The start-up wave in India that began in the late 90s peaked in 2022, with 80,152 startups officially recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). Soon after, the bubble burst and now the field is levelling with increased focus and emphasis on scalability, sustainable growth, and replication or expansion to markets abroad. 

Given the secular growth tailwinds and massive headroom for growth, India is certainly at a favourable growth stage as of now, says Karthik Bhat, founder, Force Ventures LLP, an early-stage focused investment firm primarily investing in pre-seed and seed startups. 

“Especially as the country transitions from a $3.5 trillion GDP economy to 8-10 trillion GDP economy over the next 8-10 years, there will be multiple avenues of value creation,” he tells Fortune India. 

India’s diverse culture has built a strong foundation and values that fostered a period of large swathes of capital chasing too few giant opportunities. But the problem was the over-emphasis laid on the short-term potential of the market. “We have faced this challenge in the past after events like the Y2K crash and the global financial crisis, and we saw it again in 2021. Now India's market size is growing, and conversations about governance challenges are happening more frequently, indicating a shift in mindset,” says Ashish Fafadia, partner, Blume Ventures, a seed/pre-series fund that closed its fourth fund recently at $290 million. 

After an aberration, the market is returning to its mean; the next cohort of entrepreneurial talent is all set with ideas and risk-taking attitude and this will be an ideal and cost-effective time to build a high-quality, differentiated company, says Deepak Padaki, president, Catamaran, a multi-asset class investor in both public and private enterprises, with over $1 billion across asset classes. 

“We don't have the rush to create "growth-at-any-cost" unicorns. India is economically at a critical inflection point today – we have a young upwardly mobile consumer population that is hungry for digital services and high-quality products; government policy and spending in creating the platform for growth, including our unique digital stack, is strong.”

Investment decisions are made based on market reality and momentum. Climate tech for its currency, enterprise SaaS for scalability, and fintech for its intersection with other businesses are on VC’s priority right now. 

“Blume goes by how the investment aligns with our thesis, market size reality along with a first principles approach. We don't rely on market size projection graphs but base our decisions on India's unique circumstances," says Karthik Reddy, Co-founder and Partner, Blume Ventures.

Catamaran has pinned its focus on manufacturing, working to push it from the current 15% to the mid-20s. “Specifically, the focus is on companies that are creating an indigenous supply chain in electronic manufacturing and in the electrification of vehicles,” says Padaki.

Force adopts a founder’s approach, especially considering the early-stage risk they take. “Market size is equally important in order to have a venture scale outcome. We also focus on the nature of the problem being solved and where the longer-term moat would lie, value-creation and capturing the value through sustainable unit economics,” Karthik says about the strategy hereon.

The crypto wave has thinned and is out of consideration for most investors though decentralisation around web3 is still holding out hope. Interactive AI/ML, with large language models, is gaining ground for its gravitation towards realistic use cases and its value-creating potential for consumers.

However, despite the corrections, the market is ebbing right now. A total of 568 VC funding deals worth $3.7 billion were announced in India in H1 2023, down 43.3% YoY in terms of deals volume and 76.4% in terms of value, according to the latest report by GlobalData. But the sentiment is, given India’s stable geopolitics, political climate, demographics, market opportunities, and high potential to absorb large amounts of capital from global institutional investors at scale, the deal flow will be deeper, with more venture attributes for B2C.

“India is always a great opportunity for investors, with healthy returns seen post-liberalisation,” Fafadia highlights.   

“With some of the recent issues on the corporate governance side, investors will likely exercise a lot more oversight on capital allocation decisions (beyond a certain defined threshold) of portfolio companies, which may bring in more discipline and accountability on all sides. However, in the current capital-constrained ambience, capital efficiency, especially in late-stage start-ups will become a significant point to ponder,” says Karthik.

Momentum in early-stage investment has already had a long tenure. Late-stage funding is seeing down rounds and only value-based deals are happening in the mid and growth stage. So, in addition to fund deployment decisions, “We need to think about how funds or companies are evaluating and thinking of exits. The hype and inflated valuations of the last few years were because companies did not correctly estimate the addressable market size, nor had active risk management systems in place,” warns Padaki.

Owing to the change in the macroeconomic environment that is influenced by inflation and with the now normalised valuations, a consolidation, and a pronounced shift are expected in the next few months.  

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