Category: India

How the EU–India Deal Raises the Ceiling for Indian Startups

The EU-India trade deal marks a meaningful inflection point for Indian startups: expanding export markets, diversifying sources of capital, and raising the long-term ceiling for India-to-the-world technology companies.

As a cross-border investor, here’s why the EU-India trade deal is making me even more excited about the India-to-the-world tech story:

1/ Should provide a fresh set of tailwinds to the India export story. This was much needed after the lacklustre results of the “Make in India” initiative over the last decade.

2/ In the past decades, the Indian offshore services story, the software exports story, and the cross-border SaaS story have been heavily reliant on the US. While the EU is nowhere close in terms of depth of market & innovation-buying behavior, its addition as a viable market derisks the Indian tech story to some extent.

3/ Given EU countries are leaders in critical technologies, in addition to being potential customers for the next-gen of Indian deeptech companies, I also expect them to engage as valuable “partners” across the board including in aspects like technology transfers that enable indigenous manufacturing, joint ventures in areas of mutual interest, and perhaps, increased collaboration between research institutions and organizations too.

4/ India still needs enormous foreign capital to get to the $10,000 per capita GDP mark. In addition to long-term US capital, which I expect to remain committed to India both on the private and public side (despite recent FII selloffs), deep sources of patient capital that reside in EU universities, endowments, insurance companies, century-old corporates, and multi-generational family offices should also step in and provide much-needed FDI for India.

5/ On enterprise software and deeptech, I have been underwriting the ability of Indian startups to serve the “Global South”, which largely remains under-covered by US companies. Now, with the EU being added as an open market for Indian exports, the TAM for Indian startups just goes to another level, which should ultimately translate into larger exit outcomes.

Of course, dealing with EU customers will have its own set of challenges compared to the US:

– Large and/or fast-growing markets like Germany, France & Italy aren’t native English speakers. Adapting to each language and culture is challenging.

– Constituent markets are quite fragmented, have really different cultures that have been at loggerheads in the past, and therefore, while it’s called a Union, serving it as a homogenous bloc might not be easy.

– EU customers aren’t classical early adopters and move really slowly in buying cycles.

– Many constituent markets have stifling regulations around things like data privacy, security, environment & labor, increasing inertia to innovate.

– EU operates on different labor norms, stronger worker protections, and stricter work-hour expectations that can slow execution compared to vibrant markets like the US, India, and China. Overseas companies, especially younger ones, might struggle to adapt & serve the expectations shaped by strong labor protections.

– Overall, I have observed over the years that EU customers are more skeptical of dealing with Indian companies and talent compared to, say, the US.

Nevertheless, this is a great development, and kudos to the Indian government and negotiating teams for pulling off a masterstroke. Now comes the hard work of turning legal clauses into tangible business outcomes for both sides.

The real test will be whether founders, investors, and operators can move fast enough to capitalize on this opening.

US-India/India-To-The-World: 2024 Recap, 2025 Expectations

From my vantage point as a US-India venture investor, sharing what I observed in 2024 and my expectations from 2025.

As a venture investor in the US-India corridor via Operators Studio, I saw 2024 as the year of taking stock, of heads-down building for founders, and quiet contemplation for investors.

A. 2024 Recap

1/ AI (Enterprise)– after the unveiling of ChatGPT on Nov 30, 2022, and the peaking of the AI mania in 2023, 2024 saw a bit of dust settling down in the ecosystem. In the Bay Area, I heard more intellectually honest conversations amongst founders and investors, with folks going deeper into discussing operating details and how to best leverage this tech step function beyond the “AI is going to change everything” hyperbole.

(a) Focus on the Applications layer

Along similar lines, I saw US-India founders go into deep build mode in AI. Most appeared to focus on the Applications layer, which aligns well with their core strengths. Working closely with portfolio companies like Confido Health as well as interacting with several seed-stage US-India founders, it has been particularly heartening to see them doubling down on spending time with customers, while also ramping up on the latest developments in AI. They are actively leveraging new models and tools to quickly ship new features. A lot of early US-India SaaS vibes!

(b) Indian VC skepticism

In private conversations with many large VCs in 2024, I sensed a fair amount of skepticism on whether the current generation of Indian AI companies will be able to compete with global players. As a result, many of them are choosing to be extremely selective in terms of the number of deals, waiting, watching, and observing how things are playing out in the US, while occasionally backing de-risked repeat founders in one-off large deals.

A few are also experimenting with a multiple-bets approach, writing several small checks (up to $1Mn size) into high-potential teams and seeing how they execute. Tailored seed programs have been created to do this eg. Peak’s Surge, Accel’s Atoms, Chiratae’s Sonic etc.

