As "seeking emerging markets" has become one of the biggest themes in economic fields in recent years, India's market potential has been continuously mentioned. People have seen significant single-market potential, a vast demographic dividend, and a relatively sound industrial foundation in India. These factors, combined with India's strong performance as the world's fifth-largest economy since the fourth quarter of 2021, have made many genuinely believe that India is the "Next China" economists have longed for.
However, for the venture capital industry, the "India story" might not be so rosy. Even the data from 2023 suggest that the venture capital industry has experienced what could be termed an "Indian accident."
According to the latest data compiled by the third-party business service platform Tracxn, as of December 2023, startups within the Indian market received only about $7 billion in funding. This figure is a stark drop from $37 billion in 2021 and $25 billion in 2022, constituting a "cliff-like fall." Correspondingly, another set of data shows that while 65 unicorns were born in the Indian market in 2021 and 2022, only the instant grocery delivery company Zepto became a new unicorn in 2023. The number of large-scale funding events over $100 million was only 17 for the entire year, a 69% decrease from 2021.
This phenomenon-level cooldown has frequently made headlines in financial news, and even domestic venture capital institutions in India find it hard to continue their optimistic narratives. For instance, Chandra, co-founder of Arkam Venture, awkwardly admitted amid persistent media inquiries, "We envisioned capital operating in a more rational manner, rather than trying to create irrational prosperity to inflate valuations."
The unexpected cooldown The contraction in the capital market in India is particularly eye-catching for several reasons, besides the stunning rate of decline. One key reason is that Indian venture capital institutions have performed quite well in fundraising. Local venture capital institutions like Peak XV Partners, Lightspeed, Accel, Elevation Capital, Matrix Partners India, 3one4 Capital, and Blume Ventures have announced the completion of new fund raisings in the past two years. The most significant fundraising event occurred in June 2022 when Sequoia India announced two new funds, one targeting early and growth-stage projects in the Indian market, amounting to $2 billion, significantly higher than the $850 million prepared for the Southeast Asian market.
According to general statements, Sequoia was willing to raise such a substantial fund for the Indian market because they had received tangible returns: in the 18 months before June 2022, Sequoia India harvested 9 IPOs, creating a new record in the Indian venture capital industry and gaining nearly $4 billion in returns on paper. Therefore, Sequoia India specifically stated in the official announcement that this fundraising might occur when the "long bull market is about to end, and the market is about to enter a cooling period," but they firmly believe in the long-term growth of the regional market and hope to convey more confidence to investors through this move.
In addition, in the last two years, there has been a continuous flow of news about emerging unicorn companies in the Indian market establishing industry CVCs. For instance, in March this year, the Indian local eyewear retailer Lenskart optimistically stated after receiving a $500 million investment from the Abu Dhabi Investment Authority that although the capital market has shown signs of reducing its activity, "if it is a business with a long-term vision," then this "cautious sentiment" is not so important. They are planning to explore more investment and acquisition opportunities to "consolidate their market dominance" - at the time, few doubted Lenskart's sincerity because just 8 months before this funding, Lenskart completed the largest acquisition in the company's history, acquiring the controlling interest of the Japanese premium eyewear brand Owndays for $400 million.
In hindsight, if one were to look forward to the Indian market in 2023 at the end of 2022, the views would probably only be divided into aggressive and conservative camps. The aggressive camp would believe that the Indian market is about to "thrive and flourish," while the conservative camp might think that the aggressive camp's predictions are too conservative.
Perhaps it is precisely because of this that the Indian market in 2023 is not just a monotonous parabola; it struggled and made efforts, especially in October, when there was a glimmer of hope: the Abu Dhabi Investment Authority once again made a move, investing $598 million in Reliance Industries' subsidiary, Reliance Retail Limited. After completing the financing, Reliance Retail's valuation temporarily reached 838.1 billion rupees (approximately $10.7 billion), successfully entering India's "top four retail enterprises" and driving the Indian PE/VC industry to complete a total transaction volume of $3.4 billion in October. The financing received by startups reached $1.3 billion, almost doubling compared to the same period last year.
However, the struggle quickly fizzled out. In November, the transaction volume of PE/VCs within the Indian market sharply reduced to $1.6 billion, dropping to the lowest point in 43 months. There were only 6 large-scale transactions over $100 million, sliding to a quarter of the same period last year. This downturn became a lone struggle, accumulating into the series of "sad" data mentioned at the beginning:
As of early December 2023, Indian startups have only received $7 billion in financing in the primary market, creating the lowest data in nearly five years. In addition, there were only 17 large-scale transactions over $100 million throughout the year, a sharp 69% drop compared to the same period last year. Affected by this, an "A-round drought" is quietly emerging in the Indian market - according to statistics from the American venture capital firm Lightspeed, fewer than 100 Indian software companies successfully entered the growth-stage financing phase in the entire 2023, with a large number of new businesses born between 2021 and 2022 remaining in the "seed round" status.
