The year 2023 is expected to be another formidable year for startups even as both global and domestic VCs sit on large amounts of dry-powder funds amounting to billions of dollars. Though late-stage dealmaking is expected to take a huge hit this year, fund managers and partners at domestic VC firms expect 2023 to be a reasonable year for early-stage startups. In an interview with Salman SH, Prime Ventures’ managing partner Sanjay Swamy shares his expectations for 2023. Edited excerpts:
Was 2022 a year of funding slowdown or a correction?
If you filter out the funding volumes from 2021, which was an aberration, and compare that with the 2022 and 2019 volumes, the figure looks almost similar. However, there’s no question that we moved into an era of a substantial slowdown. But this slowdown wasn’t an unexpected one, because broadly these bull run cycles don’t go on forever. We should expect 2023 to be a flat year in terms of funding volume growth. Growth-stage capital will still be very scarce and only exceptionally good companies will continue to attract capital. As a founder, if you’re lucky to have raised a large late-stage round in 2022, you should be utilising that capital ideally to break even rather than expecting to do another large raise this year.
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Do you expect deals to be more selective in 2023? Would quarterly funding drop below the usual average of $3.5-4 billion?
Stage-wise, I expect seed rounds to have more activity this year in comparison to late-stage deals because this is the best time to start companies. The cost of funding new firms just became much lower for VCs as well, with founders willing to accept lower valuation multiples. But at the moment, deals above Series B stages will become much more selective because of the bar (funding criteria).
Historical data indicates that global VC funds have begun to slow down investments in India. Is this situation an advantage for domestic VCs in India?
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I think Indian VC funds may have a less competitive landscape for investing in growth-stage startups this year since this capital was coming from overseas. Foreign VCs are throttling down investments in India because the public markets in their home country, like the US, have crashed dramatically. But they (US-based VCs) also seem to have great buying opportunities there because several publicly traded tech companies in the valley have lost much of their market cap last year. Rather than looking at investing in India, it’s cheaper for them to acquire these companies in the US itself.
Do you expect more startups to go for IPO in 2023? What are the minimum criteria they should be meeting to get to a successful IPO?
In these market conditions, if you are a company, may be with around `100 crore, with some profits on your books, you can still have a very strong IPO. You don’t have to keep fundraising in the front if your company is profitable. Looking at the performance of large IPOs of Zomato and Paytm, it is clear that the public markets in India are only for mature or proven businesses with positive unit economics and cash flows. They don’t have to be very large, but they will have to be well-understood and they are predictable in terms of cash flow. So, my view is that in future the focus of most Indian entrepreneurs should intend to build a business that can be taken public in a certain period of time rather than chasing the multi-billion dollar valuation benchmark.
Given there are going to be fewer large rounds in 2023, can we see more consolidation among tech startups?
In terms of exits, our fund has benefited a lot from strategic M&As and buyouts in the last few years…The idea that an Indian startup is now able to pay $150-200 million to buy another Indian startup is a major step forward in the market. We are also starting to have a number of IPOs expected in the future, so the ecosystem will have multiple $100-million plus exits in the near future. For 2023, I would expect a few companies to get acquired but this is more likely to happen because they are in distress.