2/ India-to-the-world deep tech

The domestic deep tech market opportunity clearly became mainstream in 2024, with a spectrum of 1st generation companies now well-established, ranging from public companies like ideaForge in drone manufacturing to growth stage space-tech startups like Agnikul, Pixxel, and GalaxEye.

Given these outcomes, almost all major Indian VCs now have a deep tech thesis, which bodes well for the next generation of founders in the domain.

(a) Rise of the 2nd-gen

In 2024, I saw the 2nd generation of deep tech founders like Sharang Shakti (anti-drone defense systems), Astrophel Aerospace (space tech) and Naxatra Labs (EV motors) emerge on the scene. They are piggybacking on the learnings and playbooks of their 1st-gen predecessors to move faster and think bigger.

(b) Global commercial traction

In parallel, I saw early green shoots of Indian deep tech startups starting to go global commercially in a more meaningful way in 2024. The biggest eye-opener for me in this regard was attending Speciale Invest’s Annual Summit in Nov’2024 and getting updates on their portfolio going global.

For instance, Ultraviolette has officially launched its EV Superbike ‘F77 MACH2’ for the European markets. Uravu Labs is starting to get some major international orders for its recycled water technology. Cynlr recently inaugrated its Robotics Design & Research Center in Switzerland. PS: for those interested in a few hours of deep-dive into the India deep tech ecosystem, the full-day recording of Speciale Summit’24 sessions is available here.

I saw similar signs of rapidly growing global traction in the Operators Studio portfolio too in 2024. Flytbase has now emerged as a clear global category leader in autonomous drone software, with major enterprise drone-dock installations across 16 countries. Cradlewise is one of the fastest-growing smart cribs in the US, and giving incumbents like Snoo a run for their money. Playto Labs has created a sharp niche of STEM learning using robotics kits and live instructors, with more than half of its revenue coming from outside India.

3/ Venture Capital

(a) No Enterprise exits

2024 continued to be a fairly tight year for VC financings in the US-India corridor. It feels like the VC ecosystem is still undergoing some sort of recalibration after the 2020/21 mayhem. While VCs saw some great IPOs at least on the consumer side, exits on the enterprise side were almost non-existent.

As a US-India venture investor, I primarily play in 2 areas – (1) AI/ Enterprise Software and (2) India-to-the-world deep tech. Exits in these areas are typically expected via M&A. With Indian acquirers being sparse, and the US M&A environment at a standstill under the previous administration, Indian enterprise exits saw virtually no action in 2024.

While smaller funds like Operators Studio can still generate healthy exits via secondary sales to growth investors, we as an ecosystem still need full company exits via M&A and IPOs to keep the liquidity pipeline flowing end-to-end over the long term.

(b) Limited seed capital

In the US, while the bar for Series As and Bs has moved significantly higher, seed-stage financings continue to see high levels of activity. In fact, most multi-stage firms like A16Z, Sequoia, and Coatue are also writing idea-stage checks into AI as we speak. Essentially, 2024 saw massive crowding at the seed stage in Silicon Valley, and given the bar for follow-ons has increased a lot, graduation rates have dropped significantly. As per Carta – “30.6% of companies that raised a seed round in Q1 2018 made it to Series A within two years. Only 15.4% of Q1 2022 seed startups did so in the same timeframe”.

India’s venture ecosystem behaved a bit differently in 2024. Established Indian VCs appeared to have become fairly risk-averse in the past year, reflecting both their larger Fund sizes (needing to deploy larger checks with more traction) as well as their efforts to triage the excesses of 2020/21. As I wrote in this post a couple of months back:

From what I am seeing in my deal flow over the last few months (and my focus is (1) enterprise software and (2) deep tech), I feel there is almost a dearth of quality, structured & consistent angel/pre-seed/seed capital in India right now.

From what Founders are telling me, almost all major Indian VC firms seem to be holding out & looking for late-seed/pre-Series A levels of traction even to start a real conversation. The proverbial $1Mn+ ARR, 2-3x y-o-y growth…

Anecdotally, it looks like only previously successful repeat founders are mopping up large seed rounds from these firms at the idea/pre-product stage. Pre-seed/seed seems to be significantly tighter for first-time founders.

Genuine question for myself and many India-based enterprise & deep tech founders out there who are fundraising – who are the angels/ seed firms in India that are comfortable in CONSISTENTLY writing checks at the true early stages in enterprise software and deep tech (idea/pre-product/MVP/design partner/some usage stage)? And by consistent, I mean doing 10-12 deals per year.

