Tech investors in India are struggling to turn a profit after funds fell from record highs amid the pandemic.
Foreign venture capital funding for Indian technology is down to $25.7bn in 2022, down almost 40 per cent from a year earlier, according to data provider Tracxn. High-profile investors including Tiger Global, SoftBank and Sequoia Capital accounted for more than half of the investment level.
The pullback is not unique to India, where fundraising and valuations are stronger than in neighboring regions such as Southeast Asia and even mature markets such as the US.
However, this has halted the rapid growth of a market that has long been touted as the technology world’s best shot at making a high return from China, whose population India is set to overtake this year.
Private market investors found themselves unable to exit their investments after funding activity ceased and the IPO was cancelled. The lack of capital then forced the startups to curtail their business and cut staff.
India is like a “crazy teenager growing up fast”, says Sandeep Murthy, partner at venture capital firm Lightbox Ventures. “People who have invested are constantly concerned about the lack of liquidity.”
Beijing’s crackdown on domestic tech companies during the pandemic has prompted investors to reroute money to India and southeast Asia, only for global inflation and interest rates to force a rethink.
Publicly held technology companies, the first of which will start in 2021, are also affected. Shares of Paytm, Zomato and Nykaa have each fallen more than 40 percent in the past year, even as India’s benchmark Sensex index rose about 2 percent.
“India overshot technology exuberance longer than the US,” said Sunil Khaitan, head of equity capital markets for Southeast Asia at Bank of America. The “billion dollar question”, he added, is whether international investors will survive this cycle or feel it is reasonable to withdraw.
Investors’ positions in large Indian technology stocks have “showed signs of fatigue”, said Steven Holden, founder of Copley Fund Research, which tracks equity fund positions globally. More emerging market funds have moved to underweight positions in the sector since the end of 2021, according to Copley data.
This has had a ripple effect on the private tech market, where the IPO pipeline has been halted. While about two dozen tech companies went public in the second half of 2021, according to Tracxn, only eight did so at the same time last year.
Venture capitalists say the lack of exits is a particular problem, as many India-focused funds are nearing the end of their life cycles. This is the point at which the investors – such as pension funds and family offices – who gave the money have to pay back. Murthy said that many of the funds created in the middle of the last century “have not achieved the liquidity that they wanted”.
Venture capital firm Orbit Startups said it has not invested in China for three years, but is also accelerating transactions in India, where it has 55 investments, according to managing director William Bao Bean. Bean added that Orbit has recently done more deals in Pakistan, Bangladesh and Latin America.
“One of the challenges is that the market has a short memory and India has no memory because it is the first technology cycle,” he said. But the correction in India’s private market “does not change the fact that India is undergoing a tremendous technology-driven economic transformation”, he added. “As a long-term investor, we are bullish.”
Indeed, the Indian market has been boosted in other ways, with the economy expected to grow by more than 6 percent by 2023. It has also attracted investors as a democratic and business-friendly alternative to Beijing at a time when US-China tensions are rising. As a result, “you will have capital coming south”, said Andrea Campagnoli, partner at Bain & Company.
India’s fall in private equity ventures and deals last year was not as bad as the decline in China and Southeast Asia, according to Bain research. Fundraising by early-stage and growth-stage technology companies in India even surpassed that of China in the fourth quarter of 2022, according to data from the Asian Venture Capital Journal.
Neha Singh, chief executive of Tracxn, said that while she expects private fund flows to remain flat in the coming quarters, IPOs could once again be a “serious exit option”.
“This year will continue to be a difficult year globally,” said Kabir Narang, founding partner at B Capital. “The key is to ensure consistency out there and see if it opens until the end of this year and 2024.”