Venture capital investors are flooded with unprecedented funds but are slow to invest

Venture capital (VC) firms are mostly taken over Fear of missing out (FOMO) and sentiment peaks during boom periods like 2021, but it only takes a few months for risky investors to change course.

Six months into the new year, despite a record $4.7 billion in dry powder, up from $2 billion last year (according to Venture intelligence data) just for investing in startups, more than a dozen venture capital firms, including Lightspeed Venture Partners, Sequoia Capital, Height Capitaland a number of smaller funds closed fewer deals in the first half compared to the same period in 2021, data from Tracxn and related funds showed.

Although the pace of transactions in the early stages is still moderately higher, there is no rush to release the terms sheet (the agreement sent by the investor before the completion of financing), which indicates a change in sentiment among the investor community from 2021.

While Lightspeed closed 10 deals in the first half of this year, up from 16 in the first six months of last year, Elevation Capital closed 21 deals versus 37 in the same period.

Both VCs have raised their largest ever corps in India this year: $500 million for Lightspeed and $670 million for Elevation.

For now, the $4.7 billion fundraiser does not include the $500 million Lightspeed fund in India and South Asia, as it was announced earlier this month.

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Amount raised by venture funds_Graphic_ETTECHETtech

The big difference this year is the lack of FOMO, which encourages VCs to sit back and take their time to invest the funds they have raised.

More than half a dozen executives, partners from leading venture capital firms and investment bankers explained to ET what lies at the heart of this controversy and how things will play out in the Indian startup ecosystem. Some of them requested anonymity.

Funding cycles for most VCs involve active deployment during the first three years, after which growth stage investments begin to flow. The typical life cycle of a venture capital fund is 10 years, when investors are looking for an exit.

“Just because VCs have dry powder doesn’t mean they should be quick to place capital because there is uncertainty and no one knows where the bottom is for the markets,” said the investor, who asked not to be named.

For example, according to data from Tracxn, Sequoia Capital India has closed 28 deals this year, compared to 32 deals in the first six months of last year.
Sequoia raised $2.85 billion through growth, venture capital and Southeast Asia.

Small Fund IvyCap Ventures Slows Deal Rates Nearly 50% Despite Cleanup
$214 million as part of the first closing of the third fund. IvyCap made five investments in the first half of the year, compared to 11 investments in the same period last year.

Vikram Gupta, founder and managing partner of IvyCap Ventures, said the fund took longer to close the deal on better terms.

“Obviously there is some caution… If you give it time in terms of negotiations, you will get the terms that you would like, so we have seen this trend and therefore we are not in a hurry to invest,” Gupta said.

Regarding the funds raised by investors and the slowdown in funding, Bejul Somaya, a partner at Lightspeed, told ET in a recent interview: “In terms of capital raised, in some periods it can be rolled out faster than three years. and in some periods it may take longer… At such times there is a flight to quality. For example, it will be very difficult for the third or fourth company in the sector to raise capital. Investors will be much more astute than they were six months ago.”

Total transactions closed in 1st half.  22 (5011) compared to 1 pol.  21 (502)_Graphic_ETTECHETtech

Fewer Exits

“In a market like today, when exits are getting harder, VCs want to give themselves time for companies to reach a point where they can exit…Otherwise, limited partners (LPs) are required to ask questions about the maturities of the last funds and exit. during the next raise. Therefore, the rollout of funds will continue to be slow,” said a partner at a leading venture capital firm.

There were many exit opportunities last year thanks to successful domestic public offerings of companies such as

Freshworks and PolicyBazaar in unprecedented technological growth.

Macroeconomic headwinds this year have also pushed several funds into early-stage investments, such as
Tiger Global Participates in $2.6M Financing Rounds like the e-commerce startup Shopflo.

The New York-based investment firm increased its early-stage deployments with 16 early-stage bets this year through the end of June, up from seven last year, according to data from Tracxn, which counts Series B seedings as early stages. financing.

For example,
Accel, which recently closed its $650 million. The India-focused fund said it would remain excited about the early-stage opportunities in India. The firm made 31 investments this year in the first six months, compared to 18 investments last year. In 2022, he closed 19 early rounds, up from 11 last year, according to Tracxn.

“Correction and slowdown in the early stages is currently minimal, but this may change in the future. In addition, we have yet to see fewer startups entering the private finance market. However, the next three to six months will be critical, and by the end of the year we will have a more complete picture,” Karan Mohla, Ascent Fund Asia Team Lead.
with a $250 million case from B Capitaltold ET last week.

Top VCs by Funds Raised in H1 2022_Graphic_ETTECHETtech

Everyone is waiting for some degree of consolidation around the best players in the category, said Vikram Chachra, a partner at 8i Ventures, which has backed fintech startups like Slice.

“Venture capitalists are trying to see who wins in the end and who can survive. They want to see a very clear path to profitability. Things like market share and gross margin are considered. So now we are starting to think almost like public market investors,” Chachra said.

He added that larger VCs can spend more time working with existing portfolio companies to grow in their valuations.

8i Ventures, which is in the market to close its $50 million fund, closed two deals in its first six months. Chachra says they typically close one or two deals per quarter.