India has long had a strong entrepreneurial spirit and it is not uncommon for people to quit their jobs to start their own businesses. A trait of that spirit is readily apparent today in the country’s thriving startup ecosystem, which has grown rapidly in recent years, to say the least.
However, the global slowdown has affected the growth of startups in the country as it has around the world. After a great year for venture capital funding in 2021, the flow of capital to Indian startups appeared to go against global trends in early 2022, but dried up in the second half of 2022.
Nevertheless, investors are bullish on their prospects in the country and feel the global slowdown is helping founders focus more on building and strengthening their core businesses.
“While this is a difficult environment for businesses, we see it as an opportunity to pause, take stock and consolidate,” said GV Ravishankar, general manager of Sequoia India.
“Founders are increasingly focusing on building and strengthening their core businesses, becoming sharper in allocating capital and driving improvements in the economic shape of their companies,” he said.
Working with uncertainty is very much in the nature of the beast. Roopan Aulakh, MD, Pi Ventures
All the investors we spoke to agreed that to make the most of the situation, startups need to maintain runway and prioritize growth if they can afford it.
For Ashutosh Sharma, Head of Investment India at Prosus Ventures, it is paramount that startups ensure their survival during this time. “This allows startups to take a step back and focus on internal processes, business model evolution and organizational issues […] Once these factors are resolved, they will lead to a better alignment of the organic product to the market, which will lead to growth in addition to economic growth.”
The startup landscape in India has changed a lot in recent years. To better understand how Indian investors are approaching investments, what regulations they pay attention to, which sectors are currently their focus and how they prefer to be approached, we spoke to some active investors:
GV Ravishankar, Managing Director, Sequoia India
After a year of hot investment, India saw a significant drop in venture capital funding in 2022, and this year is likely to be the same. How has your investment strategy changed?
After a more than 12-year bull run for technology in global markets, supported by low interest rates, we have witnessed a significant slowdown in capital flows since early 2022. This has resulted in a difficult environment from a capital availability standpoint in India and other emerging markets.
While this is a difficult environment for businesses, we see it as an opportunity to pause, take stock and consolidate. Founders are focusing much more on building and strengthening their core business, becoming sharper in allocating capital and driving improvements in the economic shape of their company.
So it’s actually a healthy period and it will lead to quality companies coming out of this market for years to come.
What advice would you give your portfolio startups to keep growing right now?
Focus on growth with a good economy and don’t “buy” growth because that comes with a bad economy and is therefore not sustainable. Focus on the core business and do not prioritize experimental investments.
Double down on the core product if capital is available as there is an opportunity to get ahead of competitors in a market like this with the right investments. The current environment may also provide good opportunities to acquire capabilities through mergers and acquisitions at attractive prices if capital is available.
Compared to 2019, what were the most notable investment trends in India in 2022? Do you expect these trends to continue in 2023? Which sectors do you think will be the next big trend in 2025?
There has been continuous innovation in recent years thanks to greater digital adoption and lower data prices. Post-COVID, we saw a significant increase in e-commerce, edtech and technology-enabled services across all industries. We also saw fintech emerge as a major theme and supply chains were digitised, including in manufacturing and agriculture.
Our core sectors are software, consumer, consumer internet, fintech and financial services. These remain our focus areas and constitute 80% of our efforts. Other emerging sectors include EVs, climate technology, aerospace technology and opportunities from supply chain shifts to India. Today these are small and emerging sectors, but tomorrow they could offer huge opportunities.
So we meet upstart founders building in this space and collaborating with startups trying to create innovative solutions to some of the challenges these industries face.
The 20% of what we do keeps changing every few years due to market trends and technological innovations, but overall the 80% has stayed the same for almost 17 years. Essentially, we seek partnerships with founders chasing big problems in big markets to make a dent in the world. That will always remain the same.
How do the sectors in which you currently invest differ from others? How do you evaluate a startup’s potential in these industries before making an investment?
We judge a startup based on the market they’re targeting (whether it’s big, growing and has profit pools), the team (founder-market fit; why this team), and business model/moats (do they have a better mousetrap and why will do they keep their advantage?).
What qualities do you find most important in a founder when evaluating their potential for success? Conversely, what is a major red flag that would cause you to back out?
One of the most important qualities we look for in founders is their persistence and determination to tackle the problems they want to solve. From the perspective of a market-fit founder, we also ask what makes a founder or team of founders best positioned to win in the market, and their unique insights into the problem they are solving.
Red flags are associated with failed background checks or if the company metrics displayed don’t check out carefully.
Ashutosh Sharma, Head of Investment India, Prosus Ventures
After a year of hot investment, India saw a significant drop in venture capital funding in 2022, and this year is likely to be the same. How has your investment strategy changed?
Given the environment of rate hikes and geopolitical uncertainty, we took a more conservative approach last year, setting the bar much higher for investment. We then shifted our investment focus to smaller ticket sizes, earlier stages and to companies in the SaaS and B2B domain.
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