4 Indian investors explain how their investment strategy has changed since 2021

India has long harbored a strong entrepreneurial spirit, and it’s not uncommon to see people leaving jobs to set up their own businesses. A hallmark of that spirit is quite visible these days in the country’s flourishing startup ecosystem, which has expanded rapidly in the past few years, to say the least.

However, the global slowdown has impacted startups’ growth in the country, just like everywhere else in the world. After a blockbuster year for venture capital funding in 2021, the flow of capital to Indian startups seemed like it would buck global trends in early 2022, but dried up in the second half of 2022.

Nevertheless, investors are optimistic about their prospects in the country and feel that the global slowdown is helping founders focus more on building and strengthening their core business.

“While this is a tough environment for companies, we see it as an opportunity to pause, take stock and consolidate,” said GV Ravishankar, managing director of Sequoia India.

“Founders are becoming a lot more focused on building and strengthening their core business and are getting sharper about capital allocation and driving improvements in the economic shape of their businesses,” he said.

“Working with uncertainty is very much the nature of the beast.” Roopan Aulakh, managing director, Pi Ventures

All the investors we spoke to agreed that in order to make the best of the situation, startups should conserve runway and prioritize growth if they can afford to do so.

For Ashutosh Sharma, head of India investments at Prosus Ventures, it is paramount for startups to ensure their existence at this time. “This allows startups to take a step back and focus on internal processes, business model evolution and organizational issues [ … ] These factors, once fixed, will lead to more organic product-market fit, which will lead to growth alongside economics.”

India’s startup landscape has changed immensely over the past couple of years, so to better understand how Indian investors are approaching investments, the regulations they are looking out for, which sectors currently have their attention and how they prefer to be approached, we spoke with a few active investors:

GV Ravishankar, managing director, Sequoia India
Ashutosh Sharma, head of India investments, Prosus Ventures
Vaibhav Domkundwar, CEO and founder, Better Capital
Roopan Aulakh, managing director, Pi Ventures

GV Ravishankar, managing director, Sequoia India

After a year of hot investments, India saw a significant drop in VC funding in 2022, and this year is likely to be similar. How has your investment strategy changed?

After more than a 12-year bull run for tech in the global markets supported by low interest rates, since the beginning of 2022, we have witnessed a significant slowdown in capital flows. This has resulted in a difficult environment from a capital availability perspective in India and other emerging markets.

While this is a tough environment for companies, we see it as an opportunity to pause, take stock and consolidate. Founders are becoming a lot more focused on building and strengthening their core business and are getting sharper about capital allocation and driving improvements in the economic shape of their businesses.

So it is actually a healthy period and it will result in high-quality businesses coming out of this market in the next couple of years.

What advice would you give your portfolio startups to continue growing at this time?

Focus on growth with good economics and don’t “buy” growth, as that will come with poor economics and hence is not sustainable. Focus on the core business and deprioritize experimental investments.

Double down on the core product if capital is available, as there is a chance to pull ahead from competitors in a market like this through the right investments. The current environment can also provide good opportunities to acquire capabilities through M&A at attractive prices if capital is available.

Compared to 2019, what were the most notable investment trends in India in 2022? Do you expect these trends to continue into 2023? Which sectors do you think will emerge as the next big thing by 2025?

There has been continuous innovation over the last several years thanks to more digital adoption and lower data pricing. After COVID, we saw significant uptick in e-commerce, edtech and technology-enabled service delivery across sectors. We also saw fintech pick up as a big theme and supply chains got digitized, including in manufacturing and agriculture.

Our core sectors are software, consumer, consumer internet, fintech and financial services. These remain continued areas of focus for us and constitute 80% of our efforts. Other upcoming sectors are EVs, climate tech, space tech and opportunities from supply chain shifts to India. Today, these are small and emerging sectors, but tomorrow, they could be massive opportunities.

So we are meeting early-stage founders who are building in this space and partnering with startups that are trying to create innovative solutions for some of the challenges faced in these industries.

The 20% of what we do keeps changing every few years because of market trends and tech innovations, but, by and large, the 80% has remained the same for nearly 17 years. Fundamentally, we are looking to partner with founders who are going after large problems in large markets to make a dent in the world. That will always remain the same.

What sets the sectors you are currently investing in apart from others? How do you evaluate the potential of a startup in these sectors before making an investment?

We evaluate a startup by the market they are going after (whether it is large, growing and has profit pools), the team (founder-market fit; why this team) and business model/moats (do they have a better mouse trap and why will they sustain their advantage?).

What qualities do you find most important in a founder when evaluating their potential for success? Conversely, what is a major red flag that would cause you to back off?

