VCs are flooded with unprecedented funds but in no rush to deploy capital
Venture capitalists (VCs) are most susceptible to the Fear of Missing Out (FOMO), which grips them most strongly during peak years like 2021. However, after a few months, risk investors may easily change their thoughts. According to statistics from Tracxn and the relevant funds, more than a dozen venture capital companies, including Lightspeed Venture Partners, Sequoia Capital, Elevation Capital, and a number of smaller funds, have closed fewer agreements in the first half of this year than in the same period in 2021. When compared to last year, when $4 billion was allocated to startup investments, this amounts to $2 billion in dry powder.
Elevation Capital closed 21 deals as opposed to 37 during the same period, while Lightspeed closed 10 deals as opposed to 16 in the first half of last year. The main difference this year is that there is less FOMO, which causes VCs to take it easy and not be in a rush to use the money they have collected. It was explained by more than a half-dozen executives, partners at leading VC firms, and investment bankers what this contradiction is really about and how it will affect the Indian startup ecosystem.
A VC fund typically has a 10-year lifetime during which time investors start looking for an exit. An investor who wished to remain anonymous stated, “Just because VCs have dry powder, it does not mean they have to deploy the capital soon because there is uncertainty and nobody knows what the rock bottom for the markets is.” For instance, data provided from Tracxn shows that Sequoia Capital India has closed 28 deals so far this year as opposed to 32 in the first half of the previous year.
IvyCap invested five times more in the first half of this year than it did in the same period last year (11 investments). In a recent interview with ET, Bejul Somaia, partner at Lightspeed, commented on the funds raised by investors and the slowdown in funding, saying, “With respect to the capital that has been raised, in some periods, it may get deployed quicker than three years, and in some periods, it might take longer… For instance, raising finance will be extremely challenging for the third or fourth startup in a sector. In the first half of this year, the company made 31 investments, up from 18 in the same period last year.
In addition, fewer businesses are still using the private capital market. However, the next three to six months will be key, and we will have a clearer idea by the end of the year, according to Karan Mohla, who is in charge of the Asia team for Ascent Fund, a $250 million early-stage fund from B Capital.
According to Vikram Chachra, partner at 8i Ventures, which has supported firms like fintech Slice, everyone is waiting for some sort of consolidation to happen around the leading competitors in a sector. “VCs are looking to see who will ultimately succeed and survive. In the first six months, 8i Ventures, which is looking to close its $50 million fund, closed two agreements.