Essentially, 2024 turned out to be an extremely tricky year for US-India founders to raise seed capital, with rounds taking significant time to come together, investors wanting to see much higher levels of traction, and valuations fairly compressed especially relative to the amount of progress in the business.

Of course, the other side of this coin was that these same factors made the US-India seed ecosystem an attractive pond to fish in for investors in 2024. In fact, looking at both the quality of the teams I evaluated as well as the entry valuations I saw, I believe 2024 will emerge as one of the best vintages of Indian venture capital a few years down the road.

B. 2025 Expectations

As we enter 2025, here are some expectations I have from Global Indian founders. These aren’t predictions; rather, a wishlist of things I would love to see play out, again in the context of my US-India/ India-to-the-world focus:

1/ Thinking bigger

In 2025, I would love to see a “Path to $1Bn ARR” slide in US-India startup pitch decks. As I wrote in this post a month back:

I would like to encourage Indian founders building software companies for the world to think significantly bigger and more aggressive both in terms of how large their business can become and how fast can they get there (y-o-y growth targets).

Why? Because software TAMs and market growth rates are much larger than what our brains can imagine. Look at the growth rates of these public companies:

1. Shopify (Founded in Canada) is growing 21% at $8.2 Billion ARR.
2. Canva (Founded in Australia) is growing 40%+ at $2.4 Billion ARR.
3. Toast is growing 29% at $1.5 Billion ARR.
4. Monday (Founded in Israel) is growing 34% at $940Mn ARR.

I am now encouraging my portfolio founders to think beyond the proverbial “Path to $100Mn ARR” slide and start strategizing a path to hit $1Bn ARR.

It’s time we reset our internal narratives and think bigger and more aggressive as an ecosystem.

2/ Thinking non-incremental

One of my observations is that we as Indian founders at large still have a tendency to go after low-hanging problem statements. As AI gathers momentum, these will be automated away quickly and easily especially by incumbents, making it increasingly difficult for venture-backed startups to differentiate themselves.

It sounds counter-intuitive to the whole Lean Startup movement of the last decade, but I believe that in 2025, it will be easier to build a differentiated startup by going after harder markets and tackling hard-to-build products that need to exist in a future that isn’t fully here yet.

In 2025, I would like to see Global Indian founders build for the world in a category-creation mindset from Day 0, and not be afraid to play the game on hard mode.

3/ Founders physically moving to their target markets ASAP

The importance of founders moving to the market where their target customers are, as close to Day 0 as possible, emerged again and again in various ‘An Operator’s Blog’ podcast episodes like US GTM Best Practices For Founders Starting up in India w/ Vinod Muthukrishnan (Cisco, Uniphore, CloudCherry) and Where is the real opportunity in AI for Indian startups? w/ Rajan (Upekkha).

If you are trying to build a venture-scale AI/ enterprise software/ vertical SaaS startup targeting the US, every year you spend not physically moving here will be a lost opportunity. Within the constraints of capital, immigration regimes, and family reasons, I would strongly recommend that US-India founders expedite their move to the US in 2025.

4/ Accelerating Deeptech exports

I would love to see Indian deep tech startups build on their global momentum and double down on exports in 2025. In particular, I see the Global South as an extremely attractive buyer of Indian technology in areas like space tech, defense, energy, and agriculture.

While the West is a harder nut to crack from a commercial standpoint, it can be leveraged to access growth capital as well as cutting-edge research talent. Soon enough, commercial traction from emerging markets will provide these companies with enough product maturity and credibility to be able to compete in the US and Europe in a meaningful way.

5/ Bounce back of seed VC

We are in the early stages of a massive global AI super-cycle, and there are several categories and pockets where US-India startups are likely to have a strong right-to-win. While remaining diligent in identifying these right markets to go after, keeping a high bar on founder-quality as well, and asking tough questions to them, I would encourage Indian venture investors (including angels, family offices, syndicates, and smaller funds/ Solo GPs) to actively deploy at the seed stage in 2025.

The seed stage is where outlier angel outcomes and fund returners get created and especially at this point in the economic cycle, the risk-reward ratios are extremely strong. By all means, it’s fair to keep the bar high. But the ecosystem needs more courageous risk capital to step up at the earliest stages of building truly innovative companies.

TLDR: for the US-India/ India-to-the-world venture story, while 2024 was the year of taking stock, I expect 2025 to be the year the ecosystem starts coming out of the bottom of the J curve.

Audio Overview of this post (via NotebookLM):

The Adani Playbook

I believe there is a lot of first-principles business thinking that tech founders can learn from Gautam Adani.

