The remarks come amid uncertainty around large funding rounds for the Indian startup ecosystem, in the backdrop of global macroeconomic headwinds – due to rising inflation and interest rates – that have affected stock markets worldwide.
Kirani, who bagged the Midas Touch Award for best investor at The Economic Times Startup Awards 2022, said companies must show profitability for at least two quarters before they approach the public markets.
This is a stark contrast to last year, when projecting a path to profitability by new-age companies was seen as a feasible plan to raise money from public markets and retail investors.
Kirani, who is known for his early bet on Nasdaq-listed software-as-a-service (SaaS) firm Freshworks, said Indian public markets prize profitability over growth, compared to US peers that largely focus on high-growth bets.
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“India’s public market knows how to price PAT (profit after tax) and PAT growth. If there is no PAT, then the markets don’t give these companies the desired multiples,” Kirani told ET.
It will take some time before Indian startups hit such metrics even as key mutual funds decide the fate of firms in the public markets, he added.
“Our belief is that in the second half of 2023, we will see some companies make an attempt to go public (in India), while in the US we are still unsure,” Kirani said.
His seed cheque of $1 million in Freshworks led to windfall returns for the Silicon Valley-based venture firm, as the software company made a big-bang debut on the Nasdaq last year, listing at a valuation of $13 billion, an almost four-fold rise from its last private valuation.
However, Freshworks’ listing gains have disappeared due to the global rout in technology stocks and its market capitalisation stands at about $4 billion currently.
On being asked whether Freshworks’ stock could have done better in the current downturn if listed in India, Kirani said local bourses still don’t know how to price SaaS companies.
“We don’t have the length and breadth of these companies. The US has more than 200 listed efficient companies. The decision (for Freshworks) to be listed in the US was the right one but I’m not sure how that would have played out if they had listed in India,” Kirani said.
India, bright spot
On the overall outlook for the country, Kirani said it was “the perfect storm but in favour of India”.
“For the first time, India’s growth is higher than the US and inflation is lesser than the US. India is looking positive and anecdotally seeing a lot more interest from scaled investors and even from our own LPs (limited partners, or investors in funds) who have questions around the sentiment,” he said. “So, in general the story of India has not taken as much beating as the US and Europe.”
Besides Freshworks, Kirani is an investor in several SaaS unicorns, including software testing startup Browserstack; media technology venture Amagi; software provider to spa and salons Zenoti; and subscription management platform Chargebee.
In March, Accel, known for its early bets in Flipkart and Swiggy,
closed a new fund of $650 million to invest in India and Southeast Asia.
“In China, there are challenges in terms of investments, coupled with the regulatory changes affecting segments like education, which have given bad signals to the global investors, especially since changes have been so sudden. In the US, the public markets have taken a hit, and no one knows the rock bottom,” Kirani said on the turmoil in key global markets. “So, there is no place for money to go and from that aspect India is looking good from a macro lens.”
Valuation catch up
While the macroeconomic situation still looks relatively better for India, according to Kirani, venture funding has taken a serious beating here too.
Indian startups raised about $2.7 billion in the September quarter this year, against nearly $12 billion during the same period last year, showed data from Venture Intelligence, which tracks startup funding data.
Kirani said companies that have raised capital in 2021 with global multiples are right now catching up to those valuations.
“Most of these companies have cash on their balance sheet, so these companies will have to increase their revenue, Ebitda and PAT before they list. So, the question is of ‘runway’ and how much cash they have to catch or cross that watermark,” he said, adding that firms were controlling costs and focussing on efficiency.
“On areas that are not working they (startups) are taking a faster decision to remove those and where things are working, they are doubling down. The challenge will be (for) the companies that have raised at higher valuations and are running out of cash,” he said.
Startups that did not raise capital in 2021, at the height of the tech boom, have to now hurry to breakeven or reach profitability, prioritising it over growth, he said.
There is, however, no sign of a slowdown in the early-stage investments pipeline, he said, adding that SaaS was active in India with high-quality companies and founders.
“Most of these founders are very ambitious and not afraid to take on (Silicon) Valley companies,” he said.
“The problem statement that Indian SaaS companies are bringing on development or production infrastructure, DevOps or AI & ML are very similar to what engineers would find in the US. So, really interesting companies will come out in the next 24-36 months from India, which will look much different from the previous generation of SaaS companies,” Kirani said.