Rethinking the Landscape of Venture Investments in India

“India’s startup funding is rebounding, but questions still remain for the industry.” –Lightspeed

Lightspeed Partners, a prominent venture firm, recently hosted their “Lift Off” summit in Mumbai, bringing together over 150 investors including Temasek and Khazanah. The event, held at the luxurious Trident Oberoi hotel, aimed to foster partnerships and discuss the current state of venture investments in India.

The Rise and Fall of Valuations

Last year’s Lift Off summit saw the birth of several deals and networking opportunities, including GIC’s investment in VeGrow. However, this year’s event had a more cautious tone as the industry faces pressing questions.

The once $22 billion startup, Byju’s, is now seeking new capital that would significantly decrease its valuation by 99%. Similarly, Paytm, once valued at $20 billion, has seen its market cap shrink below $3 billion amidst market volatility and regulatory issues.

There are also concerns about highly-valued 2021 seed deals struggling to secure follow-on funding. At the same time, there is a record $20 billion in “dry powder” among Indian VCs, raising doubts about the rationale behind excessive fundraising.

The Question of Fund Size

“Have Indian VC firms raised too much capital?”

The query posed to Lightspeed partner Bejul Somaia during the summit sparked a thought-provoking discussion. Somaia believes that the current vintage of funds, raised in 2021 and 2022, may have overestimated the potential of the market at that time.

He points out that in 2021, $33 billion was invested in Indian venture capital, compared to only $9 billion in 2023. With the number of investments also decreasing by half, he believes that this may be a result of funds raised during a time of excessive market activity.

“Market cycles do happen, so 2023 may not accurately reflect the true venture market opportunity in India,” he adds.

As for Lightspeed India’s own fund, Somaia says they chose to size it at “the lower end” of their peers’ funds, stating that it was a deliberate decision. “We want to guard against the risk of too much capital resulting in strategy drift,” he explains.

However, he also expresses interest in learning from their peers and their more expansive investment strategies. But ultimately, their goal is to deliver top-tier returns to their LPs, even if it means taking a longer time to deploy their funds.

The Global AI Race

“The concentration of technical talent in Silicon Valley is unparalleled.” Bejul Somaia

The discussion also turned towards the progress of AI in India, or rather, the lack thereof. While countries like the US and China are making significant strides in AI research and development, India seems to lag behind.

Lightspeed sees this as an opportunity for Indian startups to focus on applications of AI, such as in the consumer and enterprise space. However, the availability of top-tier AI talent remains a challenge, especially in comparison to Silicon Valley.

Hemant Mohapatra, a partner at Lightspeed, believes that India’s engineering strength could still make a mark in targeted AI opportunities, even if general innovation remains dominated by Silicon Valley.

The Patient Capital

Despite the challenges facing the Indian market, investors remain optimistic about the opportunities for growth. Lightspeed MD and Head of India Corporate Development, Anuj Bhargava, believes that this will be the year of more “public market-aligned” financing for growth companies.

He also notes the growing interest from sovereign funds in investing in Indian startups, along with patient capital from pension funds and private equity growth arms. This long-term and mature capital may help bridge the gap left behind by “momentum investors” who have been more cautious in this current market climate.

While late-stage funding may still be tight, there is a glimmer of hope in India’s early-stage ecosystem. Multiple venture firms have signed early-stage deals in January alone, indicating a strong belief in the potential for growth in this market.

Partner at Lightspeed, Rahul Taneja, attributes this to the high-quality founders and talent that are still accessible at the early stages. He sees this as a prime time for building and investing in India’s digital growth.

“There is no time like now to build (and for us to invest).” –Rahul Taneja

As the venture investment landscape in India continues to evolve, only time will tell how these discussions and decisions will shape the future of the industry. But one thing is for sure, there is no lack of ambition and determination among investors and founders alike in this dynamic market.