More than 150 investorsincluding Singapore’s sovereign wealth fund Temasek and Malaysia’s Khazanah, gathered at Mumbai’s five-star Trident Oberoi hotel on a recent Friday for venture firm Lightspeed India Partners’ “Lift Off” summit.
The two-day event aims to build partnerships by allowing “in a short period, many views, ideas and investments to be shared across nC2 connections (every permutation and combination),” described Karthik Reddy, co-founder of Blume Ventures.
The event builds on the success of last year’s inaugural Lift Off, which helped drive deals and contacts, including paving the way for Singapore sovereign wealth fund GIC’s investment in business-to-business market VeGrow later this year.
This year’s optimistic atmosphere reflected the pickup in seed funding in India over the past three to four months. But the luxurious surroundings couldn’t hide the pressing issues still facing the industry.
Byju’s, once India’s most valuable startup with a valuation of $22 billion, is seeking new capital through a rights issue that would reduce its valuation by a whopping 99%. Paytm, once the poster child for Indian startup dreams that went public with a valuation of $20 billion in 2021, has seen its market cap shrink below $3 billion amid of technology market carnage and regulatory unrest.
Many late-stage startups are still clinging to their 2021 peak valuations. And many high-value 2021 seed deals are failing without follow-on funding. At the same time, Indian venture capitalists currently have a record $20 billion in dry powder, raising skepticism among many investors about excess fundraising.
On the size of the venture capital fund
“Sitting here in early 2024, with the benefit of looking at 2023 investment activity levels as well as the pace of new business creation, I think the answer is yes,” Lightspeed partner Bejul Somaia responded when asked. asked if Indian venture capital firms have grown too big. , accumulating more funds than they responsibly can.
“The current crop of funds was raised in 2021/2022, when activity levels and investment dollars were substantially higher than in 2023. In 2021, $33 billion of venture capital was invested (early and late) in India. In 2023, this figure was $9 billion. That is why we must keep in mind that the funds raised in 2021/2022 were sized for an opportunity that reflected that moment,” he explained.
“If you look at the number of investments, the number was 2,200 in 2021 and about half in 2023. That doesn’t mean the market won’t accelerate again in two or three years… Market cycles happen. Therefore, 2023 also does not necessarily reflect the venture market opportunity in India,” he added.
Lightspeed Venture Partners India, which had returned more than $1 billion to LPs by the middle of last year, was unusually restrained during the hyper-exuberance period of 2021, when deals were struck in days with inflated valuations and unreasonable terms favorable to investors. founders: a frenzy that Somaia hopes the market never visits again.
“Environments like 2021 make me quite anxious. Investment opportunities are advancing rapidly and at high prices… and growth, advertising and salesmanship are beginning to matter more than creating lasting companies. Even though our market valuation performance seemed incredible, that was perhaps one of the few years at Lightspeed when I felt the most anxiety. On the one hand, these valuations were determined by the market and, on the other, they did not match our valuation of the business,” he stated.
“So how do you know who’s right? Does the market know something that we don’t? Fortunately, for most of that time we remained firm in our convictions.”
Magicpin founder Anshoo Sharma, One Assist founder Gagan Maini with Lightspeed’s Bejul Somaia (Image: Lightspeed)
Over the past three years, many India-focused VC firms have raised substantial new funding that dwarfs their previous vehicles: Peak XV has raised $2.5 billion for the region in recent closings, while Nexus Venture Partners raised $700 million dollars and Elevation raised $670 million. and Accel raised $650 million. Lightspeed, which started investing in India more than 15 years ago and later formed dedicated funds for the country, unveiled a $500 million fund, its fourth for India, in 2022.
“Regarding Lightspeed India’s latest fund, I think it is sized at the lower end of our peers. This sizing is a deliberate choice,” said Somaia. “That said, perhaps our peers see an opportunity that we don’t, or have a more expansive investment strategy, and we’re always curious to learn. But we want to guard against the risk that too much capital will cause the strategy to drift.”
