According to startup funding specialists, the backdrop of overall weak global economic confidence and growth-inflation concerns is more significant in the present dollar-rupee swing.
The rupee’s devaluation, which has fallen around 7% so far this calendar year, has had a negative influence on India’s inflation rate by making imports more expensive, but it is also affecting startup valuation and funding.
According to experts, the rupee’s decline, combined with other economic concerns, has harmed startup investment.
“A large majority of the VC (venture capital) funding in India is from funds that are denominated in the dollar, with funds evaluating their portfolio values and getting eventual returns from exits in the dollar,” Tarun Sharma, managing partner of India-focused mid-market growth fund MegaDelta Capital, said.
As a result, stock values have fallen sharply (particularly in the technology sector), with global capital sources becoming increasingly risk-averse.
This has resulted in lower public market values (which are typically used as benchmarks for VC/PE acquisitions as well as for determining the current worth of portfolios) and reduced capital allocations to developing economies,” he added. According to Sharma, the entire mix of risk aversion, lower public market multiples, and rupee depreciation leads in weaker capital flows into the venture capital space and lower valuations.
The rupee, which finished at 79.65 to the dollar, has dropped roughly 7% since January 2022, owing to outflows of foreign capital, rising crude oil prices, restrictive US monetary policy, and overall dollar strength.
This was exacerbated by global uncertainty caused by a geopolitical crisis caused by the Russia-Ukraine war.
Since October 2021, foreign portfolio investors have been net sellers, causing the rupee to fall considerably.
However, foreign portfolio investors (FPIs) have begun to pour money into the Indian market. According to Amit Ratanpal, founder and MD of venture capital company BLinC Invest, “What we need to look at is if there is enough liquidity for entrepreneurs to expand their businesses.
He stated that there is more than $6 billion in liquidity available for deployment, but that funders are “waiting on the fence until the entire market corrects.” In response to a question about the estimated erosion of startup valuation due to rupee depreciation, MegaDelta’s Sharma stated, “It’s difficult to say how much of the drop in funding is due solely to the rupee-dollar exchange rate, because a combination of factors (including economic sentiment and growth-inflation concerns) is causing a sharp drop in funding. “According to him, investors who made large investments last year now have portfolios that are either losing money or have seen huge markdowns.”
As a result, new investments are being delayed. Due to financial constraints, start-ups in India have been forced to lay off employees in order to save money.
This year, companies such as edtech unicorn start-up Byju’s, Vedantu, Unacademy, Ola, Trell, and Cars24, among others, have let off over 5,000 people in India.
According to Venture Intelligence statistics, only 3.5% of firms financing $100 million or more between January and June 2022 were profitable, compared to 29.2% the previous year. Global capitalists are now more concerned with profitability than with expansion.
Sequoia Capital, a leading venture capital firm, recently advised portfolio company owners that the age of being rewarded for hypergrowth at any cost is soon coming to an end, with investors gravitating toward firms that can demonstrate present profitability.