A record $562 billion of 'dry powder' is available and ready to be deployed with venture capital firms globally, even as start-up funding continues to decline. The accumulation of this capital is due to market pullback by VC funds that have turned very cautious about their investments. A combination of global macro events including geopolitical crisis, changing monetary policies, soaring inflation across the globe, and the public market turmoil has led to an increased focus on strong unit economics and the path to profitability.
As per a report from PwC, start-up funding in India hit a two-year low at $2.7 billion across 205 deals during the third quarter of this calendar year. Funding in growth and late-stage deals continued to decline, with an average ticket size decreasing to $13 million in Q3 CY22 from $23 million in the previous quarter.
The significant accumulation of dry powder happened from capital committed in 2021 and 2022 and the selectivity in dealmaking will only increase, PwC’s report titled ‘Startup Deals Tracker-Q3 CY22' says. Funding activity declined both in terms of value (59 per cent as well as volume (28 per cent).
Ashish Dave, CEO of Mirae Asset Venture Investments (India), said while new funds and capital flow to India is only bound to increase, the massive unspent cash reserve will not be democratically distributed.
“We will see an era of ‘consolidation’ that follows. The companies that execute their vision efficiently will garner market share, revenue, profits, and cash flows. When consolidation plays out, such companies will attract more investments and become more valuable. While it is great to see such capital flowing into India, founders must remember that fundraising is just a milestone, and not an accomplishment. It is not a moat, but a means to buy resources such as skilled manpower, technology, and time. It does not guarantee great execution, which is the secret sauce for the success of start-ups,” Dave was quoted as saying in the report.
He said prudent investors will track companies that create strategic moats by learning fast, pivoting if necessary, and creating multiple revenue streams.
“Since the start of 2022, we have seen that the market has already started distinguishing companies that have toiled from the ones that got lucky. Markets have separated the process-driven unicorns from the rest. It is all about the balance you need while walking the tightrope of entrepreneurship, and this is exactly where investors are distinguishing the best funambulists from the ones that may fall off. Founders who are focused on creating robust processes and a culture of growth and development will ensure that the learning curve across their organisation is better. They will manage upturns and down cycles efficiently,” he added.
The decline has been the least in early-stage deals where the average ticket size is between $4–5 million, according to the PwC report. Besides edtech and e-commerce B2B, funding activity declined across all sectors in the in July-September quarter. The fintech and SaaS sectors continued to attract the most capital in July-September.
Rahul Chandra, Co-Founder and Managing Director at Arkam Ventures said start-ups with business models requiring high burn and delayed monetisation, such as those in B2C markets, have the greatest exposure to funding risk. Lack of acquisition activity due to valuation mismatch is expected to add to the mortality of cash-starved start-ups, Chandra was quoted as saying in the report. He said global committed capital of more than $20 billion, raised for India, is yet to be deployed.
Pranav Pai, Founding Partner and CIO at 3one4 Capital, said it is almost certain that selectivity in dealmaking will increase, and start-ups will have to prove a path to sustainable growth.
“Of course, as global markets correct after a series of macro and geopolitical events over H1 2022, Indian start-ups have needed to prepare for a new season of selectivity from investors. Now is the time to introspect, build the connective tissue to align their leadership and organisations, and focus their aggression on becoming not just the most valuable but also the best-run companies in their sectors. The combination of high governance and a focused path towards sustainability must serve as the fundamental substrate for the ecosystem this decade. Additionally, if the early signals of recession in developed markets do strengthen, this preparation will serve the ecosystem well as a response,” the report quotes him.
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