Once burnt, investors curb enthusiasm for India’s start-ups

Bai — India’s economy and stock markets are booming, but its start-ups are not.

Investors, once eager to pump in billions of dollars in promising Indian tech ventures, are now going slow and cutting smaller cheques. They’ve been burnt by ignominious falls from grace — and valuations — for once-marquee young firms or market debutants of recent years such as digital payments company Paytm.

Karthik Reddy, managing partner at Indi’s Blume Ventures, which has invested in hundreds of early-stage start-ups, said his firm plans to do about eight new deals in 2024 compared with 12 in 2023. It will invest bigger sums in firms it is confident about instead of spreading funds across more companies.

“When your existing portfolio is not showing gains, it is hard to be excited to do more,” he told Reuters.

Investors looking at Indian start-ups are much more focused on potential profitability, less enamoured with tech companies and more interested in stable brick-and-mortar businesses, according to Reuters interviews with six executives at foreign and domestic investment firms as well as two CEOs at start-ups.

In January and February, India’s start-ups raised about $900m — a pace that signals another slow year after a six-year low of just $8bn in 2023, Venture Intelligence data shows.

That’s a far cry from the record $36bn raised in 2021 or even the $24bn in 2022. In contrast, India’s stock market — spurred on by 8%-plus economic growth — has surged 19% since the beginning of 2023, hitting a record high in March.

The two-thirds drop in funding in 2023 for Indian start-ups was also much steeper than the 36% drop for US start-ups and the 42% drop for Chinese start-ups, CBInsights data shows.

Significantly, Blume’s next fund is set to be either equal in size or smaller than its last one which raised $290m — an unusual development for a top Indian venture capital firm.

India’s 10 biggest venture capital firms have over the past decade always embarked on bigger funds than their last one, a Reuters analysis shows.

“In this environment. I don't think we can make big returns with more money,” Reddy said.

Lucky is not a business model

Less start-up funding can have a broader economic effect. In the last eight years, start-ups generated 20%-25% of India's new jobs and 10%-15% of its economic growth, an Indian trade body and McKinsey said in a report in March.

Much of the blame for investors’ relative reticence towards start-ups — described by Prime Minister Narendra Modi as the “backbone” of the country — can be laid at the sharp turnarounds in fortune for Paytm, online educational firm Byju and Uber-rival Ola Cabs.

Paytm’s shares have plunged 80% since its 2021 listing. It was criticised at the time for valuing itself too high and is now in crisis after the central bank ordered its banking arm wound down for persistent noncompliance.

Byju, once the poster child for India’s start-up ecosystem, was valued at $22bn in 2022 but now values itself at about $200m. It’s at loggerheads with investors over a rights issue and cannot pay its staff.

In some cases, valuations have plunged even without a big crisis. Vanguard, an investor in Ola Cabs, slashed the ride-hailing firm’s valuation to $1.9bn, a drop of 74% from 2021, though it did not give a reason.

Ashish Sharma, CEO at Temasek-backed InnoVen Capital which has invested $1.5bn in Asian start-ups, said it was clear with hindsight that too much capital was poured into some sectors, leading to sharp increases in valuations.

“Some companies got lucky ... (but) getting lucky cannot be a business model.”

“One change is that we need to be more cautious when evaluating high growth/high (cash) burn businesses and assess if the assessable market is large enough that it can attract growth investors to raise the next round of capital,” he added.

India’s Nexus Venture Partners, which manages $2bn, is “broad-basing” its bets beyond typical tech start-ups to capture a larger portion of the economy and because traditional sectors are less risky, according to a source with direct knowledge of the matter who declined to be identified.

Nexus, which has since December backed a sportswear manufacturer and a coffee chain, did not respond to a request for comment.

In one brighter sign, Japan’s SoftBank is considering deploying up to $300m in India in 2024, according to a source briefed on its plans.

That comes after not signing a single new cheque in India in two years — a sharper pullback than in other regions by the tech investment behemoth.

“Most (Indian) start-ups were too richly valued and SoftBank could not justify those valuations,” said the source who was not authorised to speak to media and declined to be identified.

SoftBank, which invested $11bn in Indian start-ups between 2014 and 2021, did not respond to requests for comment.

Reuters