Loved this podcast with senior journalist and educator RN Bhaskar, wherein he covers the journey of Gautam Adani & the Adani Group in detail, including how he made various decisions as he grew the conglomerate.

Some interesting insights:

#1 Gautam Adani started off as a diamond trader. His original DNA was pure trading – figuring out how quickly and at what price can he sell a commodity for.

#2 As opposed to most other Indian groups, Adani has always preferred doing 50-50 equal joint ventures with partners across sectors (edible oil, gas distribution, solar, data management etc.). Drives the right accountability across both sides.

#3 Started the Mundra port as a JV with the Gujarat Govt (74:26), but then seeing the long-term potential of Indian logistics, bought back the 26% stake from the Govt. at a 26x markup to the original price. Thus, ended up as a 100% owner of India’s largest private port and also the most profitable.

#4 While most ports take several years to turn profitable, Adani’s ports have been immediately profitable, mainly because he has focused on building initial capacity only for commodities he understands deeply and trades in.

#5 Many years back, Adani was looking to lease port dredgers from the Indian govt. but it had a 3-month wait. To save time, he started buying second-hand dredgers, using them for 3 months in a year, and then leasing them out to other customers for the remainder. Today, Adani has 100+ dredgers and has one of the largest dredging businesses in the world.

#6 Adani smartly used cash flows from the highly profitable trading and port businesses to buy a coal mine in Indonesia, then eventually diversified into power and LNG terminals to become a diversified infrastructure conglomerate.

#7 Here are some core operating mantras of Gautam Adani:

  • The market isn’t in your control. Cost is in your control. Watch your costs and keep them lower than the competition. Adani is ruthless in cost-cutting.
  • Build long-term relationships and don’t compromise on them.
  • If you make a mistake, cut your losses early. Adani started a partnership to enter the Aluminium industry in the 90s and realized very early that this company wouldn’t be a no 1 or 2 player in the space. He immediately shut the initiative down.
  • For every risk he takes, he always has a risk mitigation strategy in his back pocket.

#8 One of Adani’s core financial strategies has been to create “land banks” around his ports (Ray Croc anyone?). Eg. back in 2007 itself, Mundra Port had ~35,000 acres of land.

The benefits of having a land bank as part of the port include:

(a) The land itself keeps going up in value.

(b) Captive warehousing, which leads to rental cash flows.

(c) Can be leased to other internal or external businesses that need proximity to the port. Eg. Maruti has created its full export hub at Mundra. The Port also has a 2.5 km airstrip for aircraft maintenance as well as for serving defense businesses.

#9 Adani is sitting on assets with massive future potential, especially given where India’s economy is headed. For example:

(a) Adani is the largest port player in India and also one of the largest globally.

(b) Adani owns the world’s largest coal mine in Australia. Even in this era of energy transition, given India’s power sector is still predominantly thermal, he has a steady opportunity to supply coal at least for the next 25 years.

(c) Owner of multiple major airports in India.

(d) Distributes ~32% of natural gas in India.

I believe there is a lot of first-principles business thinking that even tech founders can learn from Gautam Adani, especially around identifying & aligning with long-term secular growth waves, stitching together assets to create a competitive advantage as you surf these waves, and controlling your cost structure to ensure survival during the inevitable market downcycles.

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Notes From India Trip Q2’24 – Elections, Deeptech, Fundraising

Notes from my Q2’24 India trip – everything from post-election vibes to public markets and the state of the venture ecosystem.

Just returned from my quarterly trip to India. With the recently held elections (and a bit of a surprising result there!), it was interesting to get a pulse of what’s happening on the ground. Here are some key takeaways from my meetings with founders, investors, and operators in the ecosystem:

1/ Real reasons behind BJP’s weakened mandate

While Modi created a massive pre-election narrative of the BJP coming back to power with an even bigger majority than in 2019, it ended up losing ground in the actual results tally.

Honestly, I didn’t see it coming but talking with people on the ground, one of the major reasons behind the weakening of BJP seems to be shrinking employment opportunities, especially for young graduates. While the India macro story stays strong, there are pockets of economic distress in the poor states and amongst the lesser-skilled parts of the population/ those graduating from non-top-tier universities.

It’s clear that while Modi focused a lot on infra buildout over the last 2 terms, one of his core focus areas in the 3rd term needs to be continuous job creation for all sections of society. This might require some bold reforms.