And for those entrepreneurs who have theoretically crossed the startup life-and-death line and entered the "growth stage," life isn't much better.
Educational company Byju's, with total financing exceeding $5 billion, saw its valuation plummet from $22 billion at the beginning of 2022 to below $3 billion. Prosus, one of the main investors, stated in a financial report conference call in November that Byju's is facing many challenges and can only recover with joint efforts; the pharmaceutical e-commerce platform PharmEasy completed a $300 million financing in July this year, but the financing was more driven by the liquidation pressure of old shareholders. For instance, the American index fund Vanguard disclosed through annual reports that they exited at a valuation discount of 90%, which means PharmEasy's valuation plummeted from $5.6 billion in the second half of 2021 to $500 million.
Vanguard's annual report is a "double yolk egg." Besides announcing the emergency clearance of PharmEasy at a 90% discount, they also announced a 63.7% downward adjustment of the valuation of Ola's parent company Ani Technologies, from $7.3 billion at the end of 2021 to about $3.5 billion, returning to the level of early 2017. In addition, retail companies like ZestMoney, food delivery service provider Swiggy, commercial payment service provider Pine Labs, and SaaS company Gupshup all faced layoffs, unpaid wages, and "discounted" financing for survival this year.
An orderly stagnation So how did all this happen? If you are familiar with the development of the global venture capital industry this year and have read the introductions to overseas markets such as Indonesia and South Korea by Invest China, I guess you are likely to associate the aforementioned phenomena with the "narrowing of the IPO channel leading to 'capital accumulation' and 'difficulty in exiting'." However, this story line does not quite apply to the Indian market this year.
Ernst & Young India published data for Q3 this year in August, showing that the Indian PE/VC industry achieved its best "exit performance" in 22 months in August 2023. There were 37 transactions during the statistical period, with a total exit amount of $4.3 billion, among which public market transactions accounted for 57% of the total exit amount. Driven by such strong performance, although the subsequent October and November performances were somewhat lackluster - only completing $1.3 billion and $1.2 billion in exits, respectively, compared to $1.6 billion and $2 billion in the same period in 2022 - the entire 2023 still became the year with the best public market exit situation since statistics have been available for the Indian market, with a total exit amount of $9.5 billion.
Ernst & Young India is very positive about this, with analysts stating: "As capital investment deepens, India is having a better and better IPO exit environment, which is a good sign for the entire equity investment industry. It will stimulate PE/VCs to invest boldly in India to obtain high multiples."
Of course, this doesn't mean that this year's unexpected performance of the Indian market has nothing to do with the secondary market. It's just that we need to reverse the phrase "narrowing of the IPO channel leading to capital accumulation and difficulty in exiting" to "too smooth IPO channel leading to quick capital operations and rapid exits."
As we all know, the Indian stock market experienced a bull run this year. As of early December, the Nifty50 index (NSEI) rose more than 12%, becoming the fourth-largest market after the U.S., China, and Japan, frequently "creating historical highs" and occasionally "about to break through the X trillion dollar mark." In terms of individual stock performance, 26 companies in the Nifty50 index reached historical highs, with 11 of those highs created in November this year. In the words of Subhrajit Roy, the global capital market chief of Bank of America, "Most transactions are quite smooth."
However, recently, India's regulatory authorities have subtly noticed some worrying signs, which is that a large number of "major shareholders" are accelerating cashing out and leaving - according to India's regulatory authorities' definition, "major shareholders" refer to those who can control company decisions. According to their statistics, as of December 2023, the major shareholders of Indian listed companies have cumulatively sold 1.03 trillion rupees ($12.36 billion) of shares, more than double the total amount sold in 2022.
The third-party business consulting firm Prime Database has also noticed this. They counted the "block trades" that occurred in the Indian market since January this year, namely transactions exceeding 0.5% of the total company shares or greater than 100 million rupees (about $1.2 million). They found that PE/VCs have cashed out a total of 498 billion rupees (about $6 billion) through the secondary market, with the overall scale already exceeding the still-venture-capital-bonus period of 2022.
Optimists see this data as representing the "robust macroeconomy of India," which can bring a better "emotional foundation" for next year's transactions. Pessimists believe that due to the small number of retail investors in the Indian stock market, most transactions are completed by professional financial investors, and among these financial investors, there are a large number of foreign capitals. Overheated cashing out should be interpreted as capital players considering "taking profits at the right time," commonly known as "escaping the peak." - Assuming this inference is valid, one foreseeable short-term future is: the capital market will reduce investment in the primary market to avoid asset accumulation, while a large number of immature projects will be forcibly taken to IPO to consume the last dividends.
