After a sustained growth in the post-pandemic timeframe, venture capital inflows into India’s startup ecosystem have slowed down by about 20% in the first quarter of 2023 as investors have become increasingly stringent in analyzing business models. This has resulted in deals taking a longer time to close.
According to data from Venture Intelligence quoted by an article published in the ET, aggregate venture funding dropped to $2.19 billion during January-March this year as against $11.34 billion recorded in the same period a year ago. In the last quarter of 2022, this number stood at $3.17 billion, indicating that the slowdown is also predicated on the global economic slowdown.
It’s business as usual, claim market analysts
However, market analysts say that the post-pandemic growth was a blip on the radar as investors have merely gone back to a tougher due diligence process that was followed during 2018 and 2019. The slowdown does not indicate any reduced appetite for investments in India, but is predicated on sharper diligence and longer negotiations, they said.
Moreover, the capital deployment over the past couple of quarters also indicates that money is moving to clear winners in a category. For example, about 25% of the total inflows in the first quarter of 2023 was accounted for by the $500 million raise from eyewear retainer Lenskart, while PhonePe raised $650 million in three tranches as part of its billion dollar round.
Due diligence and valuations are key aspects
In short, the market mood seems to be veering around to funding a winner within one category and not opening up new avenues in categories. Analysts also point out that negotiations were getting delayed due to valuation expectations where potential investors weren’t able to come to terms with what the founders saw as the value of their business.
Business analysts also pointed out that the process was getting delayed because even the process of due diligence was getting stronger with internal teams of VC firms taking it upon themselves to do the paperwork instead of paying a third-party entity. This could also be a result of the many deals that turned out to be poor ones upon closer scrutiny.
Another factor that appears to have slowed down the dealmaking is the reticence on the part of investors to seek quick-fix deals to retain good assets. Most VC companies now are asking for many more data points of a business and then carrying through with several rounds of negotiations towards fixing an amicable valuation.
No time for generics, it’s about specifics now
Unlike in the past when a good asset was chased by several funds, the situation has shifted towards exclusivity now where the investors are now going deeper into the governance issues of a prospective business. The challenges around companies such as BharatPe and Go Mechanic could be a reason for this enhanced level of diligence, the analysts feel.
Issues such as path to profitability have gained considerable importance during even early stage negotiations now with Venture Intelligence data indicating that during the first quarter of 2023, seed and series A investments saw $712 million, which was less than half of the $1.92 billion recorded in the same quarter of 2022. Deals also fell from 248 to 115 in this period.
Market analysts say the focus now in the early stage is how the company proposes to achieve profitability over the next few years, or more specifically for the next two or three rounds of funding, which is when the early stage investors propose to exit. So, they want a good line of sight on what the next stage investors would be willing to underwrite.
Unlike earlier when the early stage funding was largely used for customer acquisition and working expenses, investors are now seeking answers to specifics even in these areas. For example, who would the company hire to enhance marketing or product development over the next two to three years.
