Going solo: LPs want direct stakes in India's startup successes


Nikhil Patwardhan

31 reads

Nikhil Patwardhan

31 reads

India's startup ecosystem is seeing an uptick in direct investments from limited partners of venture capital firms as they seek to gain more control over their investments in order to optimise returns.

April 23, 2024


Key Takeaways

  • India’s startup ecosystem is witnessing a surge in direct investments from limited partners (LPs) of venture capital firms
  • Many family offices and HNIs, who are typically LPs in VC firms, are talking to investment bankers and lawyers to explore direct investments instead
  • A lack of returns from VC firms in the past few years coupled with some vaunted bets running into rough weather is prompting many LPs to take the reins
  • Being on companies’ cap tables will give investors direct access to them, which will help them assess certain aspects of the investment better and maximise their returns

India's startup ecosystem, ranked the world's third-largest, is experiencing significant shifts. Funding is gradually rebounding after a prolonged downturn, yet the sky-high valuations of 2022 are a thing of the past.

Take ShareChat, once viewed as a direct rival to Meta’s Facebook in India. It garnered attention from global heavyweights like Google and Twitter (X), among others. Previously valued at over $5 billion, ShareChat recently secured a convertible debt round that saw its valuation shrink to $2 billion, as per media reports.

ShareChat is far from the only startup suffering these corrections. Numerous startups, particularly those that surged during the pandemic, are facing a sobering reality. Companies such as Byju’s and Pharmeasy have been forced to resort to rights issues at significant discounts, while Udaan, alongside ShareChat, turned to convertible debentures to mitigate valuation losses. GreyOrange, a robotics startup, similarly secured funding in December last year at a significantly lower valuation than when it raised funding in May 2022.

These struggles stem from macroeconomic shifts, internal challenges, or even a combination of the two, justifying the valuation adjustments. However, even companies such as Meesho and HealthKart, which have been resilient even after the pandemic and have significantly reduced their cash burn while still maintaining steady growth, have struggled to attract buyers at premium valuations.

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