Bain & Company, a global consultancy, anticipates a surge in Venture Capital deal activity in India during the latter half of this calendar year following the general elections, according to a senior official.

I see an upsurge after the elections as momentum continues and there is more clarity on the administration. I see a lot more focused investments happening in the second half of 2024. 

There is a lot of diligence ongoing in H1, and H2 will see some of those investments come into fruition”, Sai Deo, Partner, Bain & Company, told businessline.

This global consulting firm has now released the latest edition of its Annual venture capital report titled “India Venture Capital Report 2024”, written in collaboration with the Indian Venture and Alternate Capital Association (IVCA).

Following a challenging 2023, the Indian VC landscape experienced several noticeable and positive evolutions, fostering optimism for 2024 and beyond. The early months of 2024 are already witnessing heightened activity, hinting cautiously at a favourable year ahead, according to Bain & Company. 

“India is seeing a lot of innovation in really new sectors like generative AI, deep tech, and space tech. We are fairly positive and optimistic about 2024. Hopefully, H2 will see a lot more deal-making come to fruition,” Deo said.

When asked which sectors are expected to see robust VC activity this year, Deo said investors can expect continued interest  in emerging themes such as deep tech, Space tech, Generative AI, and electric mobility. 

Generative AI has gained significant momentum in recent years as funding soared from $15 million to $250 million over 2022-23. Generative AI Apps attracted the lion’s share of funding by demonstrating convincing early signs of product-market fit. Electric mobility was the other green shoot sector that gained salience (from 3 per cent to 7 per cent of funding) as the rising maturity of the ecosystem fuelled investors’ interest.

Emerging themes

Deo highlighted that there are lot of technological advancements in space technology. In space tech and mobility, government incentives and policy reforms are helping, she added.

All global markets saw some form of decline in VC activity in 2023. VC compression occurred in India, too, but it was not dramatically different from the global average. 

Despite facing headwinds, India’s Venture Capital landscape exhibited resilience in 2023, marking a year of continued moderation. Investment activity echoed a muted sentiment globally, with investments in India declining by 65 per cent relative to 2022 and totalling $9.6 billion in 2023 compared to $25.7 billion in 2022. 

Despite this decrease, India remains the Asia-Pacific region’s second-largest destination for VC and growth funding.

Green shoots

Bain sees 2024 as a year of “green shoots,” with new emerging themes such as deep tech and space tech expected to make further strides; high-quality assets coming back to the market and seeing interest; and all the dry powder that is there with global VC funds starting to see deployment, according to Deo.

“There is lot of dry powder available for being deployed in the next few years. Fund raising will however probably be muted in 2024”, Deo said. 

A confluence of domestic and global factors extended the funding winter. Persistent inflation kept interest rates elevated, while investors considered potential growth headwinds in anticipation of a global GDP softening. These challenges heightened investor expectations and vigilance. Softening global consumption and continuing geopolitical uncertainties further dampened investor confidence.

The decline in deal flow was strongly influenced by impacted deal-making, as deal volumes contracted by 45 per cent (from 1,611 to 880 deals). In contrast, average deal value decreased by about 30 per cent, from $16 million to $11 million over 2022–23, with the share of seed deals rising from approximately 60 per cent to 70 per cent during the same time frame.

Evolving landscape

“In a year (2023) seemingly rife with hurdles, investors demonstrated resilience by adjusting to the evolving landscape. There was a perceptible shift in investment focus from tech-first bets to more traditional sectors underpinned by strong fundamentals – such as healthcare, retail, and financial services. Importantly, innovation remained a focal point for investors, despite a challenging funding environment – evident in both the surge in Generative AI investments and the robustness of deal flow in the electric mobility ecosystem”, Deo said.

Rajat Tandon, President of IVCA, said that the budget’s ₹1 lakh crore allocation for interest-free loans to foster innovation in agri-tech and defence tech is encouraging. The future for startups and VCs appears to prioritise long-term strategies over thematic investments, focusing on well-governed, profitable ventures generating sustainable returns. “Thus, the ecosystem is entering an era of poised growth, akin to a high growth curve,” he added.