Great time to be deploying capital, will be busy in 2024: Fundamentum GM

Focus on technological edge and prudent deployment

As startup funding has recently begun to witness a resurgence in the last quarter of the calendar year 2023, Ashish Kumar, co-founder and general partner at Fundamentum Partnership – a growth-stage investment firm, is confident that investments will increase going into the new year. In an interview with Aryaman Gupta, he talks about investment trends in 2023 and the coming year, dry powder, and misgovernance among startups, and more. Edited excerpts:

In your opinion, how has the year 2023 panned out in terms of investments? Have there been any silver linings?

The year 2023 has been a slower year in terms of total capital deployment. It has also been a much-needed sobering period for the venture capital ecosystem, after an unprecedented influx of capital in 2021. Late-stage capital, particularly from the US market, has not been very active this year. But early-stage capital, after slowing down during the start of 2023, has been very active over the last eight to nine months. Total early-stage deal volumes this year have not been lower, with similar cheque sizes to last year.

In terms of investor interest, sectors like generative AI have been in focus while others like e-commerce or Software as a Service have not received too much capital. The silver lining is that focus has shifted to businesses that have a clear technological edge. This has resulted in more differentiation, in turn reducing competition and increasing capital efficiency.

Indian venture capitalists are sitting on the highest-ever pool of dry powder. When do you expect this capital to be deployed?

We have been sitting on that kind of capital for the last 12 months. Funds tend to deploy capital within a three-to-five-year period. It is, however, not necessary that the entire pool of dry powder be deployed immediately. Investors are being prudent with their investments. The pace at which dry powder was being added has slowed down. Venture capitalists that are looking to launch new funds are also lower in number now.

We will gradually see this capital being deployed. In India, growth-stage (series B and series C) activity has started to recover. We are likely to see a lot more deals next year. Deployment, although slow and cautious, has begun, and will pick up post-elections.

Going into the new year, do you have any investments lined up?

There are many sectors we are bullish on. We have issued a few term sheets in the last couple of months. We will start making announcements from the next quarter onwards. We are very active and we think it’s a great time to be deploying capital. We are going to be very busy going into the new year.

Has the amount of time taken for deals to materialise gone up?

Absolutely. Due diligence usually takes place in two facets: commercial, and legal and financial. In 2021, the time taken for commercial due diligence was as short as a week. Those numbers in 2023, on average, have been one or two months depending on which stage investments are made.

The time taken for legal and financial due diligence has gone up considerably due to several cases of misgovernance that have been popping up. That period has gone up from two months to almost three to four months. On average, the time taken for deals to go through has gone up by 60-70 per cent.

With venture activity now picking back up, are we seeing a paradigm shift in the way investments are made?

Although things are expected to be better in 2024, I don’t expect investments to reach the highs of 2021, which was an aberration year. Investments will be similar to the last four-year average. Regardless, the business models and industries that attract money will be different. There is a significant push for companies to now become profitable at later stages.

The markers that investors look for before making investments have changed. The first question we ask is whether businesses, fundamentally, have potential to grow or not. Secondly, is the valuation right for us to invest in the company. And thirdly, many companies also require a sustained inflow of capital at later stages as well. So, we also look at whether there is appetite for giving them additional capital within 12-18 months. For most companies that have remained relevant in the last year or so, many bad habits have been fixed. Their fundamentals have improved significantly. Valuations have also been corrected.