India’s companies thrive on public markets, but VCs are holding back

India’s IPO market is flourishing.

In 2023, the country took the spotlight as the world’s top destination for IPOs, with 57 listings such as Tata Technologies and IdeaForge Technology, which collectively raised 494.3 billion rupees (US$5.9 billion). This was an upswing from 40 IPOs in 2022.

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Typically, a bustling IPO and stock market correlates with increased venture capital investment. Outperformance on the stock market, alongside exit events, are a chance for investors to realize capital gains and free up funds that can be channeled to new investment opportunities.

However, VC investment in the country actually declined nearly 63% between 2022 and 2023, a report from Bain & Company shows. Deal count also fell from 1,611 to 880, while average deal size fell from US$16 million to US$11 million during the same period.

The report noted that despite this significant decline, India retained its position as the second-largest destination for VC and growth funding in Asia Pacific, only ranking behind China.

So why is there a disconnect?

The reset is real

Industry observers Tech in Asia spoke to say that since 2023, VCs in India have become more discerning of the businesses and founders they back. That’s because many of their past investments have fallen short of their expected returns, which have led to a slowdown in funding.

Last year, Scott Shleifer, a senior advisor at Tiger Global, said returns on India investments had “sucked historically” compared to other global internet firms like Google, Facebook, and Tencent. The investment firm has invested in prominent India-based companies such as Ola, Flipkart, and Paytm.

On an investor call, Schleifer noted that many startups in the country faced governance issues and struggled to achieve profitability.

In 2023, for instance, Indian car servicing startup GoMechanic admitted to financial reporting lapses. This prompted early investors like Peak XV Partners (formerly known as Sequoia Capital India) and Orios Venture Partners to file a police complaint against the startup’s founders.

Concerns about inflated sales figures at healthtech startup Mojocare also led its investors, including Chiratae Ventures, B Capital, and Better Capital, to request a forensic audit of the firm’s financial records.

Another part of the problem? Many companies in the country raised funds at unsustainable levels. By and large, if an entrepreneur had demonstrated product-market fit, they would secure funding, industry observers note. Then, as they aimed to solidify product-market fit, they would secure funding once more, sometimes within a span of a few months.

Growing pressure from LPs

Lead-lag effect