PE/VCs start funding startups, albeit slowly

It is difficult to say whether the current funding downtrend has bottomed out. But more deals are definitely happening. Valuation has not gone up, but there is greater interest in deployment of capital - Dinesh Goel, partner at Siana Capital Management, tells Bizz Buzz

Vigilant On Fundamentals

• August saw $5.2-bn investment from PEs, more than twice over last year
• Valuations remain lower
• Cautious approach with high scrutiny on profitability, founders & biz model

Bengaluru: Private Equity (PE) and Venture Capital (VC) funds have started deploying capital in the startups in India though the pace of such investment remains slow. According to top fund managers, deployment of funds has started slowly by PE and VC funds, albeit in a cautious manner.

“It is difficult to say whether the current funding downtrend has bottomed out. But more deals are definitely happening. Valuation has not gone up, but there is greater interest in deployment of capital. However, fund houses are still careful about the overall quality of startups, founders and profitability aspect. So, the euphoria is not back, but more deals are happening right now,” Dinesh Goel, Partner at private equity fund, Siana Capital Management, told Bizz Buzz.

The slowdown in funding for Indian startups began around mid-2022. During January-July 2023, fund flow dropped by as much as 77 per cent to about $4 billion against $19.5 billion in the year-ago period. However, investments increased to $5.2 billion across 67 deals in August, which were more than double of the $2.3 billion witnessed in August 2022.

Infrastructure emerged as the top sector in August 2023, on the back of the large investment by GQG Partners Inc in Adani Power Limited, recording $1.8 billion in PE&VC investments across six deals. It was followed by retail and consumer products sector, which saw $1 billion in four deals.

“In the medium to long-term, Indian startups are extremely well-positioned. India has an innovation-led startup ecosystem, which is well-supported by the government. In the US, a significant portion of startups has been set up by Indian-origin entrepreneurs. Given the sheer talent availability in India, level playing field through cloud computing, and supportive ecosystem, the growth potential of Indian startups is huge,” Goel said.

Meanwhile, many fund houses are sitting on the sidelines despite raising huge rounds of funds for investment in India. Matrix Partners has raised $550 million for investing in Indian market. Similarly, Infosys’ founder NR Narayana Murthy’s Catamaran Ventures is planning to invest around $1 billion in startups.

Sources in the know said that successful listing of many startups in recent months has raised hopes of ending the funding winter that the startups are facing since last one and half years.

Last month, Indian skincare startup Mamaearth’s initial public offering (IPO) was oversubscribed by 7.6 times, giving an opportunity for its PE investors to exit their investments at profit.