Industry sources aware of the goings-on at mid-scale startups, who spoke to ET, said existing investors in such companies are demanding exits even at reduced valuations. A Bengaluru-based startup offering supply-chain solutions for retail businesses — last valued at around $300 million — is facing a significant cut in valuation along with ongoing discussions for secondary deals, according to one person cited above who said, “This is only one example and more such deals are currently structured that will play out in the coming months.”
Meanwhile, investors told ET there is a pickup in demand for secondary stakes in companies that are going the IPO route.
The growing demand for exits by early backers comes at a time when venture investments dipped drastically to $9.6 billion in 2023 from a high of $38.5 billion in 2021, according to Bain & Company. In 2022, domestic startups had racked up $25.7 billion.
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Venture funds that count themselves among the earliest ones to have taken bets on the Indian startup boom in the previous decade are being asked by their backers — limited partners — to deliver returns. “Investors are in a baton exchange game…we invest early, and then the growth-stage investors come in,” said TCM Sundaram, cofounder of early-stage venture capital firm Chiratae Ventures, among the first backers of omnichannel eyewear retailer Lenskart.
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In 2024, secondary stake transactions that have concluded or are in the works include ones like private equity firm TPG’s purchase of a stake in logistics startup Shadowfax, Peak XV Partners and Tiger Global’s potential purchase of a stake in ecommerce firm Meesho, and Malabar Investments’ plan to pick a stake in omnichannel beauty retailer Sugar Cosmetics, as reported by ET. Singapore’s Mars Growth Capital may also invest in Meesho in its ongoing secondary round, according to a report in online publication The Arc.
Last year, several large deals, including the ones involving Lenskart, baby and mother care products etailer FirstCry, logistics firm Xpressbees, and fintech firm Perfios, had a significant secondary component woven into them.
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Largely sovereign wealth funds, large family offices and late-stage investors have been picking up stake in growth stage startups.
A report released earlier this month by Bain & Company said that 2023 saw secondary transactions worth nearly $1 billion, up from around $663 million in 2022. In 2021, when several new-age firms went public, secondary deals had also surged to nearly $3 billion.
A secondary deal is between existing and incoming investors, and the cash doesn’t go into the company.
“So, when there’s an opportunity from a larger investor wanting to come in, early investors won’t turn it down,” said an investor with a Singapore-based family office that has invested in several Indian startups.
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Demand vs Supply
For companies on the road to IPO, long-term investors look to derive public market value by acquiring stakes from venture capital firms with a comparatively shorter fund life.
“The supply was always there. I think the more realistic readjustment of valuation has created the demand for secondaries,” Prashanth Prakash, partner, Accel told ET.
“It’s not just about the exits for early investors. There is more confidence because of the ability of these companies to IPO…there are more people who have the confidence to buy in through secondaries to realise long-term value potential,” he added.
Karan Sharma, managing director at Mumbai-based investment bank Avendus Capital, said most market leading firms are well-capitalised from the 2021-22 period and are not out to raise capital for running operations. “Such companies are on their path towards public markets in the next few years and see high demand for secondary stakes as late-stage investors are interested to take positions,” he said.
However, for firms where unit economics are still evolving, the company preference is to get the capital in to the company rather than provide exits, according to Sharma.
“And even from an investor’s perspective, it is better that the capital is used for growth rather than exit for early shareholders as the company would need capital to get to self-sustenance state,” he added.
Last year, Accel – one of the earliest investors in the ecommerce firm Flipkart – fully exited its position by selling its shares to Walmart. The deal also saw Tiger Global sell its remaining stake to Flipkart parent Walmart.
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Chiratae’s Sundaram pointed out that there was a significant demand from larger investors wanting to onboard the cap table of market leaders – something that creates an opportunity for early investors to exit.
“Hopefully we will stay till IPO in some cases but the life cycle of a company till IPO is ten years, which is longer than the fund,” he added.
Chiratae Ventures made a partial exit from its stake in Lenskart when Abu Dhabi Investment Authority and ChrysCapital invested in the company.
However, beyond late-stage or pre-IPO investors, family offices that typically come in at an early stage are now buying in through secondary transactions.
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ET reported in December that family offices of Indian cricketer Sachin Tendulkar, Ravi Modi of ethnic wear brand Manyavar, Infosys cofounder Kris Gopalakrishnan, and TVS Group family are among those who bought stakes in FirstCry from SoftBank. Further, the family office of Manipal group founder Ranjan Pai has also been taking bets through secondary deals in firms such as FirstCry and beauty retailer Purplle.