Dispatch from Bangalore, end of 2022 edition

In 2014, Prayank Swaroop made a pitch to the storied venture firm Accel, where he worked as an associate, about future marketplaces in India.

At the time, Flipkart and Snapdeal were the only two e-commerce startups in India that had shown a semblance of scale. Swaroop made a case that as more Indians come online, opportunities will emerge in food delivery, automotive aftermarket, warehousing, road freight, and social commerce among many other marketplace areas.

Swaroop, now a partner at the firm, turned out to be right. Urban Company, which operates in the domestic help sector, is valued at over $2 billion; Zomato and Swiggy are delivering food to millions of customers each month; Spinny and Cars24 are selling hundreds of thousands of cars each quarter; social commerce startup DealShare is valued at over $2 billion and Meesho just short of $5 billion.

Hundreds of millions of Indians have come online in the past decade and over 100 million are making online transactions and purchases each month. India, which has doubled its pool of unicorns to over 100 in the past two years, has attracted over $75 billion in investments from tech giants Google, Meta and Amazon and venture funds Sequoia, Tiger Global, SoftBank, Alpha Wave, Lightspeed and Accel in the past half decade.

But as the local startup ecosystem closes one of its toughest years, it’s now staring at another question that it has long been able to brush off as benign: exits.

About half a dozen consumer tech Indian startups have gone public in the past year and a half and all of them are performing poorly on the local stock exchanges. Paytm is down 60% this year, Zomato 58%, Nykaa 56%, Policy Bazaar 52%, and Delhivery 38%.

This is despite the Indian stocks outperforming the S&P 500 Index and China’s CSI 300 this year. India’s Sensex — the local stock benchmark — remains up 3.4% this year, compared to fall of 19.75% in S&P 500 and 21% in China’s CSI 300.

As the market changed its direction this year, many Indian startups including MobiKwik and Snapdeal have delayed their listing plans. Oyo, which planned to list in January next year, is unlikely to move forward with that plan, according to two people familiar with the matter.

Flipkart, valued at $37.6 billion and majority owned by Walmart, doesn’t plan to list until at least 2024, according to a person familiar with the matter. Byju’s, India’s most valuable startup, doesn’t plan to list in 2023 and is instead moving ahead with a plan to list one of its subsidiaries, Aakash, next year, TechCrunch previously reported.

Those looking to push ahead with their plans to go public will face another obstacle: Several global public funds including Invesco that ardently finance the pre-IPO rounds are retreating from the Indian market after getting hammered in China and other emerging markets this year, according to people familiar with the matter.

LPs have long expressed concerns about India not delivering exits and the early-attempts in the past two years from the industry seem nothing to write home about.

Indian venture funds have historically gotten most exits by the way of mergers and acquisitions. But even those exits are getting harder to come by.

An analyst at one of the top venture funds in India said that for a long time VCs who backed early-stage SaaS startups at sub-$25 million valuation stood a chance of making good exits. But as we have seen in some cases in recent months, the exit itself values the startup at sub-$25 million, making it difficult for SaaS investors to turn a profit.

II.

On a recent evening at a private gathering of a few dozen industry figures at a five star hotel in Bengaluru, many investors were exchanging notes about the deals they had been evaluating. The partners complained that the quality of startups has dropped even as the volume of pitches has surged.

Two prominent venture funds that run well-regarded accelerators or cohort programmes of early stage investments are struggling to find enough good candidates for their next batches, people familiar with the matter said.

I will argue that it’s not just that the quality of new startups has taken a hit, it’s also investors’ appetite and mental models for what they think may work in the future.

Take crypto, for instance. The vast majority of Indian investors were too late to make investments in the web3 space. (You will find very few Indian names in the cap tables of local exchanges CoinSwitch Kuber and CoinDCX and until recently, blockchain scaling firm Polygon, as a prominent VC at one of the world’s largest crypto VC funds recently pointed to me.)

Now many firms in India that had hired a number of crypto analysts and associates last year are retreating from the web3 market and have asked staff to focus on different sectors, according to people familiar with the matter.

Fintech is another area of concern for investors. India’s central bank this year pushed a series of stringent changes to how fintechs lend to borrowers. The Reserve Bank of India is also increasingly scrutinizing who gets the license to operate non-banking financial companies in the country in moves that has sent a shockwave to investors.

Many venture investors are now increasingly chasing opportunities to back banks instead. Accel and Quona recently backed Shivalik Small Finance Bank. Many are deliberating an investment in SBM Bank India, one of the banks that has aggressively partnered with fintechs in the South Asian market, TechCrunch reported earlier this month.

An investor described the trend as a “hedge” against fintech exposure.

Investors’ enthusiasm in the edtech market has also cooled off after re-opening of schools toppled the giants Byju’s, Unacademy and Vedantu.

Indian startups raised $24.7 billion this year, down from $37 billion last year, according to market intelligence firm Tracxn. The funding crunch and the market dynamics prompted startups to let go of as many as 20,000 employees this year.

Over a dozen investors I spoke with believe that the funding crunch won’t go away until at least Q3 of next year despite most investors chasing India sitting on record amounts of dry powder.

As we enter the new year, some investors will be re-evaluating their convictions and many are convinced that several down rounds for major startups are on the horizon. But many star unicorn founders are unwilling to take a haircut in their valuations, in part because they believe that will drive some talent away. PharmEasy, valued at $5.6 billion, was offered new capital at a lower than $3 billion valuation this year, according to two people familiar with the matter. (PharmEasy did not respond to a request for comment.)

“2022 started off strongly, and it seemed for a while that the Indian venture funding market would be subject to different gravitational forces than U.S. and China, which were seeing dramatic declines, but this was not to be. The Indian market eventually turned out to be subject to the same macro headwinds as the U.S. and China venture market,” said Sajith Pai, an investor at Blume Ventures.

Pai said that growth-stage deals accounted for the majority of funding last year and saw anywhere from a 40-50% drop this year. “The decline was led primarily by growth funds pausing investments because the multiples in private markets were rich compared to their public peers, and the weak unit economics of the growth stage companies.”