Made-in-India VCs continue to grow in numbers despite economic headwinds

145 new companies were set up in India in the past two years - 123 in 2021 and 22 in 2022: Tracxn data

One measure that shows the success of India’s start-up ecosystem is reflected in the rise of venture capitalists (VC) in the country.

According to Tracxn data, 145 new VC firms were set up in India in the past two years — 123 in 2021 and 22 in 2022. The total number of made-in-India VCs jumped 29 per cent in 2021 compared to 2020, when 95 funds were founded. So far, these new VCs have invested in 2,262 startups, with 1,349 deals in 2021 and 913 in 2022, respectively.

However, even with the growing number of VCs, the funding for startups reached a two-year low during this July-September period (Q3CY22) to just $3 billion, compared to $14.9 billion in the same quarter of 2021, stated Tracxn report. On a sequential basis, funding was down 57 per cent.

Despite the funding winter, emerging VCs remain optimistic about India's growth story and continue to invest in startups, albeit at reasonable valuations.

Take the case of Physis Capital, launched by Inflection Point Ventures (IPV) earlier this year, with a $50 million corpus to promote startups in the early-stage segment. Founders of IPV, who saw success for the platform, wanted to be invested in firms for a longer time and hence, launched Physis, which gives them the ability to be part of the company early on.

According to Ankur Mittal, Partner at Physis Capital, domestic investor sentiments are not highly bearish, and the onset of the festival period will assist in restoring demand.

“When we look at the private markets, we see that investors are a little bit concerned about liquidity or the news they read about lack of funding or funding winter, which has a negative impact. In response, they have become more vigilant while also aiming to take advantage of this chance by making investments at favourable terms,” said Mittal.

“As long as domestic investors continue to have faith in the resilience of the Indian economy, this trend appears to be accelerating. At IPV, many investors believe in that theory and invest as good startups are coming to our platform,” he added.

Momentum has slowed down due to the funding winter but not significantly. At the funding levels of the Seed to A series, the startups have seen funding, Mittal said, acknowledging that there has been a definite slowdown in B+ series deals and some large series deals.

This is evident in the fundraising rounds. According to Tracxn data, Q3CY22 saw 333 rounds of funding, of which 199 were in the early stage. Though the early-stage number is down year-on-year and sequentially, too, it continues to see investments from VCs.

“Though late-stage funding is experiencing a severe slowdown, early-stage funding is still growing. The reduced average ticket size at each funding stage indicates VCs’ reluctance to make larger investments until macroeconomic conditions stabilize,” added Mittal.

Similarly, investor sentiment at Merak Ventures remains bullish despite economic headwinds. Founded earlier this year, the firm launched its maiden fund of $100 million in August.

“In the present day, the Indian economy continues to grow well. There are very strong tailwinds with no obvious challenge that we see at a macro level that should be a cause of concern for the Indian economic growth engine,” said Manu Rikhye, co-founder of Merak Ventures. 

Rikhye believes that the trend of new VCs entering the Indian ecosystem is a function of the startup realm's progress in the last 15 years.

“Things have changed at the grassroots level. Innovation has gained momentum, and founders are building businesses to solve real-world problems. Iconic success stories are helping founders gain the confidence to take plunges and look to solve problems,” he said.

The other parameter that is confidence to Indian investors and family offices is the performance of some of the fund houses as exits have been successful. “The performance of funds, in terms of liquidation, has also dramatically improved in recent years. Thus, more investors want to participate in a big way in the startup ecosystem’s next wave of innovation,” Rikhye added.

To a great extent, investment in private markets can be influenced by the sentiments in the public markets, said Mittal. Overall interest or sentiments in the public markets, however, remain positive.

“If we look at the Indian stock, while global markets have underperformed, Indian stock markets have also come down. But, even in the public markets, the retail investors have shown a lot of resilience, because of which the decline in the stock markets has also been interrupted with some sharp rises,” he said.

Rikhye believes there are various factors driving investor sentiment towards Indian VCs.

“First is the potential for growth in the Indian market. India is certainly going to be one of the fastest-growing economies in the world. There will be a lot of growth momentum at an economic level in the Indian space. That, coupled with stability at the political and economic level, has attracted investor interest,” he said.

All these factors have allowed founders to effectively leverage India's current available infrastructure and capture global pricing, Rikhye added.

GOING STRONG

• 29% jump in number of made-in-India VCs in 2021 compared to 2020
• 2,262 start-ups have received investments from these new VCs — 1,349 in 2021 and 913 in 2022
• 333 rounds of funding in Q3CY22, of which 199 were in the early stage
• Despite funding winter, emerging VCs optimistic about India's growth story and continue to invest in start-ups, albeit at reasonable valuations

Source: Tracxn