2/ Investors are largely unperturbed by the election results

Given that the BJP-led NDA coalition still has a comfortable majority in the Parliament, and Modi continues to be the PM with a largely unchanged cabinet, Investors are expecting political and economic continuity in this 3rd term of the govt.

So, expect continued momentum on key execution tracks from the last 2 terms, including physical infrastructure buildout, expansion of digital public goods, and focus on technology startups.

3/ General Catalyst acquiring Venture Highway

The news of GC acquiring VH broke out while I was in Bangalore. While it could be a one-off development, it’s still a positive greenshoot that a large Silicon Valley-based, premier capital pool is allocating to the India venture market.

Personally, I also believe it’s a smart move from Hemant Taneja to acquire a high-performing team that is local and has developed on-ground expertise, versus parachuting people in from the Bay Area or doing the fly-in-and-out model.

Not recruiting and empowering a high-quality local leadership team is a classic India entry mistake that both Y Combinator and AngelList did, which is why they have struggled to crack the market.

4/ All VCs talking deeptech now

Similar to the Valley, deeptech has now clearly become the flavor of the season. Even a few years back, major Indian VCs spending time at the IIT incubators or looking at sectors like manufacturing and semiconductors was unheard of. This time, I heard multiple instances of VCs writing large seed checks into deeptech companies.

My only fear is that based on past history, the Indian VC ecosystem tends to behave in steep emotional cycles, flooding hot sectors with capital in tandem like a herd (eCommerce 15 years back, fintech 10 years back, lending and SaaS 5-7 years back), and then abandoning verticals also in tandem like a herd (eg. no one is touching edtech now).

These emotional cycles are incredibly counter-productive for long-term company building, and also tend to be incredibly disturbing, especially for younger, 1st-time founders. As the deeptech wave begins, I hope some lessons are learned and implemented from previous cycles.

5/ Angels suffering from 2021 vintage markdowns and illiquidity

One of my observations on the Indian venture ecosystem has been many new-gen angels tapping out in 2023/24. While some of the marquee spray-and-pray ones, as well as the conventional IAN/Mumbai Angels persona, continue to be active, many high-quality operator angels seem to have bowed out of the game.

On bringing this point up with folks, they confirmed that the portfolios of many new angels who started deploying in 2020 and 2021 are suffering from either major markdowns and writeoffs or prolonged illiquidity of marked-up positions. I would also add layoffs, salary rationalizations, and a lack of broader ESOP liquidity (barring a few cases here and there) to the list of reasons behind many angels bowing out of the game.

6/ Seed capital is plenty but wants more traction. Series As continue to be hard.

Similar to the Bay Area, I heard that while there is plenty of pre-seed/seed capital available in the ecosystem right now, the bar for raising Series A has significantly gone up. As a result, companies are seeing both larger seed rounds as well as extension/ top-up rounds happening as we speak.

Several seed investors shared with me that one of their learnings from doing many idea-stage deals in 2021 is how companies are taking so much longer than they initially estimated to go from zero to even $100k ARR. This is adversely impacting the IRRs of seed portfolios. Also, given valuations have now massively corrected, the next round markup isn’t in line with the time it’s taking to get to early traction.

Given this dynamic, many seed investors are now tracking companies and waiting to see more traction before pulling the trigger on idea-stage companies. Btw, am seeing similar behavior even in the late seed/ pre-Series A/ Series A spectrum too, where VCs are waiting to see a long enough timeline of revenue growth, retention, and other metrics before engaging seriously.

Another related observation – growth capital for tech companies is a major gap in the India venture ecosystem right now. Many strategics and hedge funds that were writing large checks post-pandemic have either completely exited the market (eg. Softbank, Alibaba, and Tencent) or are triaging their current portfolios. Recent cases like Prosus writing off its entire ~$500Mn investment in Byju’s isn’t helping to build confidence either.

7/ Public markets continue to rip, lots of FO appetite for pre-IPO rounds

After a brief blip post-election results, Indian public markets have continued to rip. There is a whole new generation of young Indians who are leveraging new-age brokerage apps like Zerodha and Groww to actively participate in the markets. In fact, recent F&O retail trading numbers suggest that a majority of this activity might in fact, be speculative rather than long-term, fundamental investing.

It is noticeable to see frequent ads on Indian TV channels encouraging everyone to invest in mutual funds. An uncle who recently visited us in SF was bragging over chai about how he “made 55 lakhs in the market already this year”.

During this India trip, I saw my father casually opening and checking his brokerage app dashboard multiple times daily. I also noticed that a majority of YouTube consumption by this age group is financial influencer and stock tips content.

