With record dry powder, VCs face shortage of quality late-stage companies; see potential revival in 2024

Indian venture capitalists (VCs) find themselves in a unique position with a record amount of dry powder and a challenging landscape due to a scarcity of quality companies in the later stages. Companies seeking substantial funding rounds exceeding $100 million or preparing for public market entry are limited, presenting a conundrum for VCs looking to deploy their capital. In this new funding era, the dearth of opportunities is palpable.

However, a shift in founder focus from growth-at-all-cost to profitability, coupled with corrected valuations, is being seen as a hint of a potential revival in funding activity. In 2024, industry observers anticipate the beginning of the revival to unfold cautiously and with restraint.

According to the ‘Tracxn Geo Annual Report: India Tech 2023’, VC funding in tech start-ups plummeted by 72 per cent, recording just $7 billion compared to the previous year’s $25 billion. The significant decline is attributed to a substantial 73 per cent drop in late-stage funding, falling from $15.6 billion in 2022 to $4.2 billion in 2023. Notably, the number of $100 million+ funding rounds stood at 17, reflecting a 69 per cent decrease compared to the previous year.

“There is a massive shortage of quality companies in the later stages, those ready for IPO or wanting to raise big 100+ million rounds. Investors with large deployable pools are waiting for companies in that range. For them, it is more of a scarce market than an oversupplied market. These deals will soon start appearing,” Rahul Chandra, Founder and Managing Director at Arkam Ventures, says.  

Pratip Mazumdar, Co-Founder and Partner at Inflexor Ventures, concurs, noting that this phase unveils quality opportunities for investors. “It's a buyer's market, giving us (investors) chances to invest in high-quality companies at potentially good prices.”  

However, investors are treading cautiously with these opportunities even as the deployable capital at their disposal is at an all-time high. According to research firm Preqin, 70 India-focused PE and VC houses closed funds in 2022, raising an aggregate $8.5 billion, which is the highest-ever annual fundraising value. In total, PE/VC dry powder increased to $15.6 billion at the end of 2022 from $11.1 billion at the end of 2021. Though only a fraction of the previous year, there were notable fund closes in 2023 too by a handful of India-focused VCs including Epiq Capital, RTP Global, Nexus Ventures and Vertex Ventures, adding to the existing dry power.  

As the climate shifts from exuberance to austerity, investors have directed their attention toward companies that exhibit disciplined control over cash burn, prioritize cash conservation and engage in judicious hiring practices. There is a clear preference for backing profitable or profit-focused start-ups over those aggressively chasing growth. Discussions on corporate governance and internal controls have become integral components of deal negotiations and due diligence processes.  

The good news is that green shoots are emerging, particularly in the most affected later-stage funding landscape, as Lenskart, Udaan, Zepto, and GreyOrange secure substantial rounds this year.  

Rajat Tandon, President of Indian Venture and Alternate Capital Association (IVCA), foresees a substantial upswing in funding activity in 2024, particularly coinciding with the upcoming elections in India and several other countries worldwide. “Historically, election years can introduce a level of caution, leading to a temporary pullback in funding. However, the early signals from recent state elections in India suggest a potential for stability – important factors for instilling investor confidence.”  

As resilient start-ups navigate the challenges, steadfast investors, holding firm faith in India's long-term potential, are gearing up to amplify their support, signaling the comeback of prosperous times just around the corner.  

“Inflation is looking under control and interest rates seem to have plateaued [in the US], it will move downwards at some point. Whenever interest rates soften, the shift to equity and other riskier assets is so immediate and massive. Now that we are here, there is going to be a flow back into equity in global markets that will flow into venture in India as well,” Arkam Ventures’s Chandra says.

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