Indian Startup Funding

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Happy Hump Day and welcome to the 74th edition of Weekly Olio - your trusty source for giggles, wisdom, and a dash of intrigue courtesy of our tantalizing thought piece (yes, buckle up for Publisher's Parmesan). 🧀

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The Quote󠀢 💭

The Tweet 🐦

Mohammed Qahtani, a Saudi engineer, won the Toastmasters World Championship with a powerful speech that demonstrated the profound impact of words. His presentation highlighted the ability of words to influence and inspire, showcasing their inherent strength.

The Infographic 💹

The Indian elections are a colossal democratic event, marked by the participation of over 970 million voters across diverse terrains. With nearly 800,000 polling stations, the elections span several weeks, reflecting India’s dedication to a democratic process on an unparalleled scale.

The Short Read 📝

Pocket FM - the journey so far - by Harsha Kumar

Harsha joined Lightspeed India Partners Advisors in 2016 and has 11 years of operating experience focusing specifically on technology and product. Before joining Lightspeed, Harsha was one of the early employees at Olacabs where she was AVP, Product leading a 40-person team and driving design and growth for core products at the firm –ranging from Ola’s customer and driving facing apps, to back-end infrastructure products and Ola’s B2B solution.

The growth of Pocket FM from its beginnings to its present status highlights the impact of continual innovation and flexibility. The company has reached significant achievements, yet its path is ongoing. As it progresses, Pocket FM persistently pushes the limits of what's possible in digital media and entertainment.

The Long Read 📜

Inside the miracle of modern chip manufacturing - by The Financial Times

Confronted with the boundaries of physical laws, scientists are innovating in chip design with unprecedented creativity. This shift in thinking is driven by the need to overcome barriers to performance and efficiency that current technology faces. As a result, they are exploring new paradigms in chip architecture to continue the rapid advancement of computing technology.

Shrinking the computer chip is one of humanity’s greatest scientific feats. It has enabled the processing power that has digitalized almost every aspect of our lives. To understand how the latest chips work and where technological breakthroughs are being made, we need to travel beyond objects measured on familiar scales.

Publisher’s Parmesan 🧀

Funding winter for Indian startups is over. Yes! Wait, no!?

In March, the Indian startup scene was buzzing with 11 deals worth $20-50 million, along with two deals between $50-100 million, and three deals that exceeded a whopping $100 million! Although the large-scale deals seem to have made a comeback, the enthusiasm of the pandemic era is still a distant memory. Another interesting trend is that a significant portion of the funding is being directed towards secondaries, and investors are only supporting financially robust companies. However, it's important to note that investors are still quite cautious about the actual monetizable internet market in the country, and they're offering significantly lower revenue multiples than in 2021.

Last month brought some exciting news for the Indian startup ecosystem. The renowned investors Tiger Global and SoftBank were reportedly considering investing in the e-commerce platform Meesho. This was a significant moment for the Indian startup scene as these investors had refrained from investing in India for over a year and a half. It signaled that the worst of the funding winter that had plagued Indian startups for the last two years might be behind them.

Following these reports, there was a flurry of funding announcements in the subsequent week, especially for later-stage companies. From Purplle and HealthKart to Zepto and even Sachin Bansal's bootstrapped fintech Navi, the late-stage market suddenly appeared to be bustling with activity.

However, despite the apparent exuberance, startup funding remained subdued in the first quarter of 2024. PrivateCircle Research data revealed that deal volume in the current year's first quarter halved to 345 from over 700 in the same period of 2023. But, the average deal size more than doubled to Rs 53 crore from approximately Rs 21 crore. Overall funding, therefore, grew by 20% in the January-March period despite the year-on-year drop in deal numbers.

In March alone, there were 11 deals ranging from $20-50 million, two between $50-100 million, and three exceeding $100 million, as per PrivateCircle Research data. The momentum in the startup deal landscape appears to be growing, indicating that investors are beginning to show more faith in the Indian startup ecosystem.

After the chaos of the pandemic era, investors are finally starting to see signs of recovery in funding. But here's the catch: the boom town witnessed in the past is unlikely to repeat itself, with investment metrics such as revenue multiples expected to differ significantly. Investors are now taking a more cautious approach, preferring to back financially robust companies rather than throwing money at anything that moves. And that's not all - even the priorities of company founders have shifted, with profitability taking center stage instead of just scaling GMV or ARR.

As the multiples fall, reality checks in…

It seems like the market is adjusting, and founders are finally starting to accept the current reality. But don't worry, not every company needs to become profitable overnight. Startups are expected to burn cash, but they should demonstrate a clear pathway to profitability.

In fact, some startups are already taking action, like Innovaccer, a health-tech startup based in Noida, which is seeking to raise approximately $200 million. However, they are now looking at flat or reduced valuations, previously valued at over $3.2 billion, they are now engaging in discussions with investors for a blended valuation of $2.4 billion.

Similarly, HealthKart, a nutrition supplements manufacturer, is nearing a new funding round at a steady valuation of $350-370 million. Peak XV Partners (Sequoia Capital India) is aiming for an exit from the company nearly 12 years after its initial investment.

However, investors are becoming stricter in evaluating the revenue drivers of their portfolio companies and are setting valuation benchmarks accordingly. For instance, many edtech platforms raised significant funding from global investors during the pandemic by projecting an asset-light model and rapid penetration. However, they are currently generating the majority of their revenue from traditional offline tuition centres.

But there are some exceptions where startups are seeking a valuation increase. These companies have typically demonstrated strong performance, significantly improved unit economics, and achieved substantial scalability. Take Zepto, for example. The quick commerce unicorn reached $1.2 billion in annual GMV less than three years after launching, according to Goldman Sachs. It aims to achieve EBITDA profitability by September and is seeking to raise a $300 million funding round at a valuation of $2.5-3 billion.

Similarly, eyewear platform Lenskart is also seeking fresh funds at a $6 billion valuation, a significant increase from its previous $4.5 billion valuation.

…and investors have started to get their exits

The Indian startup ecosystem is maturing rapidly, and IPOs are becoming a not-so-distant reality. As a result, some early-stage investors are willing to take partial or full exits, allowing startups to eye late-stage rounds ahead of planned IPOs over the next couple of years. However, secondaries are playing a significant role in why deals are occurring at lower or stagnant valuations, since they usually happen at lower valuations than primary deals.

Several deals that are currently in progress have a significant secondary component. For example, when Lenskart raised funding last year, it gave its early investors a substantial exit, including Chiratae Ventures, and even SoftBank sold part of its stake in the company. Similarly, Meesho's upcoming fundraise is expected to provide an exit, either partial or full, to some of the company's early investors, including Venture Highway.

Moreover, B2B marketplace OfBusiness, which has been in the market for funding for almost a year now, is looking to raise a new round to give some of its early investors an exit. However, the company, just like Eruditus, is waiting for the market to improve before finalizing its funding. These instances have led to a sudden rush of secondary deals, with VCs looking for exits from whichever companies they can.

According to some investors, there are only a few superstars in the top VCs' portfolio that are currently attracting deals, and this is giving VCs an option - and quite a lucrative one - to exit. This particularly matters to VCs that have zombie unicorns or soonicorns, which on paper might show good returns but are unsellable in this market and at this price.

Although some IPOs of 2021 like Zomato have done decently and worked in favor of global investors, startups hoping for a return to the heady funding days of the pandemic will have to wait a while longer.

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