Founder of Bay Capital Siddharth Mehta views on start-up funding

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Macro headwinds creating a slowdown in start-up
funding is a short-term phenomenon Indian VCs

• Siddharth Mehta
• Founder CIO

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Many investors believe this is the opportune time
to invest
It is not as bleak as it looks in the world of
start-ups. Top venture capital firms said the
ongoing slowdown of new deals and funding in the
Indian start-up ecosystem is not a reflection of
the health of start-ups, but a trickle-down
effect of several macro headwinds and
geopolitical issues. In the hindsight, many
investors believe this is the opportune time to
invest in early-stage start-ups with strong
business models at attractive valuations for the
long term.
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Siddharth Mehta, Founder CIO at Bay
Capital told Business Line, During Covid, the
intent was to create a safety net by providing
money to the consumers to help the economy bounce
back quickly. But as an unintended consequence, a
lot of this excessive liquidity went into
financial assets and speculative activities. For
instance, in the US and India, we have seen
investments into high-growth stocks, crypto
trading, and NFTs getting popular. Over the last
12-14 months, India also benefitted from this. We
had the highest number of unicorns, businesses
got funded. Everyone was getting funding quickly.
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Starting from January, there were supply chain
disruptions with China and its restrictions, the
Russia-Ukraine war, and, most importantly, Feds
stance on growing inflation and the need to
increase interest rates. Fed and the US have
been very much behind the curve and have reacted
slowly to inflation. As they extracted liquidity
from the financial system, the first sectors to
get hit are the speculative assets where all the
hot money went. Thats why we saw crypto getting
decimated and popular stocks in the US dropped
70-80 percent. A lot of excesses are now getting
corrected, he added.
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All the tailwinds we had last year have changed
to headwinds. We had a flood of liquidity and new
money was getting printed. Almost 40 percent of
the US dollars in circulation were printed over
the last 15-18 months. This, added with record
low-interest rates in some markets, Covid-driven
surge in some sectors like Edtech, SaaS, gaming
and bumper IPOs, have all started to become
headwinds over the last 4-5 months starting with
inflation, Ashish Sharma, CEO MD, InnoVen
Capital told Business Line. Sharma added
Reaction to this will be more pronounced in
growth and late-stage start-ups because their
valuations are already very high. The investor
base for mega-rounds of 100 million-plus is very
shallow and few. All of these investors are going
slow now and there will be a significant decrease
in mega-rounds.
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Scope for early-stage start-ups According to a
recent mid-Q2 report by CB Insights, globally the
number of deals are likely to drop by 22 percent
quarter-on-quarter, missing the estimate of 6,904
deals worth 115.4 billion. So far, only 57.7
billion has been deployed across 3,452
deals. Last year, the private equity market was
flush with liquidity with firms like Tiger Global
raising 12.7 billion and SoftBank writing
several big-ticket cheques. But now after
reporting massive losses in the stock market and
reported financials, both the investment firms
are now set to slow down funding activities while
eyeing smaller ticket investments into
early-stage start-ups. Tiger Global had deployed
12 billion in a short span of 6-9 months. The
fact that SoftBank and Tiger Global are not there
the way they were deploying capital over the last
12-18 months is going to affect the ecosystem.
Thats a good thing though given how they had
distorted the market, making one believe anything
and everything can get funded, said Mehta.
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The silver lining is in the early stage where
there is a lot of capital. And the time and
horizon of exit compared to a late-stage start-up
is much longer. So, you can underwrite some of
these risks. Even if this scenario goes on for 24
months, it will still work out as the timeline
for exit could be anywhere around 7-8 years and
by that time things would improve. But if you
enter a late stage, your timeline for exit is
around 24 months, Ashutosh Sharma, Head of
Investment for India, Prosus Ventures, told Busine
ss Line.
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Short-term trend consolidation According to
Mehta, the pace of deal activity will drop
further in the second and third quarters, but
overall, this is a short-term trend, and
long-term investors can utilize this opportunity
to pick solid and attractive businesses at lower
valuations. The broader story of digital
transformation has not changed and will continue
attracting growth, he said. The good news is all
large investment firms in India and globally had
raised a massive amount of funds. Though some of
them have deployed, most of them have still not
started deploying that fund. My view is that the
ecosystem is in pause mode. Once some clarity
emerges around the macro situation, a lot of them
will start funding again, said Ashutosh.
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The opportunity for early-stage funding still
exists. There is a lot of capital that has come
in the early stage and capital will shift towards
it. Also, the valuation for the early stage as
well will be correct. Lately, we have seen very
large Series A and seed rounds. That will taper
off and we will be able to see better start-ups.
Growth and late-stage will suffer though, Anup
Jain, Managing Partner, Orios Venture Partners,
told Business Line. Cash-heavy businesses such as
quick commerce, D2C brands, and fintech and
edtech products with very little differentiation
and operating in cluttered spaces, will find it
difficult to raise funding. Investors believe
that either some of them will shut shops or are
aligned to opt for acquisitions and mergers. For
more mature late-stage start-ups such as Swiggy
and Meesho, which had raised funding recently,
they will try to be leaner by downsizing
verticals than raising fresh capital at lower
valuations. Another impact of such a change has
been seen with ongoing layoffs across start-ups,
which is only expected to continue further.
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I believe flat is the new up right now. Even if
they do a flat round, there will tighter terms
with the investors. So, a lot of these big
start-ups will not raise funds now or the next
six months, even for flat rounds, said InnoVens
Sharma.
If you are a company which burns a lot and you
dont have a decent runway, then my suggestion is
that you go out and raise as soon as possible
even if it is at a lower valuation. Dont make
valuation an ego question, said Ashutosh.