On a similar note, a few institutional investors shared how domestic Family Offices are showing an increased appetite for pre-IPO investments in companies like Lenskart, FirstCry, and Oyo. In fact, with the domestic index doing really well, FOs are more skeptical of taking LP positions in venture funds right now, preferring to either stay liquid in public markets or take relatively de-risked, later-stage positions in pre-IPO private companies.

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India Needs To Avoid This Mistake From The Mobile Supercycle

In Q4 2014, top 3 Indian OEMs Micromax, Intex, and Lava together had >30% smartphone market share. In Q4 2023, there are now ZERO Indian companies in the top 5 smartphone vendors!

There is a critical lesson here that India needs to learn as the AI supercycle dawns on it.

It has been fascinating to see videos showcasing Xiaomi’s SU7 EV sedan emerge over the last few days. The interior UX, in particular, looks fantastic. With BYD having entered India in 2021, and Xiaomi’s well-known expertise in product design and global distribution, China has emerged as a powerful player in the global EV space. Of course, with its prowess in hardware manufacturing, it was never a question of ‘if’, only ‘when’!

In parallel, the AI supercycle in the US is having positive ripple effects in hardware and robotics. Apple is expected to make significant progress in the next couple of years on the 1st gen Vision Pro. Meta is focused on rapidly improving the Quest 3, while it also collaborates on the Ray-Ban smart glasses. Zuck also recently spoke about developing a neural interface in the form of a wristband, which can read the signals your brain sends to hands and arms.

US startups are already going gun-ho on imagining new form factors to deliver AI capabilities to users. These include AI pins, AI necklaces, and desktop robots that turn your smartphone into a whimsical companion.

With massive investments going into the chips and infra layer in the AI cycle (read my post: ‘AI Musings #6: The Bull Run Is Just Beginning (90s Telecom Boom Vibes)‘), the resulting drop in compute prices and democratized access to it is providing tailwinds to hardware verticals whose adoption has been previously blocked by uncomfortable form factors.

With all this hardware action in the US and China, I believe it’s a matter of national importance that India now steps up its game in key verticals of consumer hardware, and avoids ceding this territory to overseas players.

In the mobile supercycle, I had a ringside view into how in smartphones, homegrown Indian companies like Micromax, Karbonn, Intex, and Lava didn’t end up investing in domestic manufacturing capabilities, playing the short-sighted game of buying stock hardware from Chinese OEMs/ ODMs, and just putting a sticker and packaging on it.

Further, even with a solid local software talent pool, these companies also under-invested in software, building only basic wrappers on top of stock Android. Essentially, Indian smartphone OEMs ignored both these key areas of competitive differentiation, diverting capital away from capex & R&D, and towards brand building and customer acquisition.

This strategy was found wanting when Chinese OEMs like Xiaomi and OnePlus aggressively entered the Indian market. Given their deep manufacturing and digital expertise in China, these companies had strong differentiation in both hardware and software. Plus, they had deep pockets to outspend Indian OEMs on marketing. Therefore, despite entering the Indian market much later and starting well-behind Samsung and Indian OEMs, Chinese smartphone companies managed to build strong local brands in a fraction of the time.

The end result is this – in Q4 2014, top 3 Indian OEMs Micromax, Intex, and Lava together had >30% smartphone market share. In Q4 2023, there are now ZERO Indian companies in the top 5 smartphone vendors!

Source: Counterpoint Research
Source: Counterpoint Research


Given the ambitious goals we are setting for the Indian economy over the next decade, and the national importance of critical technologies like AI, automotive, energy, space and defense, it’s important India doesn’t repeat the strategic mistakes of the mobile supercycle. It’s imperative that indigenous hardware capabilities get built during this next AI supercycle (and other constituent subcycles in AR/VR, EVs, space etc.).

From what I am hearing about all the foundational work already happening in semiconductors, automotive, space, and general manufacturing, this is totally doable if the Indian public and private sectors can come together, backed by an encouraging policy stance from the govt. We are already seeing early greenshoots of this in space tech, where ISRO is actively collaborating with Indian spacetech startups.

I want to throw out a challenge for Indian founders, asking them to be more courageous in picking tough hardware problems to solve. There is enough global capital available that is positive on India and in its chase for alpha, will be ready to back this courage.

Further, this is also the right time for Indian conglomerates like Reliance and Mahindra to step up in a meaningful way and drive INR capex in these critical sectors. In parallel, the govt’s policies should ensure that while hardware manufacturing attracts investments from all over the world, the strength of homegrown players also get built up in this supercycle.

China is a good example of leveraging foreign capital to strengthen its domestic manufacturing and digital capabilities. Technology indigenization is critical in this age of fickle geo-politics where everything from trade to currencies are being weaponized.

