“Returns on capital in India have sucked historically.” That’s how Tiger Global partner Scott Schleifer characterised the India experience for the hedge fund giant back in February. It may sound harsh, but that’s something a lot of Indian VC firms came to terms with, in 2023. 

There’s little doubt that 2023 has been one of the toughest years for Indian startup VCs and the investor ecosystem. The past 12 months have seen partner exits, venture capital firms pulling out of India, rebranding and separation of VC structures and new fund managers coming into the picture. 

If 2022 saw startups go through instability, then 2023 was all about churn in the investor ecosystem. Sequoia Capital India’s rebranding to Peak XV Partners and separation from the US entity was the biggest story in the first half, overshadowed by the exit of Omidyar Network from India. 

Between these two big developments, a slew of partner-level departures at the likes of Orios Venture Partners, Venture Highway, Lightbox, Rebright, Lightrock India and Together Fund made it a tough year for VCs in general. 

The slowdown in investments in the past nearly 24 months and the troubles in various portfolio companies — ranging from corporate governance issues to revenue slowdown — have together created a perfect storm for VCs and fund managers. 

The headwinds have not impacted India operations alone. Sequoia US partner Michael Moritz quit the firm in July this year after 38 years, and Prosus & Naspers CEO Bob Van Dijk also stepped down from the investment major. 

And where there are departures, there are also new partners and fund managers taking over. Marquee firms such as Peak XV, Fireside Ventures, Venture Highway, Matrix Partners and Blume Ventures are some of the VC firms that named new managing directors and partners this past year. 

These new fund managers not only have to turn around the India investment story but also lead their firms into 2024 where many expect the volatile market conditions to stabilise. 

But before we get to the outlook for the next year, it’s important to look back at 2023 and understand what makes it the year of VC rejigs. 

Churn At Indian VCs In 2023

Perhaps the most noticeable trend among VC firms this year has been a slew of partner exits for reasons ranging from increasing pressure from limited partners, governance issues in portfolios, revenue and business slowdown as well as internal tensions between partners and fund managers. 

Kushal Agrawal, partner and CFO of Lightrock India resigned, marking the latest departure in a series of exits at the firm. The primary reason for Agrawal’s departure reportedly stems from internal differences regarding the operational direction of the fund.

Most recently, SoftBank India saw significant exit as India operating partner Vikas Agnihotri exited the firm. Agnihotri’s exit comes after SoftBank sold a stake in PB Fintech and Zomato, completely exiting the latter.

This is also the reason cited for the break-up at the top of Lightbox, one of the most active venture capital firms in the country. Partners Siddharth Talwar, Prashant Mehta and Jeremy Wenokur are leaving the Mumbai-based VC. 

Lightbox cofounders Talwar and Sandeep Murthy are likely to separate the fund’s portfolio and part ways due to differing views on what strategies the firm should pursue. The departing trio is looking to set up a separate fund comprising some Lightbox portfolio companies.

In the case of Orios VP, another Mumbai-based VC firm, Rajeev Suri and Anup Jain stepped away. Reports claimed the duo were unhappy with the carry-sharing arrangements. 

Both Orios and Lightbox have seen key investments falter due to market changes and competitive dynamics. 

Orios wrote off its investment in GoMechanic after the company’s well-documented revenue misreported problem. Pharmeasy, another Orios portfolio company, has seen a major devaluation in the past year and has struggled to raise new funds.

Lightbox is dealing with problems at Dunzo, one of its earliest bets. Dunzo is caught in a severe cash crunch and is unable to pay salaries to employees or vendors. Once a hyperlocal sensation, Dunzo is now looking at a bleak and uncertain future.

“Investors didn’t realise the amount of risk and liability that they are subject to because they trusted a lot of founders. And in most cases, founders were not aware and perhaps not as competent as they needed to be,” Prime Venture Partners’ managing partner Sanjay Swamy told Inc42 in July.

LP Pressure Grows On Existing Funds

The split at Orios exposed one hidden facet of the VC game. While on paper, many fund managers may be partners, their share of the carry (profits from investments) and the performance bonuses vary.

Founding partners get the bulk of the carry, while managing partners and other partners get a smaller share. Discord between these two classes of decision makers can directly increase the risk profile of the firm for any limited partner.

As we have written in the past, many limited partners were unhappy with a slew of portfolio problems at many of the biggest VC firms in India. 

LPs typically evaluate the overall fund performance, so partners whose investments have not worked out can potentially hide behind managers and partners who have led the more profitable investments. 