One of the most important qualities we look for in founders is their perseverance and grit to go after the problems they’ve set out to solve. From a founder-market fit perspective, we also ask what makes a founder or a founding team best positioned to win in the market, and what are their unique insights into the problem they are solving.

Red flags are linked to failed background checks or if the business metrics represented don’t check out in diligence.

Ashutosh Sharma, head of India investments, Prosus Ventures

After a year of hot investments, India saw a significant drop in VC funding in 2022, and this year is likely to be similar. How has your investment strategy changed?

Given the environment of rate hikes and geopolitical uncertainty, last year, we adopted a more conservative approach, setting the bar much higher for investments. Following that, we shifted our investment focus to smaller ticket sizes, earlier stages and toward companies in the SaaS and B2B domains.

Even with the increased participation in early-stage funding, our sweet spot remains a check size of $50 million to $60 million and above.

Secondly, because we do not have a fund and invest off our balance sheet, we have a long-term view on opportunities. We’re looking ahead to technology that will impact societal needs in the next decade and so forth; we don’t need to return money to LPs within a fixed window. So, even if an economic downturn lasts one or two years, our capital is more patient.

India remains a bright spot in the world economy and can support both growth and profitability at the same time. Due to this, the investor sentiment here remains largely bullish and we are already seeing the pace picking up in deal-making. We have already announced two new investments this year.

What advice would you give your portfolio startups to continue growing at this time?

The first piece of advice I’d share with founders is the reconciliation and acceptance that we are living in very unique times. There are a lot of opposing forces at play today, and we don’t know how the dice will fall.

From here, first and foremost, it is of paramount importance for founders and startups to ensure their existence. We are advising our portfolio companies to have reasonable runway to sustain themselves through the current funding winter.

This allows startups to take a step back and focus on internal processes, business model evolution and organizational issues, because in times of frenzy and growth (as we saw in years prior), these things take a backseat. These factors, once fixed, will lead to more organic product-market fit, which will lead to growth alongside economics.

The majority of successful startups in India took advantage of cheap capital in the last couple of years and are sitting on decent cash reserves. For those who were not able to raise funds in time, we suggest strongly considering raising capital at a valuation or structure that may not live up to previous expectations but that can ensure your existence to continue the fight.

There have been significant regulatory changes in India, including the draft personal digital data protection bill and the proposed telecom bill. How do you view these changes? How have they affected the way you conduct due diligence?

We have always had a very high standard of due diligence on the legal, financial and vendor sides. These changes have not impacted our own processes or benchmarks. We do welcome clarity on these aspects, as the PDDP bill had implications on data storage, cross-border data sharing, etc.

There have been financial irregularities at some Indian startups such as BharatPe and GoMechanic. How concerning are such developments? What consequences will the broader Indian startup market suffer as a result?

I see some of these as offshoots of the industry coming of age. The reality was never like the Wild Wild West with founders behaving like outlaws, but as always, there were a few mavericks.

With greater responsibility, especially as many of the startups consider public listings, there is huge onus on financial diligence and compliance. I believe the ecosystem as a whole is coming to terms with that.

Many founders are also seeing how consequential lax behavior, process gaps and lapses with regard to financials and compliance can be, and hence they will be even more stringent and attentive hereafter.

The last three to four years have been the time when the Indian startup ecosystem has come of age. The questions around exits, market size, quality of ideas and quality of founders have largely been settled. The diversity of capital sources has also increased manifold.

Today, a founder has many choices when it comes to the source of their fundraise. We are therefore entering a very vibrant phase. We are seeing founders execute on ideas that are disrupting the incumbents in mature sectors like consumer internet, but we are also seeing ideas where founders are disrupting global incumbents (for example, in SaaS).

Further, we are seeing action in new sectors where India, in general, has not produced many large companies. These include gaming, AI, climate tech and sustainability.

What sets the sectors you are currently investing in apart from others?

When we launched, we took a late-stage angle or a late-stage lens to investment opportunities. Swiggy was the first, BYJU’S was the second, then Meesho and so forth. As we got more comfortable investing in India, we expanded our investments outside of our comfort areas, both in terms of sector and the stage of investing.

Fast-forward to today, we’re proud to have a robust portfolio in India, ranging across all investment stages and many sectors.

We’ve also expanded outside of our initial B2C focus. When we started, Prosus Ventures was largely a B2C investor. But now, you’ll see a lot of B2B in our portfolio and some early SaaS bets. Our commitment to India stays as solid as ever. We are very happy about our investment history here.

What qualities do you find most important in a founder when evaluating their potential for success? Conversely, what is a major red flag that would cause you to back off?

