150+ investorsCompanies including Singapore's sovereign wealth fund Temasek and Malaysia's Khazanah visited the five-star Trident Oberoi in Mumbai on a recent Friday for venture firm Lightspeed India Partners' 'Lift Off' summit. We gathered at the hotel.
The two-day event aims to foster partnerships by allowing “more views, ideas, and investments to be shared across nC2 connections (in all permutations and combinations) in a short time frame,” the company said. said Karthik Reddy, co-founder of Blume Ventures.
The event builds on the success of last year's first Lift Off, which helped foster deals and networking, paving the way for Singapore sovereign wealth fund GIC to invest in the business-to-business market VeGrow later this year.
The upbeat tone this year reflects the recovery in startup capital in India over the past three to four months. But even this luxurious setting could not hide the pressing issues still facing the industry.
Byju's, once India's most valuable startup with a $22 billion valuation, is seeking fresh capital through a rights issue that would reduce its valuation by a whopping 99%. Once the poster child for Indian startup dreams, Paytm went public in 2021 at a valuation of $20 billion, but its market cap has fallen below $3 billion amid tech market carnage and regulatory chaos. .
Many late-stage startups remain stuck at their highest valuations in 2021. And many of 2021's highly valued seed deals are floundering without follow-on financing. At the same time, Indian venture capital is currently sitting on a record $20 billion in dry powder, raising skepticism among many investors about excessive funding.
About VC fund size
Asked whether venture capital firms in India are over-funding, Bejul Somaia, partner at Lightspeed, said, “I'm sitting here at the beginning of 2024 and I think we're going to see investment activity in 2023.'' If you look at the level and the pace of startup creation, I think the answer is yes.” , has accumulated more funds than it can responsibly deploy.
“Current funding was raised in 2021/2022, with activity levels and investment volumes significantly higher than in 2023. In 2021, $33 billion of venture capital (early and late stage) was invested in India. In 2023, this figure was $9 billion. It should therefore be noted that the funds raised in 2021/2022 were tailored to the occasion to reflect that period,” he explained.
“If you look at the number of investments, there were 2,200 investments in 2021 and about half of that in 2023. That doesn't mean the market won't accelerate again in a few years… Cycles do happen. Therefore, 2023 does not necessarily reflect the opportunities in the Indian venture market,” he added.
Lightspeed Venture Partners India (which had returned more than $1 billion to LPs by the middle of last year) has been unusually subdued during a very hot period in 2021, with inflated valuations and unwarranted founders. The transaction was completed within a few days on friendly terms. An enthusiastic Mr. Somaia is looking forward to the market never to revisit.
“Environments like 2021 are very worrying. Investment opportunities are changing rapidly, prices are high… and there is a lot more focus on growth, advertising and salesmanship than building durable companies. While our valuation performance has been incredible, it was probably one of the most worrying years at Lightspeed. On the other hand, these valuations have been It was decided, but on the other hand it was not consistent with our assessment of the business,” he said.
“So how do we know who's right? Does the market know something we don't? Fortunately, we stuck to our guns for the most part during that time. .”
Magicpin founder Anshoo Sharma, One Assist founder Gagan Maini and Lightspeed's Bejul Somaia (Image: Lightspeed)
Over the past three years, many India-focused venture capital firms have raised large amounts of new funding that dwarfed their previous operations. Peak XV raised his $2.5 billion in the region in recent deals, Nexus Venture Partners raised his $700 million and Elevation his $670 million. , Axel earned $650 million. Lightspeed began investing in India more than 15 years ago and has since established a dedicated fund for the country, announcing its fourth $500 million fund for India in 2022.
“When it comes to Lightspeed India's latest fund, I think it's on the lower end of its peer group. This sizing is a deliberate choice,” Somaiah said. “Having said that, perhaps our peers see opportunities that we don't, or have broader investment strategies, and we're always interested in learning. But we want to prevent the risk of deviating from our strategy by having too much capital.”
Somaia said he expects many companies, including Lightspeed, to take three to four years to deploy capital, rather than the usual two-and-a-half to three-year cycle. “We need to provide the highest level of return for LPs who have become accustomed to certain returns from companies like Lightspeed. We will never compromise on leveraging capital,” he said. said.
India in the global AI race
While advances in AI are accelerating in Western hubs, basic research in India is lagging behind, with few startups attempting to build language models at scale.
Lightspeed sees similarities with its early investment in an Indian energy exchange, creating a power trading platform that did not exist in Western markets. “From my perspective, we are currently in a phase of AI where a lot of the infrastructure and some tools are being built. This is happening primarily in Silicon Valley. It was a reminder that the concentration of talent is unparalleled,” Somaia said.
“As we have invested in India, we have observed limited innovation in core technology infrastructure. Most of the opportunities tend to be in the consumer and enterprise application layers. There are many reasons for this, including market dynamics and an investor community where there are few technically competent investors… so it's a chicken-and-egg situation,” he added. .
Lightspeed partner Hemant Mohapatra focuses on deep tech and has backed startups such as Rephrase, one of the early generative AI startups, and Sarvam, a large-scale language model AI startup.
Mohapatra agreed that access to top AI talent is limited globally. However, similar to the cull of cloud computing, he predicted that once the current hype subsides, there will be consolidation around several AI technologies and business paradigms. Given the strength of India's engineering bench, targeted AI opportunities could still emerge locally even if Silicon Valley maintains its overall innovator advantage, he said.
patient capital
Lightspeed's Anuj Bhargava and Rahul Taneja and Darwinbox founder Jayant Paleti. (Image: Lightspeed)
The fear for many investors in India is that some late-stage startups will continue to aim for upward rounds and run out of steam before accepting the post-downturn reality.
Anuj Bhargava, Lightspeed MD and Head of India Corporate Development, told TechCrunch that progress is being made towards collaboration with public markets. “I think this is the year that the funding realized will be more in sync with the public markets. For growing companies, the private markets have been sluggish. “I think the public markets offer great opportunities for companies that have the unit economics they can afford,” he said.
He also said that India has attracted unprecedented interest from sovereign funds in the last three years, adding that he was optimistic that they would invest in many late-stage startups. “We had a lot of funds that invested in India, even though they were not based in India, because of the opportunities the country offered outside of their home country. Many companies justified their size and progress. We ended up raising funds that we could not do. In the last few years, some of the momentum investors have not invested much in India, so there is a vacuum,” he said.
“That hole has been filled by patient capital. Sovereign funds have been very quiet in 2020 and 2021. Pension funds have been quiet and probably haven't invested much in India so far. And A growing sector of private equity funds, many of which previously did not invest heavily in technology.Thus, these three pockets of capital are mature, long-term and patient, with more to come. We expect to see some activity.”
Although late-stage funding remains quite tight, some investors see a silver lining in India's early-stage ecosystem. Peak XV, Lightspeed, Elevation, Axel and Nexus signed more than a dozen early-stage deals in January alone, according to people familiar with the matter.
“While many in the ecosystem are busy speculating when winter will end, we believe there is no time like the present to build (and invest),” said Rahul Taneja, Partner at Lightspeed. said.
He said skilled human resources and committed funding will continue to be available from the early stages. “Founders are far more qualified. Those who are leaving truly believe in their ideas and are willing to take the plunge during what many would call a down year.” is. With much better access to quality talent, capital allocators are waiting to make bolder bets. Every day, we meet great founders in the early stages of venture creation and realize how lucky we are to be in a position to support digital growth in India and Southeast Asia. ”