Venture capital: VCs are flooded with unprecedented funds but in no rush to deploy capital
Six months into the new year, despite raising a record $4.7 billion in dry powder versus $2 billion last year, according to data from Venture Intelligence, to invest in startups, more than a dozen venture capital firms, including Lightspeed Venture Partners, Sequoia Capital, Elevation Capital, and a number of smaller funds, completed fewer deals in the first half of this year compared to the same period in 2021, showed data from Tracxn and the respective funds.
While the pace of early-stage deals is still moderately higher, there is no rush to hand over a term sheet (an agreement sent by an investor before finalizing funding), indicating a reversal in sentiment. from 2021 among the investment community.
While Lightspeed closed 10 deals in the first half of this year compared to 16 in the first six months of last year, Elevation Capital closed 21 compared to 37 during the same period.
The two VCs raised their largest ever corpus in India this year, at $500 million for Lightspeed and $670 million for Elevation.
The $4.7 billion fundraise so far does not include Lightspeed’s $500 million fund for India and South Asia since it was announced earlier this month.
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The big difference this year is the lack of FOMO, causing VCs to sit back and be in no rush to deploy the funds they’ve picked up.
More than half a dozen executives, partners of top venture capitalists and investment bankers told ET what lies at the heart of this contradiction and how things will play out in India’s startup ecosystem. Some of them requested anonymity.
Fund cycles for most venture capital funds include active deployment for the first three years, after which growth-stage investments begin to arrive. The typical life cycle of a venture capital fund is 10 years, when investors are looking for an exit.
“Just because VCs have dry powder doesn’t mean they have to deploy capital quickly because there’s uncertainty and no one knows what the bottom of the markets is,” said one investor who didn’t. did not wish to be named.
For example, the number of deals closed by Sequoia Capital India this year is 28 compared to 32 in the first six months of last year, according to data from Tracxn. Sequoia has raised $2.85 billion in growth, venture capital and Southeast Asia.
IvyCap Ventures, cut its trading pace by almost 50% despite making up $214 million in its first close for the third fund. IvyCap made five investments in the first half of the year compared to 11 in the same period last year.
Vikram Gupta, founder and managing partner of IvyCap Ventures, said the fund was taking longer to close a deal on more favorable terms.
“There’s obviously a bit of caution…If you give time from a trading perspective, you get the terms you want, so we’ve seen that trend, and so, we’re in no rush to deploy capital. ,” Gupta said.
Regarding the funds raised by investors and the slowdown in funding, Bejul Somaia, partner of Lightspeed, told ET in a recent interview: “Regarding the capital that has been raised, in certain periods, it can be deployed more quickly than three years, and at certain times it can take longer… What happens in times like this is that there is a flight to quality. For example, the third or fourth company in a sector will have a very difficult time raising capital. Investors will be much more demanding than six months ago.
“In a market like today, when exits get tougher, VCs want to give themselves time for companies to get to a point where they can exit… Otherwise, Limited Partners (LPs) are bound to ask themselves questions. questions about the maturity of the latest funds and fate in the next relaunch, so fund deployment will continue to be slow,” said a partner at a major venture capital firm.
Last year there were plenty of exit opportunities thanks to successful national public offerings from companies such as
Freshworks and PolicyBazaar in an unprecedented tech bull run.
This year’s macro headwinds have also allowed several funds to tap seed investments, with companies like Tiger Global participating in $2.6 million funding rounds like that of the start-up. Shopflo e-commerce activation.
The New York-based investment firm has ramped up early-stage rollouts, making 16 early-stage bets this year through the end of June, up from seven last year, according to data from Tracxn, which counts l ‘series B seeding as an early stage financing.
For example, Accel, which recently closed its $650 million India-focused fund, said it would remain excited about the India startup opportunity. The company made 31 investments this year in the first six months, compared to 18 last year. It closed 19 start cycles in 2022 compared to 11 last year, according to Tracxn data.
“The correction and slowdown in the early stages is currently minimal, but this may change in the future. Additionally, we have yet to see fewer startups tap into the private funding market. However, the next three to six months will be crucial, and we will have a better picture by the end of the year,” said Karan Mohla, who leads the Asia team at Ascent Fund, a seed fund with a USD250 corpus. million from B Capital, ET said last week.
Everyone expects some degree of consolidation to occur around top performers in a category, said Vikram Chachra, a partner at 8i Ventures who has backed startups like fintech Slice.
“VCs try to see who wins in the end and who can survive. They want to see a very clear path to profitability. Things like market share and gross margin gains are under consideration. So we are now starting to think almost like public market investors,” Chachra said.
He added that big VCs could spend more time working on existing portfolio companies so they grow in their valuations.
8i ventures, which is in the market to close its $50 million fund, completed two deals in the first six months. According to Chachra, they typically close one or two deals per quarter.
Arpit Beri, director of Singapore-based Jungle Ventures, said there was a “slowdown in activity across the board”. and a higher education habilitation platform for Leap Finance students.
“The damaging growth-at-all-costs mindset is finally taking a back seat, paving the way for discussions of unitary economics. High-gross margin industries, like SaaS and consumer brands, offering efficient and scalable capital growth, are quickly becoming investors’ favorites,” Beri said.