2023 Year in Review: Secondary rounds may headline deal flow at startups next year too
Even as a funding crunch hit Indian startups in 2023 with primary capital becoming hard to come by, there was a significant increase in secondary share sales across late-stage ventures.
Risk investors ET spoke with said the trend is likely to continue in 2024, as the focus would be on the limited number of good assets where existing investors are looking to part-sell their stake.
Companies with adequate capital have been in discussions with investors for more secondary deals, which have contributed a significant chunk to the overall late-stage funding in 2023.
“Good exits have become hard to come by. Existing investors are selling it to new investors, even if it is happening at a valuation discount from the last time raised as long as they are good returns over and above what they initially invested with,” Mohan Kumar, founder and managing partner of growth-stage venture capital firm Avataar Ventures, told ET.
“This (secondary sale) is the only way for investors to exit even at steep discounts. In India, this is happening for the first time. In ..
Kumar said the trend is likely to continue in 2024, with early investors having to choose between staying patient for valuations to recover or exit immediately.
“Investors don’t like a downround, and for companies valuations were out of whack (in 2021). There is only so long they can wait before they hit the markets,” said Alok Goyal, partner at Stellaris Venture Partners. “Secondaries are likely to continue as a theme.”
Among the largest deals in this category this year was the $450 million raised by Lenskart from ChrysCapital and Abu Dhabi Investment Authority through secondary share sales.
The secondary portions of such deals gave partial exits to early investors and sizeable stakes to family offices. The money from a secondary sale does not go into the company coffers.
This year, startups also resorted to internal bridge rounds from existing investors to extend their runway and avoid downrounds.
Overall funding plunged by almost 70% in 2023 amid global macroeconomic headwinds, conflicts and inflationary pressures. Investors and operators believe the stress on investments will continue well into 2024.
Data from Venture Intelligence shows that as of December 15, Indian new-age companies had picked up just $7.5 billion worth of capital across all stages compared with $24.3 billion last year, as investors remained skittish.
“There is still some hangover remaining in the ecosys.
The year also saw shutdowns across stages, including those of hobby-learning platform Frontrow, buy-now-pay-later company ZestMoney, and teenager-focussed neo-bank Akudo.
“Good companies and resilient founders will get funded, even if the terms are not as per their expectations,” said Anand Lunia, partner, India Quotient. “The zombiecorns and their investors may finally get tired and wind up. There will be a reset in venture capital fund sizes and round sizes.”
Source: Economic Times
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