2024, A Record-Breaking Year For Indian Startups, Yet VC Firms Remain Hesitant—Why?

2024 has been nothing short of extraordinary for Indian startups. With funding soaring by over 53% compared to the previous year, the ecosystem is buzzing with activity and innovation.

According to GlobalData, the first eight months of 2024 alone witnessed a remarkable surge in funding, signaling strong confidence in the country’s entrepreneurial spirit. But here’s the twist—despite these milestones, India’s venture capital (VC) ecosystem is playing it safe. Why are VC firms hesitating when the numbers seem so promising?

The Numbers Don’t Lie… Or Do They?

Let’s start with the highlights.

VC firms in India raised $2.5 billion in capital this year, up from $1.9 billion in 2023, according to PitchBook. Startup IPOs also shattered records, with 12 companies going public and raising billions. This not only solidified India’s reputation as a global innovation hub but also rewarded VCs handsomely.

In fact, VC funds raked in over $4 billion through IPOs and public market sales in 2024—double what they earned in 2023 and 2.5 times their 2022 returns. Heavyweights like SoftBank, Peak XV, Accel, Elevation Capital, and Prosus turned their early bets into monumental successes on Dalal Street.

Major funding rounds returned with a bang, too. Zepto alone raised over $1 billion, while family offices contributed another $1 billion to the startup ecosystem. Overall, VC investments totaled $10.9 billion by mid-December, up from $9.6 billion in 2023.

…But Caution Lingers

Despite these stellar achievements, the VC world is treading carefully. The exuberance of 2021 and early 2022 seems like a distant memory, replaced by a more measured approach.

Several factors are driving this shift –

Pressure for Better Returns: With a large cash pile sitting idle, VC firms are under immense pressure to deliver stronger returns and profits.

Industry Resets: The ecosystem is still recalibrating after the heady days of 2021. This reset has led to significant churn, with senior executives moving on to start their own platforms or join new firms.

Shifting Investment Dynamics: Early-stage investing is seeing a shake-up. Larger funds are stepping back, creating opportunities for smaller funds and micro VCs to fill the gap. However, follow-on rounds for early-stage startups are taking longer to materialize, reflecting cautious optimism.

Downsizing and Consolidation

This caution is evident in some major announcements. In October, Peak XV Partners (formerly Sequoia Capital India) downsized its $2.85 billion fund by 16%. Meanwhile, General Catalyst, a prominent Silicon Valley-based VC firm, announced its acquisition of India-focused early-stage investor Venture Highway in June, signaling a strategic pivot.

Big Deals, Bigger Questions

While 2023 was relatively quiet for large deals, 2024 has seen a resurgence. Companies like Zepto, Rapido, PhysicsWallah, Mintifi, Atlan, Healthkart, and Finova Capital all closed mega rounds exceeding $100 million. Yet, deal activity overall remains muted, with only a slight improvement over last year.

Extraordinary Churning in the Indian VC Ecosystem

2024 has been a year of significant transformation for India’s venture capital (VC) ecosystem. At least 22 senior executives from top VC firms exited their roles, moving to other firms or launching their own investment platforms.

Notable examples include Sameer Brij Verma from Nexus Venture Partners, who started Northpoint Capital, and former ICICI Venture partner Subeer Monga, who joined Sorin Investments.

Meanwhile, firms like Stellaris Venture Partners and Elevation Capital responded to the changing landscape by promoting executives to partners to expand their investment capabilities.

A Shift in Investment Strategy

The investment mix in India’s VC space is also undergoing a noticeable change. With global investors such as Tiger Global and SoftBank scaling back their activity over the last two years, and larger players like Peak XV Partners and Lightspeed focusing more on late-stage investments, smaller firms are stepping up to lead seed-stage investments.

According to Venture Intelligence, early-stage deals worth $1.7 billion were closed in India by December 13, 2024, slightly higher than the $1.6 billion recorded in 2023.

“The size of the fund usually dictates cheque strategy. If a VC firm has a fund of over $500 million, smaller cheques and seed investments don’t make sense for them,” a senior VC executive explained.

Notable exceptions include startups like omnichannel premium apparel marketplace Lyskraft and AI startup Sarvam. Lyskraft raised $26 million in seed funding from Peak XV, Prosus, and Sofina, while Sarvam closed a $41 million seed round in late 2023 led by Lightspeed.

Growth Capital Is A Challenge

While seed-stage investments are seeing activity, growth capital remains elusive. Global giants like Tiger Global and SoftBank have become highly selective. There was a time when Tiger Global wrote $5 million seed cheques, but their retreat from the scene has brought more discipline to the seed-stage market. This pause is providing smaller investors the time to conduct thorough due diligence and make more informed decisions.

In this evolving scenario, micro VCs and specialized funds are gaining prominence. 2024 saw the launch of micro VCs like Volt Capital and AJVC, while existing players such as consumer-focused Sauce VC successfully raised new capital.

What’s Driving the Churn?

As mentioned above, the Indian VC ecosystem is not just experiencing a shift in investment patterns but also an unprecedented churn in its leadership. Several high-profile fund managers have departed prominent VC firms, leading to consolidation, founder exits, and second-time entrepreneurs starting new ventures.

So, what’s behind these exits?

Portfolio Troubles: Problems in key portfolio companies have created a challenging environment for VCs. These issues often lead to internal scrutiny and questions from limited partners (LPs), even for fund managers who were not directly involved in problematic investments.

LP Affinity: Limited partners often show a preference for specific fund managers. These fund managers are evaluated not just on their portfolio performance but also on their ability to attract capital for fundraising.

Fresh Perspectives: For some partners or investment directors, leaving their current firms provides an opportunity to bring a fresh perspective with a new venture fund or to explore new investment theses.

The Last Bit

The Indian startups ecosystem has undoubtedly come a long way, and 2024’s record-breaking numbers indicate the sectors potential. However, the cautious stance of VC firms raises important questions. Are we witnessing a healthy recalibration, or is this a sign of deeper concerns about sustainability and long-term profitability?

As the ecosystem evolves, balancing bold bets with prudent strategies will be key to ensuring its continued success. For now, the spotlight remains on the startups driving innovation and the VCs deciding whether to take the leap.