India’s prominent venture capitalists (VCs) are encountering new hurdles as startup investment takes a hit. These high-flying investors, managing large sums of money, have lowered their expectations and are now making cautious early-stage bets with hopes of generating 3 to 5 times the invested capital.
Key Takeaway
India’s top VCs are facing challenges in the startup investment landscape as they struggle to find promising opportunities that can provide significant returns. The abundance of capital has made investors cautious and choosy, leading to longer due diligence processes and lower deal volumes.
In recent years, several leading investors in India, such as Peak XV Partners, Elevation Capital, Lightspeed, Nexus, and Accel, have successfully raised funds of over $500 million. Motivated by previous successes and the vast potential of the Indian market, they were optimistic about future returns.
However, the mood has changed this year. Investors are increasingly finding it challenging to identify startups with the potential to provide significant returns. This is now a major concern in the world’s most populous nation. According to a VC with a recently raised fund below $250 million, investment firms with $500 million or more in capital reserves face greater difficulties in deploying those assets profitably.
VC firms typically make 20 to 30 investments per fund, focusing on a select few startups that can potentially generate substantial returns to compensate for any losses. Early-stage investors, in particular, allocate most of their fund capital to young startups, hoping to get in early on the next big thing. However, the abundance of capital has made India investors unusually cautious and selective.
Investment bankers reported that firms are now scrutinizing deals at Series A and B stages for up to 6 months, which was significantly longer than before. For instance, India’s sovereign fund has been evaluating an investment in agritech startup WayCool for more than six months. Gaming startup Loco has also been in talks with investors to raise $80 million, but no deal has materialized over six months.
One of the top VC firms, Bessemer Venture Partners’ India team, has only made one net new deal this year. According to some investors, Bessemer has been conducting thorough due diligence for months and maintaining high levels of skepticism.
Indian startups have raised approximately $7 billion in capital in 2023, according to market intelligence platform Tracxn. This amount is significantly lower than the $25 billion raised in 2022 and $37 billion in 2021, and it’s the lowest since 2016. The dwindling value of many top Indian startups has also made investors more cautious.
Investors are questioning whether they have overestimated India’s SaaS (Software as a Service) opportunity. Some investors feel that companies have been able to develop products successfully but struggle to sell and scale revenue beyond a certain point. There have been less than 100 transactions for Indian enterprise software startups across seed through growth in 2023, indicating a chokepoint in Series A funding.
Furthermore, India-focused investors are becoming increasingly bearish on Southeast Asia, where they expanded in recent years. They believe that excessive capital chases too few viable deals in Southeast Asia, leading to inflated valuations and diminishing potential returns.
These challenges highlight the evolving landscape for VCs in India, as they navigate a more cautious and competitive market in search of the next big startup success.