This current generation of Indian founders also have the benefit of home-grown role models like Sachin Bansal and Binny Bansal, who stood up to US and Chinese competition in eCommerce, ultimately ensuring a homegrown & enduring market leader like Flipkart continues to thrive to this day.

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India Startup Valuations, Corporate Governance, And Other Good Stuff: Notes From The Recent Trip

From valuations drastically coming down and hard questions around SaaS, to the unlock of INR LP capital and rise of deeptech – sharing candid notes from my recent India trip.

Just came back from one more of my quarterly trips to India. Based on meeting scores of founders, investors, and operators, here are a few interesting insights on the current state of the Indian startup ecosystem:

1/ 4-6 quarter lag between US and Indian private markets

There appeared to be investor consensus that the real shakedown in overfunded/ overvalued tech startups in India hasn’t really started yet. Most VCs believe that 2024 will be brutal for many of their portcos that are on the wrong side of things and are, therefore, expecting brutal downrounds and recaps.

Given that the US private market correction started sometime in mid’22 and is still ongoing (eg. Convoy, a digital freight brokerage last valued at ~$3.6Bn, recently shut down reportedly under stress from creditors), there seems to be a significant lag between the US and Indian private markets.

With US VCs expecting startup shutdowns to peak in 2024, assuming the above lag, we are potentially looking at a weak fundraising environment in India continuing deep into 2025.

For India-based founders, this underlines the importance of having enough runway to tide the next couple of years out.

2/ Current fundraising environment is worse than I thought

Over this trip, I heard of at least 10 deals falling through at the final legal documentation stage. Anecdotally, I could identify a couple of reasons:

  • Smaller funds are facing capital call challenges with LPs, given tough global macros and general pullback from venture as an asset class.
  • The bar for financial diligence has really gone up. Funds are willing to walk away if even a few issues crop up in the typical Big 4 fin DD. A common issue I heard is a founder signing a term sheet on the claim of say $1Mn ARR, and post-fin DD, true recurring revenue as per accounting standards turns out to be $200k. This is a deal-killing red flag!

3/ Valuations have significantly compressed

Based on triangulating numbers from convos with multiple investors, these are the generally prevailing valuation ranges for each financing stage right now in India.

Note:

(1) These numbers are highly anecdotal and will vary a lot case-by-case depending on sector, team, and traction. However, I validated these broad ranges from multiple Indian VCs.

(2) Am also including a comparison with current US benchmarks as per Carta.

Pre-Money Valuations (as of Oct’23)IndiaUS
Pre-seed$3-5Mn$5-10Mn
Seed$5-10Mn$10-25Mn
Series A$10-20Mn$25-70Mn

What’s striking to me is how compared to the US, the valuation ramp with each stage of maturity is relatively low in India.

4/ The rise of Rupee denominated capital in venture

I remember the Managing Partner of the VC firm I used to work for more than a decade back, having a strong thesis that similar to China, India’s venture ecosystem will truly be unlocked by the participation of domestic capital pools. On this trip, I saw encouraging green shoots of this view, with Family Offices like the Mariwalas and Hindujas allocating to venture capital both actively and passively.

One interesting trend here is how the younger, next-gen heirs to these family businesses want to play an active role in working alongside the new crop of Indian founders. I sensed a passion and excitement in their approach, which transcended from startups being mere wealth management or portfolio allocation decisions.

To me, unlocking INR LP capital is a hugely encouraging trend and one that will make the local innovation economy more resilient to geopolitics and global shocks.

5/ Deeptech becoming a mainstream venture theme

Deeptech seems to have transitioned from being a fringe venture theme for many years, to now being one of the core theses of all mainstream VCs. Peak XV’s latest Surge batch is dominated by AI and deeptech, Accel is running an Industry 5.0 program via its Atoms accelerator, deeptech specialists like Speciale Invest and Pi Ventures are busier than ever, and I heard of many investments in-process in the semiconductor space.

The cornerstone of my investing thesis is – “India started by exporting software services in the 90s-early 2000s. It then moved up the value chain to become the global hub for software products/ SaaS from the mid-2000s till 2020. Over the next 20 years, India will move even further up the value chain and export cutting-edge innovation to the world”.

This time, I saw strong signs of this thesis on the ground in India.

6/ Corporate governance clean-up in progress

It was clear that both founders and investors are owning up to the corporate governance mishaps over the last year. The problems have been recognized, accountability taken, causes diagnosed, and learnings accepted and assimilated. I heard many instances of deep clean-up happening within companies, right from the board to the lower operating levels.

