Why does this matter? Well I think since the pandemic struck, every form of prediction is foolhardy. Things can change overnight. We have seen unprecedented creation and unprecedented loss. But even though it’s a fool’s errand, predicting the future is also the extension of dreaming with conviction. So here we go.
Risky, record-breaking 2021
2021 was a crazy year for the Indian investor.
More than 50 unicorns,
$63 billion in private equity and venture capital money, more than 1,000 disclosed deals, the Sensex up to 61,000 points. Meanwhile, global VC investments jumped to $643 billion, almost twice as much as the
$335 billion recorded in 2020.
The bulls are running and the bears are in hiding. The internal line in such runs is that it’s a great time to be a founder and a bad time to be an investor. High valuations kill investor returns.
I think this coming year will be one of consolidation, correction and exits. While many investors still believe the party will continue, my sense is that the cycle is going to turn this year.
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Venture capital is a “risk-on” asset class. With the largest money tap in the world turned on at the beginning of the pandemic, the Fed printed $4.6trillion in the last 20 months.
That money had to be deployed somewhere.
With yields at all-time lows, “risk-on” asset classes were the norm. But with yields set to rise, capital will now fly to safety. That’s why I expect the Indian ecosystem to enter a phase of correction, consolidation and exits.
Unicorn reversion to mean
I expect there to be fewer unicorns created in 2022 than last year, but more than in 2020.
The Indian ecosystem was “pulled forward” last year. It raised more and created more than its trajectory should allow, but it will now revert to the original path.
There are three reasons why this happened in 2021: money was available, high risk was attractive, and China was not attractive. India became the best destination to deploy capital, and in Q3 of last year we saw more money deployed in India than in
China.
As money becomes less available, high risk becomes less attractive, and China becomes more attractive, footloose capital will move away from India.
Unicorn creation is therefore going to be slow this year.
Healthy consolidation, featuring fintech and D2C
Fintech firms attracted the most funding in India in 2021, raising more than $9 billion.
A significant amount of money will now be used for mergers and acquisitions. This will be very similar to edtech, which saw a huge boom in 2020, and then had one of the biggest M&A years in 2021.
But consolidation won’t be limited to fintech.
Direct-to-consumer brands, which have proliferated, will also see activity. Several companies have adopted
‘Thrasio-style’ models, which will look to acquire and deploy capital.
Fresh capital infusion this year is therefore going to be limited.
IPO boom time
On the same lines, I also expect the number of IPOs to double from last year. While it may seem like the opposite of correction and consolidation, exits are in line with taking advantage of a peaking market.
It may also result in many Indian retail investors burning their fingers with tech companies.
All of this is necessary for the ecosystem. Every ecosystem sees cycles that go up and then down. Cycles like these are helpful for building long-term business resilience.
Why does this matter?
I think founders should raise as much as they can to ensure they have a runway if capital flow drops. It may also push companies towards long-term sustenance or even that often-overlooked word in high-growth companies—“profitability”.
None of this is actually a negative in the long term for the Indian startup ecosystem. I continue to be
long India. I truly believe we are setting up for an epic decade ahead, with all the ingredients in place. We just need to tighten our seat belts before the rocketship takes off.
Aviral Bhatnagar is an investor at Venture Highway, an early-stage seed fund. He is the founder of
A Junior VC
, a platform that democratises insights into startups in India and Southeast Asia. Views are personal.
