Funding winter could get worse for startups: General Catalyst’s Deep Nishar
Some of India’s unicorns such as BYJU’s, OYO, Swiggy, PharmEasy, Eruditus, Pine Labs and Meesho, among others have suffered valuation markdowns at the hands of US investors in recent months.
The stubbornly high inflation in the US and the indigestion of the excesses driven by record-breaking funding in 2021 could mean startups are yet to face the worst of the downturn, according to the US-based venture capital firm General Catalyst’s Managing Director Deep Nishar.
The comments are in response to a significant drop in global venture capital through the first six months of 2023. VC funding has halved between January and the end of June compared to last year’s same period, according to PitchBook data. Startups at all stages have been hit hard.
Asia has followed the global trend because fewer deals are being made at the late stages. However, the pain is greater in India, where the H1 2023 drop was nearly 80 percent, to $4 billion. This marked the worst 6-month period for four years. Venture Intelligence data showed the pain: India’s startup funding in July fell to a record low.
“It could get worse from here,” Nishar told CNBC-TV18 in an interaction on Young Turks’ “Voices from the Valley” special.
“The reason is inflation, at least in the US, continues to stay stubbornly high, as well as the fact that the excesses of 2021 are beginning to show in terms of indigestion,” he said.
Some of General Catalyst’s most-famous portfolio startups such as Irish-American payments provider Stripe and e-grocer Instacart have suffered valuation markdowns and cut jobs in the tough funding environment.
General Catalyst was an early Stripe investor. In March, this year it co-led the $6.5 billion round, which lowered its valuation to $50 billion, down from $100 billion. Instacart, on the other hand has reduced its internal valuation from $39 billion to $12 billion by 2021. It also laid off staff and put aside plans to list the company in stock exchanges and go for an Initial Public Offering.
Some of India’s unicorns such as BYJU’s, OYO, Swiggy, PharmEasy, Eruditus, Pine Labs and Meesho, among others have suffered valuation markdowns at the hands of US investors in recent months.
“In 2020-2021, the gap between valuation and value creation widened more than normally,” said Nishar, who was formerly a top executive at SoftBank’s Vision Fund.
Explaining that the gap has now begun to converge with corrections, Nishar said, “Valuations have rationalised, which is a great thing, and a lot of value creation happens in the cooler period…”
“Companies have not just taken the challenge but doubled down because of the value creation they have in their customer base,” he added, highlighting the measures undertaken by startups to cut costs, hunker down and pave a path to profitable growth for a longer capital runway.
General Catalyst, since its founding inception, has raised more than 14 billion dollars across 11 funds. Over 1,000 investments into startups like Airbnb, Canva Grammarly Hubspot Kayak Snap Vroom Snap, Deliveroo.
The VC firm in India has supported 18-20 startups. These range from the unicorns CRED, Spinny, to the social commerce platform CityMall, and B2B SaaS provider FarMart.
Speaking about General Catalyst’s investment strategy during the funding winter, Nishar said, “Strategy remains the same. Find the best companies and entrepreneurs, then enter the market at the right valuation. Don’t get exuberant or too stingy.”
General Catalyst has raised $4.6billion for its 11th Fund in 2022. It is a cautious move at a time where some of the most prominent venture capital firms have replenished their funds. This creates more dry powder available for investment.
General Catalyst is not the only VC to have replenished its funds since last year. Sequoia Capital India(now Peak XV), Accel India, Matrix Partners India and others also did so. However, despite the fact that the global economy remains uncertain and startup finances are vulnerable, an estimated $16 Billion worth of dry powder destined for India has yet to be deployed.
Commenting on the slowdown in VC investments despite a large war chest close at hand, Nishar explained, “When times get tougher, what also happens is more sanity ensues in the market and everyone takes a pause and that pause is very good, both for the entrepreneurs and investors.”