Startup Investors Get Jittery

According to industry experts, many private funds are dollar-denominated and stand to make losses if they sell at current levels.

“Rupee depreciation could impact the returns (of investors). The general market sentiment is bad, and so rupee depreciation can impact more negatively. Right now, there is a more controlled flow of money going outside of India, and a lot of funds could see that side effect," said Naganand Doraswamy, CEO and managing partner of Ideaspring Capital, a Bengaluru-based venture capital fund making early stage B2B enterprise investments.

Foreign investors’ returns take a hit since they invested at a time the rupee was stronger, another investment banker said, since the company is worth less today in dollar terms even if it has grown. Therefore, exiting investments at current rupee levels would mean the money they send back in terms of dollars will be lower.

Comparatively, for a domestic investor getting the same exit price, his internal rate of return (IRR) in rupees would be higher vis-à-vis the dollar IRR of foreign funds.

“It is not a systemic issue yet, but the hit could be obviously to the extent of the forex movement beyond the budgeted hedge of 4-5% rupee-dollar movement. So, the impact could be if the investors had come in much earlier and the rupee depreciation is higher than 4-5%," said the banker cited above, who did not want to be named.

Since January, the rupee has declined over 9% against the dollar, hitting its lowest at 81.9 on Thursday. The finance ministry recently cited RBI data showing the rupee has depreciated steadily since 2018. The local unit has dropped from 69 in 2018 to over 71 levels by the end of 2019. It dipped further to 74.30 by the end of December 2021 and is near the 82 level now.

According to Doraswamy, smaller funds could take a bigger hit. Many high net worth investors who invested when the rupee was at 65-70 per dollar are sitting on lower returns, he added.

Alok Mittal, co-founder and CEO of Indifi Technologies, a fintech lending platform for micro, small and medium businesses (MSMEs), said, “While long-term funds may remain unperturbed, investors may be worried about the future rate of depreciation, and hence, the return promise could see some moderation if the currency continues to decline over a longer period." Inbound capital from foreign funds would be marginally better off right now, he added.

However, investors are in a wait-and-watch mode at present. Many experts believe investors will wait for the rupee to stabilize before pledging more money.

A recent Grant Thornton report said India Inc. recorded a 41.6% decline in deals at $25.1 billion in PE and VC investments in the first six months of 2022, compared to $43 billion a year earlier.

Many VC firms have also started signing smaller cheques for early-stage startups at a time growth-stage funding is losing steam.

“Overall, the investment community is also looking for the uncertainty to go and then look at newer investments or exits once the market is not as volatile. They also do not want to over-expose right now. Larger rounds such as Series D are also happening at a discount, and hence, overall transactions will be slower given the sentiments and uncertainty in the currency," said Ideaspring Capital’s Doraswamy.

Several PE and VC funds in the last few months of their life cycle are also finding it hard to offload unlisted investments, with liquidity conditions tightening. Typically, funds have an investment tenure of 3-10 years.

Capital markets regulator Sebi is considering extending by another two years for funds to hold on to their investments to sell at better valuations. The market is already seeing delays in initial public offerings of PE-and-VC-backed firms such as Pharmeasy, Mobikwik and Wellness Forever, among others.