Somaia said he anticipates that many companies, including Lightspeed, will take three to four years to deploy their funds instead of the typical two-and-a-half to three-year cycle. “We need to offer top-notch returns to our LPs, who have become accustomed to a certain type of return from a company like Lightspeed. We will never compromise that to put money to work,” he stated.
India in the global AI race
With increasing AI progress in Western centres, India is lagging behind in fundamental research as very few of its startups attempt to build large linguistic models.
Lightspeed sees parallels with the company’s initial investment in the Indian Energy Exchange: building an energy trading platform whose analogue did not exist in Western markets. “My perspective is that right now we are in a phase with AI where a lot of the infrastructure and some tools are being built. This is happening primarily in Silicon Valley. In fact, it has been a reminder that the concentration of technical talent in Silicon Valley is unparalleled,” Somaia said.
“Over the time we have been investing in India, we have seen limited innovation in core technical infrastructure. Most of the opportunities tend to be at the application layer, both for consumers and enterprises. There are many reasons for this, including market dynamics and the investment community, where we have few technically strong investors… so it’s a bit of a chicken and egg,” he added.
Hemant Mohapatra, Partner at Lightspeed, focuses on deep tech and has backed startups such as Rephrase, one of the first generative AI startups, and large language model AI startup Sarvam.
Mohapatra agreed that access to top-tier AI talent is limited globally. But similar to the cloud computing shakeout, she predicted consolidation around some AI technologies and business paradigms once the current enthusiasm wanes. Given the strength of India’s engineering, specific AI opportunities could still arise locally, even if Silicon Valley maintains its overall innovative dominance, she said.
The patient capital
Anuj Bhargava and Rahul Taneja of Lightspeed with Darwinbox founder Jayant Paleti. (Image: Speed of Light)
A concern of many investors in India is that several late-stage startups continue to push for breakthroughs, exhausting their runways before accepting post-recession realities.
Anuj Bhargava, Lightspeed CEO and head of India corporate development, told TechCrunch that he sees progress toward aligning with public markets. “I think this is the year in which the financing that will be produced will be more synchronized with the public markets. For growing companies, private markets have been slow. But for names that have really improved their PnLs, reduced burn and are based on sustainable unit economics, I think public markets offer a great opportunity,” he said.
India has also attracted growing interest from sovereign wealth funds in the past three years on a scale never seen before, he said, adding that he was optimistic that they will invest in many late-stage startups. “We had a lot of funds that were not based in India but invested in India because of the opportunity the country offered them outside their own. Many companies ended up raising money that did not justify their scale or progress. In recent years, some of the momentum investors have not invested as much in India, creating a gap,” she said.
“That gap has been filled with patient capital: sovereign wealth funds were very quiet in 2020 and 2021; pension funds that were quiet and probably hadn’t invested much in India before; and the growth arms of private equity funds, many of which previously did not invest much in technology. So these three pockets of capital are mature, long-term and patient, and I anticipate we will see more activity from them in the future.”
While late-stage funding remains considerably limited, some investors see bright spots in India’s early-stage ecosystem. Peak XV, Lightspeed, Elevation, Accel and Nexus signed more than a dozen early-stage deals in the month of January alone, according to a person familiar with the matter.
“While many in the ecosystem are busy guessing when winter will end, we believe there is no better time than now to build (and for us to invest),” said Rahul Taneja, partner at Lightspeed.
Skilled talent and eager capital remain accessible in the early stages, he said. “The quality of founders is much better: people leaving their jobs really believe in their ideas and are willing to take the plunge in what most would call a ‘slow year.’ Access to high-quality talent is much better and capital allocators have been hoping to make bolder bets. Every day we meet exceptional founders in the early stages of building a company and realize how fortunate we are to be in a position to support the digital growth of India and Southeast Asia.”
