Sateesh Andra, Managing Director of Endiya Partners, tells businessline that the investment landscape has turned rational, forcing start-ups to work hard to justify the investment rounds. Andra, who has closely watched the IT industry and the investment scenario for over 20 years, says there’s no funding winter for good start-ups. An early-stage venture capital fund, Endiya Partners has made 30 investments so far, with assets worth $100 million under management. Edited excerpts from an interview.
What is the state of the funding landscape in Indiapost the pandemic?
Due to the pandemic, private markets underwent significant correction globally. A significant amount of India’s capital comes from foreign investors. About 80 per cent of our venture capital, or risk capital, comes from abroad. A lot of that comes from the US. If the US sneezes, we all catch cold here. So, very clearly, a correction is going on, and I believe it’s a good thing. I think it helps to an extent, because entrepreneurs will focus on building businesses with the right unit economics. Companies have to double their revenues to justify current valuations.
Is the funding winter still on? We are not seeing reports of big-ticket funding announcements.
I don’t think there’s a funding winter for good companies, for good start-ups. Series D valuation is corrected by 40-50 per cent. Series C by 30-40 per cent; and it’s almost 20 per cent correction for Series B. The seed stage, pre-series A or series A are not on a significant correction. At Endiya this year, 10-12 of our portfolio companies have raised follow-on rounds. In January, there was Darwinbox-Microsoft round in 2023. Then we had Scrut Automation raising series A round, Myelin Foundry raised a round. Companies are raising capital in this environment at very healthy valuation multiples, and decent round sizes.
Are there certain start-ups and companies that genuinely want to be good but are unable to access funding?
There’s a herd mentality in the investor ecosystem. As you rightly pointed out, e-commerce, direct-to-consumer, edtech and fintech sectors were heavily funded and everyone is pumping in investments. There’s a fear-of-missing-out (FOMO) element prevailing. I would like to see start-ups that get you ambulances, that take you to hospitals in 15 minutes in India, rather than offering groceries in 15 minutes.
What’s the change now in terms of valuations?
The previous valuations were irrational. But the companies below series B, there is nothing to worry at all. If you look at the last two to three years, entrepreneurs would pitch and give you a week to decide, saying, “otherwise I’m going to get money from someone else”, and then close. That’s not the case now; entrepreneurs cannot dictate... we can take four, six or eight weeks to understand how the company is performing, the competition, market size, intellectual property, all of that. So the expectations are set right.
Start-ups say they are finding it difficult to raise bridge funding at a crucial stage of their journey.
The bridge funding is a problem for everyone — what I call ‘Valley of Death’. How do you cross the chasm? Say some angel or friends give an entrepreneur initial money for a product or a deep-tech product or for an agri-tech start-up. Now, we go in and put in a few millions as an investor. After that, they need another five to ten millions, that’s the missing gap. That’s getting addressed now.
You said the investment break-up is 80:20 between the US and India. What is hindering the growth of domestic funding and how can it be expanded?
This whole start-up asset class is the riskiest. Data tells you that with millions of start-ups and trillions of venture capital invested, only 10 per cent of the start-ups succeed. For the last 10 years, only 10 per cent of VC investments returned more than 10 times; 40 per cent of the VC investments returned less than 1X. You cannot ask everybody to put a lot of their money into this asset class. When a HNI [high net-worth individual] or a family office or a financial institution or a sovereign wealth fund is allocating capital, it will first allocate to low-risk, low-return option. Investments go up as a country’s GDP goes up, liked it happened in the case of the US.
What’s your approach to funding?
The firm was started seven years ago along with Ramesh Byrapaneni, Abhishek Srivastava, and Abhiram Katta. We are a thematic investor, identifying themes that others have not identified. A few examples are semiconductors, SaaS and Edge AI, where we invested quite early. We take risks. About 95 per cent of our investments are at a stage where risks are very high. There’s a team risk; there’s a product risk; and market risk. We are operator VCs. We roll up our sleeves and go to work with entrepreneurs. And we don’t tread a spray-pray approach. Our emphasis has been on product start-ups. Less of services or consumers, and it’s been more of B2B.
Has this approach helped you upturn the 90:10 ratio of start-up mortality?
Yes. There are two metrics that we have compiled. Normally it is what is called the graduation rate. What it means is, if you are invested in a pre-series A then they go to B-C-D. One step up. Industry has certain averages. We are two and a half times better than industry. What I mean is, in the industry average, only 35 per cent of start-ups move from Pre-Series A to Series A; and another 50 per cent go to the next level.. For us, 70-80 per cent of our start-ups go from Pre-Series A to Series A. Being a focused thematic investor, an operator VC, not only ensured a lot more capital for our companies, but also lower mortality. We still have failures. It’s part of life.