VCs looking at new sectors as funding winter starts to abate

Bengaluru: Even as start-ups are struggling to shake off the funding winter and start attracting foreign capital, a few green shoots may be arising in certain sectors, say venture capital funds (VCs). Burned by cases of corporate misgovernance in a number of start-ups, the financers also point to a greater deployment of due diligence and discretion in investing.

VCs invested over $8.3 billion (across 233 deals) in Indian companies during April to June 2024, according to data by research service Venture Intelligence. Deal volumes this quarter were up 18 per cent compared to the immediate previous quarter.

This is welcome news for the ecosystem which saw funding declining for four consecutive years. 

VCs agree that while less founders are approaching them as compared to 2021, they are showing more caution and thought. “The number of talented founders and operators continues to grow, and this is one of the major differences between the startup ecosystem of 2016-2019 and the ecosystem of 2024,” said Sonal Saldhana, Vice President, Investments, 3one4.

New sectors in the spotlight

A number of VCs told DH that space tech, semiconductors, deep tech, manufacturing, and defence are the sectors garnering interest, in addition to the enduring appeal of SaaS (software as a service).

Anil Joshi, Founder and Managing Partner at Unicorn India Ventures, said that they are currently in their third fund. He said, “Funds one and two were largely around technology companies. But now fund three is more on deep tech.”

“We are seeing early stage activity in discretionary consumption, global trade enablement, lending based financial services, energy transition focused companies, frontier tech including drones/UAVs, biology, semiconductors, defence focused technology, manufacturing, and in AI powered solutions within various domains. We have invested in a number of these areas just over the last 12 months,” Saldhana said.

Girish Shivani, Founding Partner of early-stage YourNest Venture Capital, said that the fund plans to invest in eight to ten deep-tech startups in the next few months, deploying Rs 35-40 crore. For four such companies, term sheets will be issued in the next week. 

Expectations ahead 

Madhukar Sinha, Founding Partner of India Quotient, said that the market is easing out compared to what it was six-eight months back. “Once the US interest rate eases out, you will see that a lot of capital is sitting on the sidelines because of higher interest rates. That money right now is deployed in debt in the US, and once it moves from debt to equity, you will see that the public market valuations will go up and then those companies will start investing,” he said.

Sinha believes manufacturing is taking off because it is moving out of China for geopolitical reasons as well as due to businesses diversifying to younger populations. India Quotient, which makes 10-11 investments every year, has made five so far and intends to meet its targets.

“The seed stage and early stage was not that impacted, as was the case with late stage, growth stage and mid stage, but that has also now started picking up,” said Unicorn India’s Joshi, adding that a good chunk of capital from VCs is available due to less investments in the last two years and now there is a steady flow of investment.

Referring to caution also being shown by VCs, Joshi said they have started laying emphasis on having dedicated resources for compliances. He explained, “There are no compromises. Investors are careful on these factors. Even LPs [Limited Partners] have started asking about that.”