India has not had a new unicorn in the last two quarters of FY23, which is one of the longest lean periods the domestic start-up ecosystem has witnessed since 2016. In contrast, the last two quarters of FY22 saw 30 new unicorns, following the VC funding boom of 2021. It’s evident that the ‘funding winter’ is here to stay for a while, and things might get worse before it gets better. Several venture capital funds that continue to do some deals are now urging their portfolio companies to focus on unit economics, and stay away from bloated valuations.
“Regardless of the market conditions, overfunding is a dangerous trend. Yes, it does allow the management team to have a longer leash in terms of cash flow availability, but at some point, the business has to grow into its astronomical valuations. This is a factor that we often see being overlooked during boom cycles,” Venkat Vallabhaneni, Founder & Managing Partner of Inflexor Ventures, tells Business Today in an exclusive interaction. (Inflexor Ventures is a homegrown early-stage VC fund that launched during the pandemic).
The fund scouts for investments in sectors like telecom, biotech, logistics, fintech, cybersecurity, computational bioinformatics, and so on. Last year, amidst the funding slowdown, Inflexor Ventures backed 12+ start-ups between seed and Series B stages, and deployed ~15 per cent of its fund corpus of Rs 600 crore. Some of its key investments include GramCover, A5G Networks, BioPrime, Kale Logistics, Awiros, etc. Inflexor Ventures has also doubled down in some of its Fund 1 (Parampara Capital) companies, including Atomberg, PlayShifu, Entropik, and Bellatrix.
Vallabhaneni pointed out: “80 per cent of our portfolio companies have raised at least one subsequent round, and about half have raised two or more rounds… The advice that we give to founders has remained consistent in that building a lasting business is not a game of years, but one of the decades.”
Inflexor Ventures reckons the continuing bearish environment in the capital markets will impact the VC industry, both in terms of fundraising and deployment. “LPs are cautiously watching the developments but they also understand the nature of VC investment as long term,” Vallabhaneni said, adding, “That being said, more money has been raised by homegrown VCs than ever before, and that is more a testament to the optimism surrounding the Indian start-up ecosystem.”
Inflexor counts large Indian financial institutions, prominent Indian family offices, some prolific angels and other new-age investors among its LPs. Several of them are exploring venture capital as an asset class for the first time.
The prolonged funding winter has put things in perspective. The ‘growth at all cost’ phenomenon, which was driven by the availability of cheap capital in the pandemic years, might be corrected, now that “VCs tame their growth expectations and shift focus to business fundamentals and long-term sustainability”, according to Vallabhaneni. “So, strategies and decisions must be aligned with the larger end goal. There may be some difficult short-term decisions that need to be taken to ensure the survival of the business, but that’s what the job entails,” said the investor.
The industry has, of course, seen the growing acceptance of venture debt, which is cheaper than equity capital, and increasingly preferred by growth-stage startups. But Inflexor Ventures has no immediate plans of getting into that asset class, even though it considers debt “a critical tool” for startups. “Debt funding and equity funding are two fundamentally different businesses. Our DNA is in equity funding for startups, so it doesn’t seem likely, at least in the near future, that we will raise a debt fund,” Vallabhaneni stated.
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