India’s tech investors struggle to cash out as funding falls


Tech investors in India are struggling to profitably cash out after funding dropped from the pandemic’s record highs.

Foreign venture capital funding of Indian tech fell to $25.7bn in 2022, down nearly 40 per cent from a year earlier, according to data provider Tracxn. High-profile investors including Tiger Global, SoftBank and Sequoia Capital more than halved their level of investment.

The pullback was not unique to India, where fundraising and valuations have been more robust than in neighbouring regions such as south-east Asia and even mature markets such as the US.

However, it has halted the rapid growth of a market long touted as the tech world’s best shot at recreating the high returns of China, which India is set to overtake by population this year.

Private market investors have found themselves unable to profitably exit their investments after funding activity ground to a halt and IPOs were scrapped. The lack of capital has in turn forced start-ups to curb business and cut staff.

India was like a “crazy teenager that grew up way too fast”, said Sandeep Murthy, a partner at venture capital firm Lightbox Ventures. “Those who have invested are continuously concerned about the lack of liquidity.”

Beijing’s crackdown on domestic tech companies during the pandemic led to spooked investors rerouting money to India and south-east Asia, only for rising global inflation and interest rates to force a rethink.

Publicly held tech companies, the first of which started to list in 2021, have also been hard hit. Shares of Paytm, Zomato and Nykaa are each down more than 40 per cent over the past year, even as India’s benchmark Sensex index is up about 2 per cent.

“India overshot the tech exuberance for longer even than in the US,” said Sunil Khaitan, head of equity capital markets for south-east Asia at Bank of America. The “billion dollar question”, he added, was whether international investors would weather this cycle or feel burnt enough to withdraw.

Investor positions in large-cap Indian tech stocks have been “showing signs of fatigue”, said Steven Holden, founder of Copley Fund Research, which tracks equity fund positioning globally. More emerging market funds have moved to an underweight stance in the sector since late 2021, according to Copley data.

This has reverberated in private tech markets, where a pipeline of IPOs was halted. While around two dozen tech companies went public in the second half of 2021, according to Tracxn, only eight did so over the same period last year.

Venture capitalists say the lack of exits is a particular concern, as many India-focused funds approach the end of their life cycles. This is the point at which they must pay back investors — such as pension funds and family offices — that put money into them. Murthy said many of the funds set up in the middle of the last century “have not achieved the liquidity they expected”.

Column chart of Growth and early stage funding ($mn) showing Tech start-up investments in 2022

Venture capital firm Orbit Startups said that while it has not invested in China for three years, it has also slowed the pace of deals in India, where it has 55 investments, according to managing director William Bao Bean. Bean added that Orbit had recently done more deals in Pakistan, Bangladesh and Latin America.

“One of the challenges is markets have short memories and India doesn’t have much of a memory because this is their first tech cycle,” he said. But the correction in Indian private markets “doesn’t change the fact that India is going through an amazing technology-driven transformation of the economy”, he added. “As long-term investors, we are bullish.”

Indeed, India’s market has been buoyed in other ways, with the economy expected to grow more than 6 per cent in 2023. It also appeals to investors as a democratic, business-friendly alternative to Beijing during a period of rising US-China tensions. As a result, “you will have capital coming south”, said Andrea Campagnoli, co-head of Bain Capital’s technology private equity practice for Asia.

India’s fall in venture and private equity deals last year was not as big as the declines in China and south-east Asia, according to Bain research. Fundraising by early-stage and growth-stage tech companies in India even overtook 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 expected 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 tough year globally,” said Kabir Narang, founding partner at B Capital. “The key will be to ensure consistency of exits and see if things open up towards the end of this year and 2024.”


Share post:


More like this

World Bank warns global economy at risk of lost decade of growth

The global economy is in danger of suffering a...

America’s Housing Markets: Home Prices Fall in the West and Rise in the East

In an unusual pattern, the 12 major housing markets...

iPhone 15: eSIM-only in more countries this year

Apple began its switch to eSIM-only iPhones last year...

We're initiating a position in this retailer as a turnaround play

Calling up this sneakers and athletic wear retailer from...