Indian Private Markets Will Survive Funding Winter Frost: Report Many macro and micro factors have led to a prolonged funding winter, which experts feel will end this year

The Indian private markets will survive the funding winter frost, according to a recent report. "Even as the startup ecosystem slowly but surely adjusts to the ice bath shock, observers predict that growth pangs are essential for the evolution of a mature and strong ecosystem," says a recent report by early-stage investment firm LetsVenture.

The firm recorded 169 deals across cleantech, deeptech, enterprise SaaS, and fintech, among others on LetsVenture and Trica.

"2023 is also the year we saw a significant increase in the interest of domestic capital allocators to participate in secondaries - both GP-led continuation vehicles as well as direct secondary investments in tech startups. This is in line with what we are seeing globally - in 2023 and early 2024, Blackstone and Lexington closed record-breaking secondary fund vehicles at $22.2 Bn and $22.7 Bn respectively," said Shanti Mohan, founder & CEO, LetsVenture and Trica.

Talking about the theme for 2024, Siddarth Pai, founding partner, 3One4 Capital said told the firm, "I'd say it is maturity. The years from 2020 to 2023 were about reflection and rebuilding, 2024 is going to be about maturity, and 2025 is when we start seeing the flywheel truly take off. A hard reset normally takes three to four years to settle and we're towards the end of that as of now,"

Furthermore, the investment ecosystem in India has been continuously evolving. The global downturn-led funding winter has brought a tremendous shift. The winter is in fact being seen more as a behavioral shift in how investors are approaching their investment decisions. "In the last few months, the ecosystem has witnessed significant markdowns in inflated valuations, which has also brought back some rationality to the market and a renewed focus on the path to profitability and sustainable growth for startups. In my experience, some of the best companies are actually born during and after downturns. Startups that are anchored on strong business foundations, positive unit economics, and longer and steady cash runway will continue to thrive," said Sanjiv Rangrass, Venture Partner, Unitus Ventures.

With the bid-ask price further reducing in 2024, as macros remain under stress and the 'golden tap' only opens a fraction, I see the action in the domestic secondaries market only picking up further, added Mohan in the report titled, 'Private Market Investing Outlook'.

Here are some of the observations and predictions made in the report by the investment firm:

Maturing of the Indian startup ecosystem: The Indian startup ecosystem in 2024 is on the cusp of unfolding its wings after the painful and trying times of last year. This is a time when it matures and settles down. And 2025 is when it hits the inflection point.

Limited Partner (LP) sentiment: From an LP perspective, the good news is a strong belief in the next 15 years in India, while there is a negative sentiment towards deploying more capital in China.

Patient capital is slow: Family offices have greater potential to offer patient capital compared to VCs. However, decision-making continues to be slower.

FOMO investing recedes: The year 2023 goes down as the year when private market investors in India internalized the value of developing one's conviction. There's no FOMO.

Founders have settled in a realistic startup market: The evolution of founder and startup quality is at the center of the slowdown and changes in the startup environment. Their attitudinal shift and approach to business-building points to a maturing ecosystem.

Sectors that are hot now: While healthtech and fintech are evergreen sectors, investors are scouting for deals in cleantech such as EV and renewable energy, deeptech, including artificial intelligence, drones, and spacetech. The EV sector in India has primarily been about two-wheelers and four-wheelers. The larger space where EVs can play a fundamental difference is going to be freight.

Sector consolidation in different cities: Certain sectors work better in certain geographies. Deeptech (Bangalore), Fintech (Mumbai), SaaS (Chennai) – driven by the concentration of talent, access to mentors, and perhaps change in work-from-home/office policies.

Less frequent but rich funding rounds to surface: Investors are getting a lot more selective. One will not see large numbers as before but given the market sentiment, one will end up seeing fairly rich rounds coming up. They may not be as frequent, but they will end up being strong.

Beyond the metros: The wealthy in small towns in India are ready to invest in startups due to greater awareness of the asset class. They prefer investing in and promoting local founders as their first and easily accessible means to the ecosystem.

Portfolio-based investing: Micro-funds continue to be the path for investors who lack time or interest to deeply analyze deals. There will be more innovation around portfolio-based investing (as we are doing at LetsVenture today).

Valuation enigma not sustainable: High valuations are proving to be a big hurdle in closing bridge rounds.

IPO green shoots: Lenskart's $100 Mn fundraising as part of Series J round and the Mamaearth parent company Honasa Consumer's D2C landscape-defining IPO are a few signs of green shoots for growth and the late-stage market.

Equidebt to the rescue: Despite enough dry powder, risk aversion is at an all-time high. Probably the reason why there is an increase in debt funding. 2023 saw an uptick in alternate forms of funding combined with equity.

Greater investor scrutiny on governance: In the past year, investors have realized that they have set a narrow set of metrics that became the focus for founders to raise capital and scale, thus creating room for misgovernance to fester.