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Homegrown financial services company Avendus, which invests in the Indian startup ecosystem through the Avendus Future Leaders Fund, expects to maintain the deal momentum despite a challenging environment.

“We do about 4-5 deals a year and hope to do the same number this year also,” Ritesh Chandra, Managing Partner, Avendus Future Leaders Fund tells YourStory.

Established in 2019, Avendus Future Leaders Fund likens itself to a private strategies fund as it invests in the later stages of its portfolio startups and partners with other private equity players.

Avendus Future Leaders Fund I raised Rs 375 crore. The firm aims to secure Rs 1,500 crore from the second fund—Avendus Future Leaders Fund II— which, in 2021, saw its first close at Rs 584 crore.

The fund will focus primarily on four sectors: consumption, financial services, healthcare and technology, But it will avoid tying itself to a single segment, Chandra says.

It has so far backed 14 startups including ecommerce platform FirstCry, finance services provider Veritas Finance, life sciences company Indegene, logistics service providers Xpressbees and Delhivery, and fintech startup Juspay.

Chandra says the fund has already deployed around 76% of the capital it has raised so far and the complete deployment is likely by the middle of this year.

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Among its portfolio companies, it has fully exited Delhivery and Bikaji Foods, with a partial exit in Ujjivan.

Navigating a slowdown

India’s startup ecosystem is seeing some challenging times: the year 2023 saw more than 50% drop in total funding compared to 2022. Despite this, Chandra believes India has several startups with sound business fundamentals.

He further notes that several startups in India have built considerable depth in their businesses and this has created a strategic moat, meaning new entrants will likely struggle to compete with them. At the same time, the spending power of these startups’ customers is expected to increase.

Also, 2024 is probably the year when startups will start raising capital again. According to Chandra, capital raised during the boom of 2021 provided a cushion for companies for the last two years. Additionally, investors have considerable dry powder to deploy in the right businesses.

Startups have also made plans for a public market foray—top examples being Ola Electric, FirstCry, Unicommerce, and Mobikwik. The expectation is that this would set the ball rolling regarding money re-entering the ecosystem.

A great filter

Not all startups, however, will raise capital, Chandra warns.

In essence, startups that operate a strong business model will continue to command a premium in their valuation. “Those who have demonstrated their chops will not have a problem raising capital,” asserts Chandra.

At the same time, another set of startups will probably raise capital at a lowered valuation and lastly, the third group may find it very difficult to raise the required investment.

The present environment has also nudged investors to focus on how their portfolio companies run.

“There is massive questioning around execution and investors are being more discerning,” says Chandra. In addition, there is also a focus on governance standards at these startups.

Execution is a priority now and investors are keeping a close watch on companies with positive unit economics who judiciously use the cash to grow the business.

Chandra says the growth stage of funding is seeing high activity but not late stage. “The valuations have come to a reasonable level and those days of irrational exuberance are gone,” he remarks.

The tides are shifting in the Indian startup ecosystems, with capital likely to flow in soon. However, investors are being cautious and public markets will begin playing a prominent role in shaping the ecosystem soon.

“The public market is receptive to them (startups) and if they can price it right. There is no dearth of capital,” says Chandra.

Avendus Group was founded in 1999 by Ranu Vohra, Gaurav Deepak, and Kushal Aggarwal. The firm provides financial services in investment banking, wealth management, credit solutions, and asset management. It has offices across 10 cities around the world, including India, Singapore, the US, and the UK.