'Business as usual' for Sequoia's early-stage bets amid start-up headwinds

Within the early-stage space, Sequoia remains bullish on AI, deep tech, and semiconductors

While the Indian startup ecosystem is going through a funding slowdown and large enterprises are having their valuations slashed, global investment giant Sequoia Capital is betting big on early-stage startups in the country.

At a time when funding for early-stage startups fell almost 68 per cent YoY in the first quarter of this year to $844 million, Anandamoy Roychowdhary, Surge Partner, Sequoia Southeast Asia, says It’s "business as usual" for the investment giant’s early-stage portfolio companies.

Sequoia, he revealed, remains bullish on the early-stage segment, especially in sectors like artificial intelligence, deep tech and semiconductors.

“Early-stage investments are a very core part of our strategy… I suspect that the hottest sector for the next few years will be AI, but semiconductors and deeptech are a close second,” Roychowdhary told Business Standard at the sidelines of the Semicon India FutureDESIGN Road Show, organized on Friday by the Ministry of Electronics and IT.

The governmental push to aid semiconductor start-ups will yield large scale companies which, he says, are an exciting prospect for investments, and have the potential to be the next big chapter in India’s start-up story.

Under the design-linked incentive (DLI) scheme, the government has already on-boarded around 27 start-ups, allocating Rs 1,200 crore for them. Rajeev Chandrashekhar, the minister of Electronics and IT, has said that the start-ups in the semiconductor design realm have good prospects and are attracting commercial capital, aside from government support.

“We look for a solid technology advantage, a methodology that works well (while making investments). We try not to invest in something that will win because the government will protect it. Something that will win on its own merits is very important,” explains Roychowdhary.

The California-headquartered investment firm, in June last year, raised a massive $2.85 billion to fund Indian and Southeast Asian start-ups – its largest for the region. As much as $2 billion was allocated to Indian venture and growth funds.

However, the firm’s ambitions for the region did not come to pass due to economic headwinds. The second half of 2022 saw the Indian tech world falter, as funding declined.

According to an analysis by market intelligence platform Tracxn, Sequoia invested in 41 per cent fewer rounds in 2022 compared to 2021.

Nevertheless, the firm remains sanguine about its India bets. Sequoia, in March this year, announced the eighth cohort of its four-year-old incubation program for early-stage start-ups in India and Southeast Asia, Surge.

The program, which launches two cohorts a year, has allowed the firm to stand on equal footing with heavyweights like Y Combinator, in terms of early-stage and seed-stage bets in India.

“Surge focuses on early-stage investments. We are aggressively and actively looking for early-stage companies that we can invest in, both in India and southeast Asia,” Roychowdhary says.

According to a recent report by PwC, start-up funding in the country fell 33 per cent year-on-year (YoY) in calendar year 2022 (CY22) to $23.6 billion from $35.2 billion in the previous year. Early-stage funding, in contrast, saw a 12 per cent increase last year compared to CY21, which accounted for 60-62 per cent of the total funding in terms of volume.

Early-stage investments, industry watchers say, were seen as safer bets which gave investors a chance to enter at a lower cost and exit during the growth stage, resulting in higher returns. Moreover, compared to late-stage companies, investment amounts in this segment were way lesser, resulting in comparatively lower risk for investors.

The first quarter of 2023, however, dashed these expectations. Funding for early-stage start-ups, which was expected to rise, fell almost 68 per cent YoY in in Q1 to $844 million, according to Tracxn data. On a quarter-on-quarter basis too, funding saw a slight decline of 4 per cent.

Regardless, Sequoia is optimistic about its bets in fledgling companies. “There is definitely a slowdown in the market. But what we are also seeing is that companies are a lot more focused on becoming profitable and fixing unit economics,” says Roychowdahry. “We continue to be very bullish about the ecosystem.”

“In this new world, companies have to focus on becoming profitable, have better unit economics and not just grow for the sake of it,” he adds. Start-ups that demonstrate profitable growth “would be fine”.

This comes at a time when the start-up world is facing increasing consolidation as investors struggle to make profitable exits. Sequoia, in contrast, doesn’t see exits “as much of a challenge”.

According to analysts Business Standard spoke to, valuation multiples for Indian start-ups have dipped by 50-70 per cent recently. Large Indian start-ups, they say, are likely to face down rounds going forward.

However, this has not forced Sequoia to alter its investment strategy in India. “All slowdowns usually temper. And this is most likely a tempering slowdown,” claims Roychowdhary, who considers the current environment a temporary lull.