on the growth side,” he said. “Private equity or sovereign funds that are much more measured are taking their time for diligence and are pricing rounds the way they want to. Having said that, easy money that was flowing earlier from hedge funds and crossover funds is not there.”

A Mumbai-based banker said that in addition to domestic investors and family offices, private equity and sovereign funds are also getting into tech investing in a big way. But their timelines for closing deals are longer, at nine to 12 months, he said.

Founders, especially in the early stage, are turning to investment banks to raise capital, unlike fundraises till 2022. At the time, “sentiment was still in favour of founders… Being an operationally healthy company, we could command terms,” said a Gurgaon-based founder of a mobility startup, currently in the market to raise $40-45 million.

According to Tracxn data, funding in Indian startups marked a positive trend over the last three months. Deals worth $449 million were struck in January, followed by $799 million in February and $747 million in March. However, year-on-year, the total $2 billion raised in the quarter is still around 38% lower than the $3.3-billion deals announced during January-March 2023.

What Next?
Though the overall funding scenario remains subdued, industry executives are of the view that the pipeline could swell as startups grow into valuations ascribed to them during the boom of 2021 and 2022.

“Founders have realised… ‘We are not being rewarded for growth only. So, we’ll grow a little slowly but let’s make unit economics efficient’,” said Vinod Murali, managing partner at venture debt fund Alteria Capital. “We have a lot of companies at breakeven; some have even turned profitable… they have grown 30-40%, maybe not 200%, therefore growing into their valuations.”

The overall investment landscape is a gentler slope from the 2021 highs as founder expectations on valuations moderate and investors look to write smaller cheques.

“On an average, valuations have tempered by 20-25% (from 2021), especially at early stages with pricing becoming more sensible,” said Harshjit Sethi, managing director at Peak XV Partners. “While funding has not increased dramatically, we see a lot of companies that had raised their seed rounds in 2021 and 2022 coming back to the market (this year) after achieving product-market fit.”

“Certainly, we expect more investment activity this year, as a result of companies improving their fundamentals (or economic profile) and newer company formations taking place in sectors such as AI (artificial intelligence) and deeptech,” said Sethi.

(With inputs from Tarush Bhalla in Bengaluru)