Looking to invest in AI, cybersecurity, Bharat: Accel's Prayank Swaroop

At a time when the investment scenario has been challenging since 2021, financing conditions have started to improve with larger funding rounds becoming more common, said Prayank Swaroop, partner at top venture capital firm Accel. In a video interview with Peerzada Abrar, Swaroop said that Accel is betting big to invest in areas such as consumer brands, fintech, software-as-a-service (SaaS), artificial intelligence (AI), cybersecurity, and Bharat. Accel is known for early investments in companies such as Meta, Slack, Dropbox, Flipkart, and Swiggy. Edited excerpts:

How do you see the overall investment scenario amid macroeconomic uncertainty?

The overall investment scenario has been challenging since 2021, particularly in India during 2022 and early 2023. However, during the past 12 months, conditions have started to improve with larger funding rounds becoming more common. Early-stage activity remains robust, with firms like Accel being particularly active. Indian public markets have successfully absorbed several tech IPOs, and more tech companies are expected to go public in the next year. This trend is driving significant activity in both private and public markets. The Indian economy is performing well, and many companies are now profitable or nearing profitability, indicating a positive shift.

What kind of companies are going for IPOs?

Currently, the IPO landscape is favouring consumer platform companies, especially those with well-known brands, as they are easier for the market to understand and evaluate. These companies can leverage strong consumer recognition to facilitate their public offerings. While large software or business-to-business (B2B) companies in India haven't yet taken this step, it's anticipated that they will eventually take it. Fintech firms, particularly in the insurance sector, are also gearing up for IPOs. The trend shows that consumer brands will likely go public first due to their digital adoption and market penetration, with B2B marketplaces and other fintechs following suit in the coming quarters. A lot of our companies are preparing for IPOs; while I can't delve into specifics due to the sensitivity around IPOs, many other companies are either raising pre-IPO rounds or planning their IPOs.

How do you see the trend of startups flipping back to India from countries such as Singapore and the United States?

The trend of companies shifting from being domiciled in the US to India is becoming increasingly prominent. Accel’s role in this process varies by company; some firms find it beneficial to list or get acquired in the US, while others see advantages in the Indian market. A key consideration is whether listing in India aligns with the company’s goals and market conditions. The trend indicates a positive shift, with Indian firms leading the way back to India, capitalising on favourable domestic market conditions. New companies are now more likely to be domiciled in India, benefiting from a robust economy, supportive public markets, favourable taxation, and a sound judiciary. This positive trajectory is attracting both Indian and international investors to the Indian market, promising foreign institutional investment (FII) participation.

Is Accel playing any role in helping companies move back?

We support companies by providing comprehensive guidance and mentoring across various domains. Our legal, finance, and corporate development teams collaborate closely with company CEOs to prepare them for critical transitions, such as moving back to India or getting ready for an IPO. We provide detailed checklists and strategic advice to help founders make informed decisions, ensuring they understand what makes sense for their companies. Ultimately, while the execution rests with the founders, our insights offer a solid starting point for exploring essential aspects and making sound decisions.

What are the investment opportunities that you are focusing on in the country and globally?

The funding scenario has indeed been challenging since 2021, but there are notable trends and investment opportunities emerging both in India and globally. In India, consumer brands are a focal point due to the country's status as a consumption-driven economy. Sectors such as fashion, footwear, luggage, food, and cosmetics are seeing significant interest. There's a notable trend towards premiumisation driven by increased disposable incomes among millennials, who are willing to spend more on quality products. Additionally, there's a growing focus on 'Bharat', targeting tier two and tier three towns where rising spending power is creating opportunities. This market segment is value-conscious, requiring thoughtful business strategies for successful investment. Manufacturing in India, supported by the Make in India initiative, is also promising, with innovations seen in semiconductors, defence, and general manufacturing. Globally, areas such as SaaS, generative AI, and cybersecurity are robust investment sectors. Accel is particularly active in these domains, emphasising the need for Indian companies to compete globally. Access to international markets and understanding effective marketing and sales strategies, particularly in the US, are critical for success in these global arenas.

How do you view AI-led innovations by Indian startups compared to the global scene?

AI has gained significant momentum globally, with generative AI emerging as a transformative force. Last year saw considerable hype, but now there's a shift towards practical applications within companies. Despite challenges like model hallucinations, AI adoption is increasing, especially in cutting internal costs like customer support automation. Indian startups are actively contributing to AI-led innovations, albeit facing competition from global counterparts. They are exploring diverse applications from AI in the creative economy to cybersecurity, reflecting a broadening scope beyond traditional sectors. Key areas of future innovation include agent-led platforms, AI for reasoning, and integrating knowledge graphs for enhanced analytics and data-driven decision-making. Indian AI companies need robust funding, strong teams, and compelling use cases that rival those developed by US counterparts. This approach is crucial as AI continues to permeate sectors like education, healthcare, and more, shaping the next phase of technological evolution globally. In the last two years alone, we have invested in more than 27 companies in AI in India.

You are also betting big on cybersecurity, why?

I believe that in the next decade, a big unicorn in cybersecurity will emerge from India. Despite the vast potential in the cybersecurity sector globally, there's a noticeable absence of Indian companies scaling to unicorn status in this space. Globally, cybersecurity is a robust market with substantial investment and mergers and acquisitions, yet India hasn't seen similar success stories. At Accel, we have recognised this opportunity and recently announced a European fund specifically targeting AI and cybersecurity startups, underscoring the growing interest in this area. Notable companies such as Sprinto and recent acquisitions such as Pingsafe highlight promising developments. Despite challenges in understanding the cybersecurity market, particularly for Indian investors, there is a growing cohort of Indian-origin founders making strides. This includes companies generating significant revenue domestically, indicating a maturing market. However, the transition from service-oriented cybersecurity firms to scalable product-led ventures remains a critical gap. Looking ahead, the cybersecurity landscape in India holds immense potential. With supportive investors and a burgeoning ecosystem, the groundwork is set for the emergence of groundbreaking cybersecurity startups. This endeavour aligns with broader global trends where cybersecurity remains a pivotal area of innovation and investment.

Amid declining valuations and many regulatory and governance issues at many top startups, has there been any change in how you make investments?

All investors have become more cautious. Diligence has become longer and deeper on the legal and financial sides. Investment terms are more stringent to prevent wrongdoings, and board reporting and financials are more rigorous. However, a few large companies take the headlines, but the majority of Indian companies we have funded in the last five years are performing well. Early-stage activity in the startup ecosystem is currently vibrant, with a noticeable increase in the number of companies seeking initial funding. It's becoming relatively easier for startups to raise rounds in the range of $5 million to $10 million compared to larger rounds exceeding $50 million. This trend is partly influenced by a shift in investor sentiment, where valuations have adjusted downwards by approximately 20 per cent to 30 per cent. As a result, investors perceive these early-stage companies as offering better value. Over the past year, there has been a notable surge in new business formations compared to the preceding two years. However, securing larger funding rounds remains challenging, reflecting a more cautious approach among investors in deploying substantial capital.