Clarity and conviction as well as being a team player. These are all good markers of a founder’s temperament and character. Of course, honesty and transparency are also key.

Swiggy is a good case study to compare deals back then versus now. Our interaction with Harsha [Majety], co-founder and CEO, was not a two-week interaction; it was a long-term courtship where we observed the company for many months, noting its execution capabilities, how it delivers on its promises, including projections and growth numbers. We also ran a few surveys before we proceeded to invest.

My first meeting with Harsha was early in their history, when it was a Series B company. There were many food delivery companies in India at that time. There were other companies at the time who had more orders per day than Swiggy, but as soon as I met Harsha, his conviction around how first-party delivery (drivers working for Swiggy, not the restaurants) would be the game changer in India stuck with me. Nearly all the food delivery companies at that point in time were using third-party delivery: They would leave the order with the restaurant, and it was the restaurant’s responsibility to make that delivery possible through their own delivery drivers.

Harsha was very clear that user experience would change in India only when the food delivery company controlled that delivery experience. So even at a very early stage — and you can imagine at earlier stages you burn a lot because you don’t have enough density to give money to your delivery guy — he was very convinced, and his conviction around that was compelling and sold me early on.

How do you prefer to receive pitches? What should a founder be aware of before speaking with you in order to have the most productive and informative conversation possible?

We always prefer a warm introduction made by a mutual connection. We partner with almost everyone in the ecosystem, so one will always find a strong, mutual connection.

The founder should think of us like any financial investor, but with the caveat that we are, through our investments, trying to make an impact on our listed parent in terms of value creation. Therefore, it is also very important for us to see beyond IRR at absolute returns.

We are a source of patient capital and therefore a longtime partner and willing to wait for reasonable amounts of time for that value creation to happen for our shareholders.

Vaibhav Domkundwar, CEO and founder, Better Capital

After a year of hot investments, India saw a significant drop in VC funding in 2022, and this year is likely to be similar. How has your investment strategy changed?

We had always stayed disciplined in terms of our entry valuations and our focus on being market-first, so the key change we had to factor in was that follow-on rounds would slow down, companies would be required to show a lot more traction and business model clarity would be crucial earlier than before.

We realized that we needed more time to get to these milestones and increase the size of our pre-seed rounds and [so we] added a little more capital to some of our existing pre-seed investments.

What advice would you give your portfolio startups to continue growing at this time?

We are using the funding slowdown positively to focus on building a real business with a clear product-market fit and clear business model that we believe we can scale and build a large company around. The slowdown has allowed everyone to get rid of the noise and focus on what is important.

Regulatory changes are crucial to ensure innovations are additive and do not cause problems, so we welcome them. At the same time, we want to be cautious about ensuring companies are building in line with regulatory direction and with a clear business model.

We like to have full clarity on this in order to create strong conviction in an idea.

Governance is key. Every time we encounter a situation where governance was absent or it failed, the trust around the ecosystem gets hurt. Without that, we will not scale as an ecosystem and will hurt global investor confidence.

Generative AI is likely a large platform shift and might be a key trend that will take over 2023, in terms of focus. Keeping the hype aside, it truly changes everything about how we work, and we intend to go deep in this area and already have an initial critical mass of investments that are our channels for gathering real insights.

Climate is another emerging segment, but I am going to be cautious in terms of what we invest in, as we want to mainly focus on truly defensible and innovative plays.

What sets the sectors you are currently investing in apart from others? How do you evaluate the potential of a startup in these sectors before making an investment?

We are currently focused on software, SaaS, AI, climate and commerce. Across all these sectors, we are mainly looking for unique insights that founders have about their markets and their unique view of the solution.

What qualities do you find most important in a founder when evaluating their potential for success?

I have been an operator for more than 20 years, and I focus on understanding a founder’s “why” a lot. I want to understand and be sure that the founder is intent on building their company for the next decade and has done enough work to build their conviction. Grit and perseverance are crucial.

How do you prefer to receive pitches? What should a founder be aware of before speaking with you in order to have the most productive and informative conversation possible?

We are a small fund and primarily receive pitches via our founder network; they know what may be a best fit for Better, and their reference carries a lot of weight in my mind.

I have written a lot about our journey and how we think, so when founders study that and feel aligned with our views based on our content, we’ve seen to work well.

Roopan Aulakh, managing director, Pi Ventures

After a year of hot investments, India saw a significant drop in VC funding in 2022, and this year is likely to be similar. How has your investment strategy changed?

We are an early-stage, deep tech fund. Since our inception, we have followed a first-principles approach to investing and try not to get too swayed by cyclical changes and short-term ups and downs.

