Global venture capital (VC) funding in start-ups hit a two-year low in August 2022, indicates Crunchbase data. The rate of new unicorns has slowed down. Deals are taking longer to close. Many companies are even preparing for down rounds. It is, what they call, a “funding winter”.
But that’s the VC side of things. The other side might still be looking up. Ask any debt fund manager or alternative investment fund (AIF), and they’ll tell you that a winter may not be all that bad. It is, in fact, "healthy for the ecosystem" because the mistakes of the funding highs are getting corrected.
Ashvin Chadha, Founding Partner of Anicut Capital, tells Business Today, “Some of the biggest venture funds are now becoming slow. There is a focus back on compliances, on getting the house in order. Everybody’s portfolio is suffering because what they did last year does not look so good this year. There is a correction among funds just like in start-ups.”
Anicut Capital, which offers a mix of structured credit, acquisition financing, and early-stage equity capital to start-ups, has backed more than 26 companies in the first half of this year. Doesn’t look like winter for the seven-year-old multi-platform asset management fund then.
Alternative Funds Catching Up
Ashvin elaborates, “Foreign investors have effectively shut shop in India. We are being super aggressive with early-stage cheque sizes. We are seeing the best founders and the best deals available to us because so many [venture] guys have backed off and gone back to the drawing board. At the early stage, we’re not seeing any winter at all.”
“I also see a lot of private equity (PE) funds doing controlled transactions. Mid-market PE buyouts have started again, which have not happened for many years,” he says.
Chennai-based Anicut Capital has, so far, raised two funds on the debt and private credit side - Fund I had a corpus of Rs 400 Cr and Fund II had Rs 875 Cr. It plans to launch its third credit fund towards the end of this year and has filed papers with SEBI. Fund III is expected to have a corpus of Rs 1,200-1,500 Cr, and might close by mid-2023.
On the equity side, it manages an angel fund for seed-stage start-ups, and a new Rs 500 crore Opportunities Fund to invest in growth-stage / Series A companies. Many of the start-ups being funded by the latter have graduated from Anicut’s first fund. In the last three years, these funds have deployed Rs 250 crore and developed a network of 700+ investors.
Ashvin shares, “We have managed over Rs 2,000 crore of AUM in seven years. And we have done it without any distributor or wealth manager. Because that becomes expensive capital then. We started with private credit, went into early-stage seed, and now we have gotten into Series A/B.”
Few Good Deals Make A Fund
Among its star bets include ShareChat, SUGAR Cosmetics, Wow! Momo, Bira, LendingKart, Earth Rhythm (where Nykaa acquired a stake recently), Neeman’s (in which Sixth Sense Ventures led a Series A round), Box8, and more.
In ShareChat, interestingly, Anicut Capital came in as a late investor in mid-2020. “One of their existing investors invited us to join an internal round after TikTok [ShareChat peer] got banned. We’re only two years into the company, but on paper, we are sitting on a 5X return,” Ashvin reveals.
Anicut had also led the first debt financing round in D2C major SUGAR Cosmetics in 2017-18. Following that, it converted some warrants into equity shares. “We’re equity holders in SUGAR through our first fund. It has done phenomenally well for us, and is up 7.5X in three years,” says Ashvin.
Another of its portfolio companies, Wow! Momo (also backed by Tiger Global), raised Rs 40 crore debt capital from Anicut in late-2020. And that’s all it takes — “a few good deals” — to make a fund, reckons the company.
Ashvin says, “In every fund, you need 2-3 great deals, and that’s it. Every deal is not going to be a homerun. We are relaxed that we will lose some deals, that people will outbid us, and will move faster than us. We know it is not possible for us to do every good deal. Because of our debt pedigree, we are the Rahul Dravid of investing where singles and twos are enough for us. Over the course of time, we will get a bad ball, and we will hit a six.”
Future Bets & Funding Climate
So, where next is Anicut Capital looking for its next good deal?
Anything sustainable — EVs, mobility, climate tech — is seeing a lot of action right now, says the company. “We are also seeing a lot of interest in B2B SaaS companies that are built in India for the world,” Ashvin reveals. “The mindset of investors has changed in the last one year. Today, they want to see high growth margins and EBITDA profitability. You can build those things quicker in B2B sectors as opposed to in consumer businesses.”
As equity capital dried up over 12-15 months, venture debt has obviously gained more traction. But that is not without its challenges either.
Ashvin states, “I always tell founders that debt comes along with a lot of strings. You may work 8-10 hours a day, but your interest meter is running 24 hours. Having said that, profitable companies will always want to take on debt rather than equity.”
Will equity funding then return to its exuberant pandemic highs of 2020-2021? If yes, by when is the winter likely to end?
“I hope it doesn’t come back anytime soon because we end up making more mistakes in that kind of a buzz,” Ashvin says.
He adds, “The guys who got mispriced last year are now struggling to raise money. Which is good because the system requires a clean-up.”
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