Even as early-stage investments in the burgeoning startup ecosystem in India have been witnessing traction despite the ‘funding winter’ and macroeconomic uncertainty, exits may be challenging in this space in the years to come.

“Many startups have raised capital in the past year at what is being viewed in 2022 as high valuations. There was definitely FOMO [fear of missing out] in the minds of investors in 2021,” Anup Jain, managing partner at Orios Venture Partners said in an interview last week on the sidelines of DealStreetAsia’s Asia PE VC Summit 2022.

Funding across pre-seed and seed deals in India increased 90% to touch $596 million across 351 deals in Jan-July 2022, compared with $313 million across 215 deals in the same period last year, according to proprietary data compiled by DealStreetAsia.

“In 2021, there was also a lot of dry powder due to larger funds and more new funds being raised as tech startups became extremely sought after as an asset class. So, there was pressure on deployment, in the case of several funds. But the actual test lies now in 2022,” said Jain.

“It is important to see how these startups scale up with the capital raised over the past few months and achieve strong unit economics. Many fund managers may find themselves holding out for longer on investments they made at rich valuations. The next 12 months will also see a separation of quality in terms of investments from one fund manager to another,” he added.

Orios Venture Partners focuses on investments in the Indian technology sector and its portfolio companies include Country Delight, a direct-to-consumer (D2C) food essentials brand, Battery Smart, a battery-swapping network for electric vehicles, and travel portal Ixigo.

In early-stage deals, investors can exit portfolio companies by selling their stakes to other investors as and when startups scale. Typically, they keep a 3-5 year horizon, while in growth-stage deals, exits happen by way of trade sale, public listing, recapitalisation and secondary sale as and when a startup reaches a significant scale.

“Between last year and this, valuations have come down significantly – it could be anywhere in the range of 25-30% in early-stage transactions,” said Jain.

Asked if startups are comfortable raising funding at reduced valuations, Jain said: “If a company has not grown over last year, it certainly cannot expect a higher valuation. If it has done marginally better than last year, it should be prudent to take money at last round’s valuation. We may see more funding at same round valuations or even down-rounds in the coming months.”

He also highlighted how most layoffs have happened in some of the late-stage startups as they have been guarding cash. As some are finding it difficult to raise funding, mergers and acquisitions (M&As) are also catching pace. “Going forward, we may see consolidation picking pace in the grocery delivery, B2B commerce, lending and healthcare segments.”

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