'There is a lot of gunpowder left in the early stage'

Been around for 14 years, Nexus has interests in varied sectors like SaaS, Climate, Healthcare and Consumer Internet

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With the macro-environment deteriorating substantially, there definitely seems to be tougher days ahead for companies looking to raise capital. "The deterioration is very much evident across the public markets, private markets, debt markets and capital market system. In the backdrop of this, it will be tougher and more challenging for companies lacking a business model to get lofty valuations or next round of financing," says Sameer Brij Verma, MD, Nexus Venture Partners.

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However, Verma thinks that there is a lot of gunpowder left in the early stage as they have a 10-12 year cycle with a different timelines so one can continue to invest. "So, I see seed and Series A velocity to continue. But overall I see volumes coming down by 30 percent or so. But in the growth, early growth companies, I definitely see the environment getting tougher and tougher. I feel this market will continue for at least the next 2-3 quarters until there's overall macro stability, supply chain restoration and inflation getting under control," says Verma.

But players seem to be very quiet this time after a lot of frothiness in the last two years, and external capital making way into the country. "That leaves us with funds who are committed to the Indian market and I don't see that activity stopping. As a result of a lesser number of players in some cases, I do see some bit of correction on the early stage venture side. I do see valuations coming down by 20-25%. But the madness was never on the early seed or early stage side. Entrepreneurs are now a lot more realistic about the market and their expectations," adds Verma.

Given the backdrop over the last two and half years, it is very clear that a lot of companies raised a lot of capital. And a lot of our portfolio companies are very well-capitalised for 24-30 months. In some cases, even more. Broadly too many company are well-capitalised. And because of liquidity last year, a lot of them are recalibrating their plans and focusing on core businesses, trying to cut off extensions. Even those companies that have capital for 6 years in the bank are rationalising the cost due to overall macro environment. "This is an opportunity to go back to basics. We are also telling our companies to be rational about stuff and realistic about the market and valuations, control the expenses and build a profitable business. It could also be possible that things may not be good for next 2-3 years so all of them are making sure that they are well-capitalised. This market cannot continue permanently. The companies which emerge stronger from here will definitely emerge as market leader and come out on other sides as winners. We are telling our companies to control burn, rationalise expenses," says Verma.

The 14-year growth cycle witnessed a lot of cheap capital chasing growth and market leadership in new companies in respective domains. But given the cost of capital has increased, with Fed tightening and overall tightening across the central banks, Verma sees things rationalizing and investors focused on companies that are well-capitalised and ready to let go of the growth and focus on profitability.

"We do have substantial portfolios at different stages, and these companies will go public. But the public markets are unforgiving on loss-making businesses. So they need to have a very strong case of solid growth plus profitability. That's the eventual exit in most of the cases. The good thing is we have started to see exits through IPO routes in India and the US," says Verma.

Founded in 2006, Nexus plans to focus on sectors like Saas, Climate, Healthcare and Consumer Internet going forward. "We have been around for 14 years and mostly make investments in 8-10 companies every year. So far this year, we have made 4-5 deals already and will likely have 5-6 more," says Verma.

Factsheet

Companies:110+

Unicorns: 14

Sectors: Consumer, Enterprise, Open Source, Web 3, Healthcare, Education