2023 has drawn to a close and a new year has begun.
In recent times, it feels like we’re standing on a ledge combining innovation and risk. And in some ways, 2023 was no different. Yet, in many ways, it may have been a way forward.
Private equity and venture capital investments in Indian companies declined about 40% to $27.9 billion in 2023, compared to $47.62 billion in 2022, according to data from Venture Intelligence and the Indian Private Equity and Venture Capitalist Association. Deal value and volume were said to be the lowest in five years.
And the quarterly figures? PE and VC investments were said to hit a 60% year-on-year growth in 2023’s July-September quarter, compared to Q3 of 2022. Yet, 2023 was said to witness a moderation in exuberance, when it came to the PE-VC ecosystem. In H1 2023, India’s PE-VC investments were said to hit about $21 billion, compared to $40 billion during the corresponding period last year, according to a report by Bain and Company. There’s a contraction in deal values due to diminishing volumes, with the number of deals declining from 800 in H2 2022 to around 680 in H1 2023.
Despite global slowdown, PE-VC investments continued to trend in India in 2023
But in a post-pandemic world, large deals could be having a resurgence, with investors shifting their focus from a protracted series of small and mid-size transactions to larger and more impactful deals. In just H1 2023, about 4 megadeals, each exceeding $1 billion, were said to have materialised. The average deal size was said to have an uptick of about 20%.
In the VC space last year, large-ticket PE investors were focusing on sectors, like financial services, healthcare and infrastructure with a slowdown in growth and late-stage investing. With AI seemingly the poster child of 2023, it AI startups secured close to $50 billion in global funding.
Rising inflation, interest rates and global uncertainties may have contributed to the overall slowdown in H1 2023. And there’s a move away from riskier bets and a focus on proven track records and growth potential. The increased focus on larger deals could mean industry consolidation, with larger players acquiring smaller competitors to gain market share and achieve economies of scale. If there’s a substantial capital injection that allows a company to expand their market presence significantly, become a dominant player within its industry and strengthen its market standing. And acquiring smaller companies with unique technology would allow larger entities to stay ahead of the curve.
Another defining feature of 2023 seemed to be substantial open-market block deals, which accounted for nearly half of all exits. There was a discernible uptick in investments in the listed realm as well.
Diversity in sectors marked PE-VC investments in 2023
In Q3 2023, growth investments were said to soar to $4.5 billion, with buyouts following at $3.5 billion. And the renewable energy sector might be fuelling the infrastructure sector to take the lead during this period. The life sciences sector is said to have experienced an unprecedented surge in investments to reach an all-time high due to a surge in buyouts within the healthcare sector. How good was the exit landscape during this period? Reportedly, it reached $8.6 billion across 85 deals.
Overall funding may have fallen, compared to 2021’s record highs, but it wasn’t as dramatic as global markets. Investments by PE and VC funds fell to about $28 billion across close to 700 transactions. Indian PE firms may be holding significant dry powder. If there are some Indian sectors facing headwinds, there could be potential for PE firms to invest in distressed assets.
Concerns before the transforming PE-VC space in India
The PE-VC space in India seems to be undergoing a transformation, with investors looking to adapt to a changing economic and political ecosystem and optimise their portfolio allocation strategies. It seems like investors may be prioritising profitability and proven business models, which could lead to higher scrutiny and a decline in late-stage mega-deals. Early-stage and growth-stage ventures with clear paths to profitability may gain traction.
There was also the rise of entities caught in a financial purgatory, neither dead nor fully alive: The zombie VC. This is a firm still managing existing portfolios but unable to raise capital for new investments, which could be due to rising interest rates, economic downturn fears and a decline in technology valuations. Some believe that many VCs might find themselves in zombie status in the coming years and may not be able to raise their next fund. And it could take 3-4 years for troubled VC firms to exhibit signs of distress.
And downturns might still provide some value. This is because during economic downturns, there is negative market sentiment, which means lower valuations for companies, which could lead to larger ownership stakes acquired for more favourable prices. That could, potentially, increase returns when the market rebounds. Economic downturns could serve as a reality check for companies to force them to re-evaluate their business model and focus on fundamentals.
What startup founders should keep in mind
Startup founders might be finding themselves at a critical juncture. There’s a two-headed goliath they’re dealing with in the form of burn rate management and the pursuit of profitability. The decline in funding might be emblematic of the notion that the era of unrestrained spending is waning and scrutiny of every rupee spent is warranted. No more profligacy, and prudent financial management of one’s startup might be the new survival imperative. Is there a focus on user acquisition at the cost of sustainable monetisation? This needs to go away. There might still be an allure of rapid expansion, but startup founders may need to reassess their growth trajectory against the backdrop of this investment climate. And emphasising a path to profitability through exit strategies might grow investor appeal.
Nearly a month into 2024, what does the year hold? India’s economy is expected to sustain growth momentum and resilience, despite global headwinds and uncertainties. The Indian scene may be one of cautious optimism amidst a changing landscape. There could be sector-specific opportunities and regional growth that could offer promising avenues for investors.
Startup founders, the markets might appear to be tightening, but the opportunities for substantial growth still persist.
Shrija Agrawal is a business journalist who has covered startups and private capital markets before it was considered cool in India.
The views expressed are personal