During a recent visit to Bengaluru, I had a chance to speak to some key venture capitalists about the outlook for deals in the coming months. Quite a few of them were of the view that the funding winter was finally tapering off. Deals were being cooked and it wouldn’t be surprising, they said, to see even larger deal sizes being put through. However, they were waiting a tad bit longer, and all eyes were on June 4, the day the results of the General Elections would be declared.
“The general consensus is that there will be policy continuity, but VCs would still like to wait till after June 4 to be absolutely sure,” a key VC player told me.
Latest figures from GlobalData seem to support the theory that the funding drought, which Indian start-ups had to grapple for nearly two years, is finally coming to an end. GlobalData says Indian start-ups raised $3.1 billion in VC funding between January and April 2024, by way of 375 funding deals. In terms of value, this translates into a 13.8% rise year-on-year, though the rise in volume terms is 1.1%.
However, this clearly marks a trend where deal flow is no longer just a trickle. In fact, Aurojyoti Bose, Lead Analyst at GlobalData says India emerged as a notable exception to register improvement in deal volume and value at a time when several peer countries were either witnessing a decline in deal volumes or value or both. Bose says it is noteworthy that India, apart from being a key Asia-Pacific country standing just next to China in VC funding activity, is also among the top five markets globally, both in terms of VC funding deals volume and value.
Long-time serial entrepreneur Krishnan Ganesh, an authoritative voice in the VC ecosystem says it was always expected that the winter wouldn’t continue forever, since start-ups are an asset class which cannot be ignored for long. It’s a high-risk, high-return ecosystem and there would be merit in deploying funds there. The June 4 election results date is a momentous occasion and while deals are in the pipeline, VCs would wait to be absolutely sure of the outcome since that would also have a bearing on valuations.
But the lessons learnt by start-ups and VCs remain relevant despite the pick-up in deal activity. Deals are taking longer to be signed—what was done in a month takes four months now, valuations have become much more reasonable and ticket sizes are smaller. There is a clear tempering, a slowing down, Ganesh tells me. Pearl Agarwal, Founder and Managing Partner of pre-seed stage venture capital firm Eximius Ventures agrees and says trading multiples have reduced from 15-20x revenue multiple to 5-8x. She says pre-seed deals are of the order of $1-2 million, seed deals $3-5 million, and they are seeing series A up to $15-20 million as well, but larger deals beyond that are difficult. “So companies need to prove scale before being able to raise that amount now,”she tells me.
Which are the sectors VCs are betting on? There’s some fear of missing out (FOMO) as far as Generative AI is concerned and VCs want a piece of that pie. Clean energy, mobility and derived demand sectors like batteries and recycling of batteries are other areas. For instance, Agarwal’s firm is upbeat about fintech, online media & gaming, healthtech, SaaS, and the consumer sector, particularly vertical commerce. She feels the intersection of Gen AI and these sectors will lead to several new opportunities. Then there is the Bharat piece—infrastructure, e-commerce and products/services in vernacular languages also interest VCs. Ventures based on India’s digital public infrastructure (DPI) is another interesting area.
An entrepreneur who is building his own fintech on top of the DPI stack agrees that there’s VC interest building up. But there’s tremendous caution. This entrepreneur tells me a leading global tech VCs has put a $10-million profit as a criterion for investing, indicating how careful global VCs have become after the meltdown.
PEs also eyeing more deals
Grant Thornton Bharat’s Monthly Dealtracker shows similar upmove in activity on the private equity (PE) side as well. The April edition of Dealtracker shows a surge in PE activity, the highest since May 2022. There were no billion-dollar deals, but 12 high-value transactions exceeding $100 million were seen, totalling $3.8 billion, signalling robust activity. However, the same caveat relating to the outcome of the elections applies to PE deals as well. “The landscape hints at a promising future for India’s investment climate, supported by a growing consumer market, a thriving tech start-up ecosystem, and supportive governmental policies. However, the outcome of Lok Sabha elections and global economic trends remain crucial influencers in the near term,” Grant Thornton Bharat says.
Sudhir Dash, Founder & CEO of boutique PE firm Unaprime Investment Advisors, and a PE veteran, tells me that the PE space is looking carefully at June 4 since no PE investor wants policy disruption. However, there’s enough excitement to keep the PE space buzzing and control deals are being cooked with sizes of $100 million to up to $2 billion.
One good example of PE interest is the race for Haldiram Snacks, the 87-year-old foods company where a clutch of top PE firms are reported to be interested in a control deal at a valuation of a hefty $8.5 billion. This, Dash reckons, is a call on the potential of the Indian consumer market. Healthcare, manufacturing, and BFSI lending businesses are other key areas where PE interest is peaking.
On the BFSI side, with bank balance sheets cleaned up of legacy issues and NBFCs also showing robust growth, PEs are looking with interest at the financial services space.
More names like Haldiram’s, from the consumer space, may see PE interest, besides regional consumer brands from south India. Personal care and cosmetics brands are also witnessing heightened PE interest.
Clearly, the discussion in investment circles is now moving from the funding winter to a return of activity. The caveats: good governance and a stable policy environment are essential.
Sourav Majumdar is Editor, Business Today. Views are personal