I see this as a major growing-up moment for the Indian venture ecosystem as a whole, and post this clean-up, everyone will be better off for it. I expect a whole crop of young founders and venture investors to emerge battle-hardened from these experiences, and from here on, focus their energies on building generational companies.

7/ Hard questions being asked of application SaaS

Similar to the sentiment at Bessemer’s recent Cloud100: Rise of SaaS in India Brunch 2023** in SF, Indian VCs are now starting to ask some hard questions about competition and product differentiation to application SaaS startups.

The Zoho playbook worked in the early 2000s. The Freshworks playbook worked in the 2010s. In this rapidly changing, post-AI world, whether these old paradigms are still applicable needs to be questioned and discussed in an intellectually honest way.

**Key SaaS takeaways from this event here.

8/ Very early signs of the domestic B2B software opportunity

While the India cross-border SaaS opportunity is now well established, I am also hearing scattered anecdotes of startups going after large ACV, domestic B2B opportunities. While VCs continue to be generally bearish on domestic B2B software, founders have started taking note of the journeys of the likes of Perfios and Netcore. Some of these companies have shown that though it takes time, it’s possible to build large ($100Mn+ ARR) domestic software product businesses.

In fact, over the last year, I have seen several enterprise startups reach $3-10Mn ARR by serving large Indian customers. Maybe it’s time to be more open-minded and take a nuanced view of the domestic B2B software opportunity?

9/ Tech-enablement of legacy domestic verticals

Applying technology to improve the growth and efficiency of legacy verticals like construction, procurement, automotive parts, logistics etc. is emerging as a key business opportunity. While horizontal B2B commerce platforms like Udaan, OfBusiness, and Moglix are already mainstream, am also seeing the rise of a new set of more specialized, vertical platforms.

These are really large TAM opportunities given the amount of GMV that changes hands in the brick-and-mortar portions of the economy. As India grows from a $3.5Tn to a $10Tn economy, the tech-enablement opportunity in these broader spaces will grow even faster.

10/ Didn’t see a clear thesis on AI

While almost all Indian VCs are deploying in AI startups, I didn’t hear any clear thesis or POVs from most of them. Not to be too harsh on them as barring the emerging hyper scalers like OpenAI and Anthropic, the early stage AI scene is pretty fuzzy even in Silicon Valley. PS: check out my recent post ‘AI Musings #1 – How The Odds Are Stacking Up?‘.

11/ Promise of IPO’ing in India

I heard distinct excitement around the potential of late-stage startups doing IPOs in the Indian market. Over the last couple of years, Indian public markets have shown a strong appetite both for tech growth stocks as well as small to midcap SMB stocks.

I spoke to a founder who recently listed his tech services company at a relatively small scale. His experience in managing the compliance and related overheads of running a publicly listed company in India has been fairly smooth so far. In fact, he has enjoyed both interacting with and learning from well-prepared large institutional investors.

Similar to INR LP capital, unlocking domestic public markets for IPOs of new-age companies will be a huge boost and de-risker for the local innovation ecosystem.

Other memorable moments…

LetsVenture, my very first angel investment, completed 10 years. I still remember the first brainstorming session with the founders when it was just an idea on a blank sheet. The company has since emerged as the leading infrastructure layer for private market investing in India. I am in awe of the tenacity of Shanti Mohan (Co-founder and CEO), and how she has selflessly contributed and fought for organizing private market investing in India. PS: some special moments at the celebratory dinner with early backers – Subrata of Accel, Sharad Sharma of iSpirt, and others are here.

LetsVenture’s achievements over the last decade

I was also on a panel at LetsIgnite with one of my oldest friends Anirudh Singh (Avataar Ventures), alongside Vishesh Rajaram (Speciale Invest) and Uday Sodhi. It was an unfiltered discussion on everything from portfolio construction, diversification, and power laws to entry prices and exit approaches. It was also the first time I presented my investment strategy to any external audience, so this particular event will always stay close to my heart. PS: some key insights from the panel are here.

LetsIgnite’23 panel on venture portfolio construction

Towards the end of the trip, I partnered with my friend and collaborator Arjun Rao (Speciale Invest) to do a closed-door, no-holds-barred type session with select infrastructure SaaS founders in Bangalore. The main theme was the US-India corridor. I like to keep these sessions very raw, no-gyaan, only brassstacks around operating and financing challenges that US-India enterprise founders are dealing with daily. PS: some key takeaways from the session are here.

Closed-door session on US-India corridor, in partnership with Speciale Invest

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