VC investments broadened the funnel to traditional sectors and emerging themes such as Gen AI and deep tech and electric vehicles saw increased interest
Gurgaon, MARCH 14, 2024 – Despite facing headwinds, India’s venture capital (VC) landscape exhibited resilience in 2023, marking a year of continued moderation. Investment activity echoed a muted sentiment globally, with investments declining by 65% relative to 2022 and totalling $9.6 billion compared to $25.7 billion in 2022. Despite this decrease, India still retained its position as the second-largest destination for VC and growth funding within the Asia-Pacific region, as per the latest edition of Bain & Company’s annual ‘India Venture Capital Report 2024’ written in collaboration with Indian Venture and Alternate Capital Association (IVCA).
A confluence of domestic and global factors extended the funding winter—persistent inflation kept interest rates elevated, while investors considered potential growth headwinds in anticipation of a global GDP softening. These challenges heightened investor expectations and vigilance. Investor confidence was further dampened by softening global consumption and continuing geopolitical uncertainties.
The decline in deal flow was strongly influenced by impacted deal-making, as deal volumes contracted by 45% (from 1,611 to 880 deals). In contrast, average deal value decreased by about 30%, from $16 million to $11 million over 2022–23, with the share of seed deals rising from approximately 60% to 70% during the same time frame.
Sai Deo, Partner, Bain & Company said, “In a year seemingly rife with hurdles, investors demonstrated resilience by adjusting to the evolving landscape. There was a perceptible shift in investment focus from tech-first bets to more traditional sectors underpinned by strong fundamentals – such as healthcare, retail, and financial services. Importantly, innovation remained a focal point for investors, despite a challenging funding environment – evident in both the surge in Generative AI investments and the robustness of deal flow in the electric mobility ecosystem.”
Overall, tech-first sectors (consumer tech, fintech, and software/SaaS) maintained their dominance in 2023, capturing nearly 60% of funding. The deal flow, however, reduced to 0.3 times the levels observed 2022, as investors rigorously evaluated business model viability and unit economics while several scaled start-ups chose to defer fund-raising in a valuation challenged environment. Investor focus drifted to traditional sectors with strong fundamental tailwinds (e.g., banking, financial services, and insurance [BFSI], healthcare) as well as emergent themes [e.g. electric mobility and generative artificial intelligence (AI)]
Generative AI gained significant momentum as funding soared from ~$15 million to ~$250 million over 2022-23 – generative AI apps attracted the lion’s share of funding by demonstrating convincing early signs of product-market fit. Electric mobility was the other green-shoot sector that gained salience (from 3% to 7% of funding), as the rising maturity of the ecosystem fuelled investor interest. The ecosystem received over $0.6 billion in funding in 2023 with original equipment manufacturers (OEMs) and mobility services attracting over 70% of the funding.
A few deal flow patterns observed in 2022 continued into 2023. For example, the number of megarounds, representing investments exceeding $100 million, experienced a dramatic drop of nearly 70%, falling from 48 in 2022 to only 15 in 2023.
However, smaller and medium-sized deals (those under $50 million) displayed greater resilience and witnessed milder compression (decreasing by around 45% from 1,501 in 2022 to 852 in 2023), signalling investor optimism for India’s medium-to-long-term prospects. Additionally, leading private equity (PE) and growth funds sustained interest in growth equity and doubled their share in deployment to pull even with leading VC firms. Several also made maiden investments in tech-first sectors (e.g., ChrysCapital in software & SaaS, General Atlantic in generative AI) diversifying their portfolios.
From deployment to fund-raising, 2023 witnessed robust activity with ~$4 billion raised. This marked one of the highest levels in India’s VC landscape, second only to the groundbreaking year of 2022 when $8 billion was raised. Notably, a “change of guard” was observed as domestic VC funds took the forefront in fund-raising and comprised 90% of the total capital raised. These funds drove activity when several major global VC funds remained comparatively reserved, having raised significant capital in the previous year. Several thematic funds were launched focusing on emerging themes and sectors such as sustainability (e.g., $150 million by Omnivore) and gaming (e.g., $25 million by Lumikai). Interestingly, a quarter of the total fund-raising came from maiden funds, signifying continuing investor interest in India as an attractive investment hub.
“Over the longer term, global investors will likely remain bullish on India as an investment destination with numerous promising sectors and themes primed to draw investor interest. Erstwhile dominant sectors like B2C commerce and software and SaaS are expected to rebound as structural tailwinds persist. Further, several emergent themes, such as sustainability-centric agritech, energy transition, and India-nuanced AI tooling, are projected to surge in funding activity in the near-to-medium term” said Sriwatsan Krishnan , Partner, Bain & Company.
It was also a year of buoyant exit activity, as investors sought to provide liquidity to their LPs in a high-interest-rate environment. Exits surged by almost 1.7x to reach $6.6 billion in 2023— crossover funds led the pack and comprised close to 65% of total exit value. Non-IPO public market sales were the majority exit route, as crossover investors trimmed their positions in their publicly listed portfolio companies Secondary and strategic sales also increased in value, primarily driven by mega-exits in consumer tech.
“Global trends influenced a thorough assessment across the startup-VC-government ecosystem. Investors and the government heightened scrutiny, promoting better governance practices amidst the downturn. IVCA spearheaded initiatives educating VCs and founders on governance. The budget’s ₹1 lakh crore allocation for interest-free loans to foster innovation in agri-tech and defense-tech is encouraging. The future for startups and VCs appears to prioritise long-term strategies over thematic investments, focusing on well-governed, profitable ventures generating sustainable returns, thus the ecosystem is entering an era of poised growth, akin to a high-growth curve.” said Rajat Tandon, President, IVCA.
Following a challenging 2023, the Indian VC landscape experienced several noticeable and positive evolutions, fostering optimism for 2024 and beyond. The early months of 2024 are already witnessing heightened activity, hinting cautiously at a favourable year ahead. And over a longer horizon, India’s robust fundamentals—underscored by its significant consumption headroom, demonstrated fiscal and monetary discipline, geopolitical positioning, and expanding digital backbone—will continue to fuel optimism among investors.
For more such News Kindly Check blogoday.com