Another facet exposed by the problems at VC firms is the influence of limited partners (typically larger institutional investors and high net-worth individuals). The LP-fund manager relationship goes both ways. 

When raising funds, partners are more likely to approach LPs who have backed them in the past. In other cases, LPs want partners to break away and start new funds that fit the current market thesis better. 

LP pressure has increased in the past year or so as new areas of focus have emerged. The emergence of generative AI and other next-gen segments has compelled many LPs to look at funds and firms that have built their thesis around these areas. Some VC partners have completely stepped away from investing.

Brij Singh Bhasin, general partner at the early-stage venture capital firm Rebright Partners, stepped down to launch Snow Mountain AI, a generative AI-focussed startup. And if experienced VCs are not immune to the allure of new opportunities that emerged in 2023, can LPs be far behind?

“Increasingly, the startup LP network has started to recognise that emerging fund managers are some of the biggest value creators in the market,” Ankur Pahwa, founder and managing partner of PeerCapital, told Inc42 earlier this year, pointing to how many early-stage VC funds have come up in the past year.

He added that LPs want to see fund managers with very clear guardrails in terms of their stage and sector focus. No longer are limited partners swayed by momentum or opportunistic investing, which was the case in 2021 when startup funding peaked. After that peak, LPs have rationalised their expectations and streamlined their focus on VC funds as an asset class. 

New Leaders Take The Helm

If partners left firms in pursuit of new opportunities, in other cases, VC firms rejigged their leadership to fortify themselves for the new market realities. 

Several seasoned executives were promoted to partner and cofounder roles at firms such as Peak XV, Fireside Ventures, Matrix Partners and others. 

Early stage consumer-focussed Fireside Venture promoted partners Kannan Sitaram, Vinay Singh, and Dipanjan Basu to cofounder positions, while Matrix Partners India elevated principals Aakash Kumar, Pranay Desai, and Sudipto Sannigrahi to the role of MDs. 

Soon after Sequoia Capital India’s rebranding to Peak XV Partners and separation from the US firm, the firm promoted Rohit Agarwal to the position of managing director. 

Priya Mohan took over from Venture Highway founder Samir Sood and was named as the managing partner. Venture Highway is currently raising its third fund, which is being led by Mohan and cofounder Neeraj Arora.

Most recently, Orios Venture Partners appointed Sukhmani Bedi as a partner after the departure of Suri and Jain. Bedi, a three-time startup founder, has been with the firm since March 2022 and was formerly handling portfolio management at Orios. 

The Need To Evolve: VC Outlook For 2024

It is not just VC firms that are rejigging their leadership. Even private equity firms such as TVS Capital Funds prepared themselves for the new realities of the market. The Chennai-based firm appointed Naveen Unni, a former McKinsey & Co exec, as the managing partner.  

Unni’s appointment coincides with the fact that TVS is preparing to see many of its bets mature into exits by mid to late 2024. Ola Electric has filed its pre-IPO prospectus, while another TVS portfolio company Digit Insurance is also on course for a public listing in 2024. 

In an interview with Inc42 earlier this year, TVS Capital’s Gopal Srinivasan mentioned how the firm’s core focus areas have evolved over the years. He hinted at the fact that other firms also need to grow and mature with the market. 

“Everything that’s happening in India, from the public digital infrastructure to regulatory push from the RBI and IRDAI is enabling digital businesses. When people are not afraid to go digital for financial services, it creates a huge market for businesses. And, of course, urbanisation in many parts of India is creating a lot of new behaviours,” Srinivasan said at the time. 

Despite the challenges of the past year and in light of the somewhat negative sentiment of firms such as Tiger Global, there is a streak of optimism too. Many fund managers and partners have told us throughout the year that these pains are temporary. 

For instance, Surya Mantha, managing partner at Capria Ventures (formerly Unitus Ventures), believes that the momentum is with India when you look at the global macroeconomic factors affecting China and the US. 

“Several factors underpin our view that India is ready to step up: the young population, the digital public infrastructure that not only enables hundreds of millions to participate in the country’s economic life but also enables business innovation, a large and growing consumer economy as well as relatively stable macroeconomic conditions,” Mantha told Inc42 in June this year.

This view is echoed by the likes of Bejul Somaia, partner at Lightspeed Ventures, who tweeted that the India story is just beginning, as well as Naganand Doraswamy, managing partner and founder of Ideaspring Capital. 

Even though Doraswamy agreed that historic returns have not been great, he believes this is a very early stage in the India story to be counting the chickens. 

[With inputs from Nikhil Subramaniam]