While there has been no major impact on our investment decisions due to the decline in VC funding, we are following a few guidelines. For example, we are ensuring the companies we fund are sufficiently capitalized to get to the next appropriate milestone in their journey.

We have made five to six investments per year on average over the last two to three years. This year, we plan to invest in a larger base given that we have just raised our second fund.

What advice would you give your portfolio startups to continue growing at this time?

In these times, truly remarkable companies can stand out. While it is important to keep an eye on the burn and runway, founders need to be careful that they don’t lose sight of growth.

Startups with more than 15 months of runway can use this phase to focus on building without distraction. Our prescription isn’t universal or one-size-fits-all and varies depending on the stage and nature of the company.

For companies at the scaleup stage, we advise growing in a capital-efficient manner: Estimate the ROI of different activities and double down on what’s working; leverage out-of-the-box thinking around partnerships; and tap into adjacent segments to expand deeper into existing accounts.

For companies that are working towards product-market fit, our advice would be to focus on building “must-have” products for customers and draw on alternate sources of funding, such as grants, to extend runway.

Indeed, these developments are concerning and call for some serious introspection from founders and investors alike. They have thrown up a lot of interesting questions: Are these one-off individual integrity issues? Or are these cases reflective of a systemic, industrywide “growth at all costs,” “valuation-first” mindset? Could the boards have done more from a corporate governance point of view?

In one sense, these issues coming to light could be a blessing in disguise and an opportunity for the Indian startup ecosystem to correct course. In the long run, we hope this leads to a renewed commitment to fundamentals like transparency and sustainable growth.

Regulatory changes are par for the course. As long as the rules of the game remain fair and apply across the board, one needs to be prepared to adapt to changing policy landscapes.

While evaluating companies, we like to weigh the impact of existing or future regulations, potential threats and opportunities stemming from these, and then take a balanced call factoring in the regulatory risk.

Having said that, VC funding is all about betting on the future — a future we can’t read or predict despite using our best judgment today. Working with uncertainty is very much the nature of the beast.

One of the most notable shifts that we welcome is the increasing priority being given to deep tech startups. When we started investing in this space, we were perhaps one of the first movers. It’s encouraging to see the growing number of deep tech startups in India and the increasing number of investors backing them. This trend will continue as investors look for differentiated and defensible businesses.

We believe that the next wave of outsized returns will come from sectors like space tech, material science, biotechnology, AI and crypto infrastructure. These startups can leverage India’s comparative advantage in terms of talent pool and cost competitiveness.

What sets the sectors you are currently investing in apart from others? How do you evaluate the potential of a startup in these sectors before making an investment?

While we are sector-agnostic, our focus is deep tech — in other words, companies that are using disruptive technologies to solve large, global problems. Within the digital domain, we are focusing on applied AI, generative AI, AI infrastructure and crypto infrastructure.

Beyond digital, we are looking at material science, space tech and synthetic biology. These are innovative companies that are IP led, have differentiation in the global arena and are defensible in the long run.

We follow a fairly detailed evaluation process:

Assessment of the inflection point: We follow an internal framework to assess the inflection point for the startup by mapping it across tech difficulty and demand-readiness.
Mapping out the global competitive landscape: We’re looking for companies that are building products that can compete on the global stage, so this is a key branch of our decision-making tree.
Tech diligence: We assess the fundamental strength and differentiation of the core tech by diving deep into the technology stack.

What qualities do you find most important in a founder when evaluating their potential for success? Conversely, what is a major red flag that would cause you to back off?

We are on the lookout for founders who are driven, hungry to prove themselves and focused on execution. We also try to determine the founder-market fit: How passionate are the founders about the problem? What is the special insight that the founders have about the industry that will make them the right people to address the problem?

On the other hand, a major red flag for us is a lack of integrity. Building startups is hard and there is no shortcut. We like to get a sense of founders who are in it for the long haul.

How do you prefer to receive pitches? What should a founder be aware of before speaking with you in order to have the most productive and informative conversation possible?

We are open to all approaches. Referrals through our networks have worked the best for us thus far (45% of our portfolio). However, we make it a point to look at every email that comes our way, as opportunities can come from all directions.

To make the process mutually productive, we encourage founders to determine a fit with our thesis beforehand in the best interest of everyone’s time. We do deep-dive sessions on various aspects of the business — tech, GTM, etc. — so preparation on these fronts always helps.

We also believe that a transformative conversation isn’t a one-way street and therefore do our best to make it an open, interactive dialogue with founders so that they benefit irrespective of whether we partner or not, and we learn from their journey, too!