Investors are expected to double down on quality assets with larger rounds, setting a more measured pace of deal-making in 2022. Deal-making will likely be affected by the funding winter that has set after tech stocks took a huge beating in the global markets, causing a moderation in the funding frenzy also in the private market.
“We expect that macro headwinds and compressions in global public markets are likely to have a trickle-down impact over the next couple of quarters – however, this is likely to reflect more in the quality of deals vs. overall capital deployment,” said Sai Deo, an associate partner in Bain & Company’s private equity practice and co-author of the report. “Investors will likely double down on larger rounds in high quality assets and focus heavily on companies demonstrating leaner unit economics leading to more cautious pace of deal making and rationalized valuations.”
Veterans in the start-up arena are likely to find backers as the filtration becomes a bit more stringent.
“Early-stage deals will retain pace but investors may be more likely to bet on experienced founder-operator teams with well-defined business models,” said the report. “Additionally, emergent sectors such as Web 3.0 / Crypto or block-chain linked technologies will continue to see momentum.”
Exits via public listings may also see some moderation as IPOs in the pipeline may adopt a wait-and-watch stance given global headwinds in public markets, the report said.
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This comes on the back of a record year of decadal high investments by venture capital firms, with total deal value crossing $38.5 billion in 2021. Last year’s funding boom was driven by a dual impact of around 2x growth in number of deals (1,545 deals vs. base of 809 in 2020) as well as average deal size (expanding from $12.4 million to $24.9 million over 2020–21).
Global VCs led more than 90 mega rounds of $100 million+ (vs. ~20 in 2020) funding, typically as follow-on rounds in market leaders such as Swiggy (online food delivery) and Dream11 (gaming). Similarly, early-stage deals saw a dramatic shift in pace and ticket size, with Series A rounds hitting the $10 million+ mark in average deal size, the report highlights.
“Last year was a banner year for VC investments in India. There was growth from emerging sectors as well, notably B2B E-commerce, Short-form video, D2C (including brand aggregators) and crypto/Web 3.0 which saw a steep increase in deal activity,” said Arjun Upmanyu, partner, Bain & Company’s private equity practice and co-author of the report.
India minted 44 unicorns in 2021, becoming the third largest home of unicorns, with 73 privately held active unicorns, after the US (~500) and China (~170).
The report shows that the active investor base in India also consequently saw a significant expansion, reaching 660+ from a base of 516 in 2020. Several seed funds and family offices debuted or raised funds for early-stage rounds, becoming more significant on the pre-seed to Series A landscape. While Tiger Global and Sequoia Capital retained the top spots on the leader-board in terms of deal volume and capital deployed, new investors made significant inroads into India in 2021.