The most powerful evidence supporting this view appeared in October this year. In October, the Nifty50 index fell by 3%, the worst performance of the Indian stock market in the entire 2023, and the reason for this result was the largest-scale exit of foreign capital in the year - foreign investors cashed out a total of 245.48 billion rupees (about $2.95 billion) in the Indian stock market in October - if it weren't for the mysterious eastern country with its own "protecting the market" halo, achieving 32 consecutive months of net inflow of domestic capital, totaling 140.91 billion rupees (about $1.69 billion) of stocks, a snowball effect would have been inevitable.
Faced with such potential risks, practitioners in the primary market can only choose "self-discipline for freedom."
In recent related surveys, PE/VCs in the Indian region all explicitly stated they would slow down the pace, such as extending the review period for transactions from the A round to the B round to "at least 6 months" to ensure funds are used on truly potential projects. Anant Vidur Puri, a partner at Bessemer Venture Partners, frankly stated that they only made one move in the Indian region throughout 2023 because they are building a high-quality investment portfolio: "Some years we might make six or seven moves, some years we won't make any moves... it's not related to our investment stage, it just depends on whether we can see enough excellent projects in the market."
And this calmness has exposed the "false prosperity" of many tracks. For example, the financial technology company ZestMoney, previously backed by Goldman Sachs, ambitiously raised $150 million in the capital market with the vision of "being the first credit card for young Indians." The latest news is that the founder was voted out by the board in May, and the new management team originally planned to raise a few million dollars in small financing to find a new way out but found "no way out," so they simply announced in early December that the company would completely bid farewell to the "involution life" - shut down.
Quite a few investors have discovered that India's SaaS track is full of bubbles. An anonymous early investor interviewed by the media stated that investors only shared the cost of product development, and no entrepreneur could come up with a product capable of generating meaningful revenue scale. He recalled his portfolio and declared: "It's almost impossible for Indian startups to produce products that the American market would pay for."
Similar conclusions were also made by the previously mentioned American venture capital firm Lightspeed. Dev Khare, their Indian market chief, stated that most of the software startups he saw this year were "imitations" or "only capable of satisfying lightweight functions." With hundreds of similar projects emerging in India every year, it's difficult for him to take these companies to pitch meetings.
Echoing this sentiment, more and more people are starting to realize that the "investment themes" in India's primary market still can't compare with strong markets like China, the U.S., Israel, and Japan. For example, in August 2023, when the best exit record in the Indian PE/VC industry was created, the investment themes bringing the most returns were primarily in the infrastructure and retail consumer sectors; in the most volatile October for the stock market, the largest investments by venture capital went to retail consumer and then real estate.
In summary, the Indian market in 2023 was immersed in a vicious cycle of "overheated IPOs leading to potential risks - PE/VCs tightening project reviews - project parties starting to expose shortfalls in their models - new entrepreneurs only being able to choose lightweight entrepreneurship - lightweight entrepreneurship mismatching with investors' expectations - investors only being able to chase top-tier projects - top-tier projects causing IPO overheating," ultimately co-authoring the current "crash chapter" at year-end.
A sincere choice By this point, you might be wondering, if not India, South Korea, or Indonesia, where is the smart money going? Don't worry, I have prepared two little surprises.
The first surprise comes from a research organization called "Future Union." At the beginning of this month, Future Union released a worrisome report stating that a large number of American pension funds, university endowments, and public funds are still investing in China and Hong Kong markets, including some sensitive technology areas. Specifically, they pointed out that the top 74 institutions investing in China have completed more than 1,100 investments through various forms, with a total investment amount exceeding $70 billion. Among these, 39% of investors made decisions in the last 12 months.
Andrew King, the executive director of Future Union, concluded with deep meaning: "Despite various influencing factors, those entrusted to manage American pension funds have a renewal rate of 75%... It seems everyone is saying 'what looks like the right thing to say,' but 'acting consistently' is another matter."
The second surprise is that in November this year, foreign investors achieved a net inflow of $35 billion (about 250 billion yuan) into the Chinese bond market, creating the highest record since statistics have been available. Notably, this new record was achieved while the U.S. Treasury yield remained higher than the 10-year Chinese government bond yield.
Therefore, although economists' mainstream interpretation is that investors generally predict the end of the Fed's rate hike cycle and need to find new cash management schemes, many prefer to interpret it through other macroeconomic data.
For instance, according to the latest data released by the National Bureau of Statistics, China's total export trade in November increased by 0.5% compared to the same period, while a large number of institutions had forecast a -1.1% decrease. In terms of sectors, the export growth was primarily supported by the automotive manufacturing, electronic products, and toys sectors, with the automotive sector continuing to maintain double-digit growth compared to the same period last year.
Clearly, under this premise, especially when the "bright emerging markets" are actually supported by "infrastructure," "real estate," and "energy" as the "main narratives," the foreign capital's favor for the Chinese bond market is difficult to attribute solely to "financial management."
