Winter doesn’t come to early-stage deals: This fund backed 26 start-ups in the first half of 2022
Global venture capital (VC) funding into start-ups hit two-year low in August 2022, says Crunchbase The data. The pace of new unicorns has slowed down. Transactions take longer to complete. Many companies are even preparing for downward rounds. It’s what they call a “funding winter”.
But that’s the VC side of things. The other side could still look up. Ask any debt fund manager or alternative investment fund (AIF) and they’ll tell you that a winter might not be so bad. It is, in fact, “healthy for the ecosystem” because the errors of the funding highs are corrected.
Ashvin Chadha, founding partner of Anicut Capital, recounts business today“Some of the biggest venture capital funds are slowing down now. The focus is on compliance, on getting the house in order. Everyone’s wallet is hurting because what they’ve been doing the year last one does not look so good this year. There is a correction among funds as well as in start-ups.
Anicut Capital, which offers a combination of structured credit, acquisition finance and seed capital to start-ups, has backed more than 26 companies in the first half of this year. So it doesn’t look like winter for the seven-year-old cross-platform asset management fund.
Alternative funds are catching up
Ashvin clarifies: “Foreign investors have effectively closed up shop in India. We are very aggressive with early stage check sizes. We see the best founders and the best deals available to us because so many [venture] the guys backed off and went back to the drawing board. At first we see no winter at all.
“I also see a lot of private equity (PE) funds doing controlled transactions. Mid-market private equity buyouts have started again, something that hadn’t happened in many years,” he says.
Chennai-based Anicut Capital has so far raised two funds on the private debt and credit side – Fund I had a corpus of Rs 400 Cr and Fund II had Rs 875 Cr. It plans to launch its third loan fund later this year and has filed paperwork with SEBI. Fund III is expected to have a corpus of Rs 1,200 to 1,500 Cr and could close by mid-2023.
On the equity side, it runs an angel fund for early-stage start-ups and a new Rs 500 crore opportunity fund to invest in growth-stage/Series A companies. the latter are graduates of Anicut’s first fund. Over the past three years, these funds have deployed Rs 250 crore and developed a network of over 700 investors.
Ashvin shares, “We have managed over Rs 2,000 crore of AUM in seven years. And we did it without a distributor or wealth manager. Because then it becomes expensive capital. We started with private credit, then we got into the early stages, and now we’ve moved to Series A/B. »
A few bargains make a fund
Some of its star bets include ShareChat, SUGAR Cosmetics, Wow! Momo, Bira, LendingKart, Earth Rhythm (where Nykaa recently acquired a stake), Neeman’s (in which Sixth Sense Ventures led a Series A), Box8, and more.
In ShareChat, it is interesting to note that Anicut Capital arrived as a late investor in mid-2020. “One of their existing investors invited us to join an internal round after TikTok [ShareChat peer] got banned. We’ve only been in the business for two years, but on paper we’re sitting on a 5X return,” Ashvin reveals.
Anicut had also led the first round of debt financing in the main D2C SUGAR Cosmetics in 2017-18. Subsequently, it converted certain warrants into shares. “We are shareholders of SUGAR through our first fund. It has been phenomenal for us and has grown 7.5 times in three years,” says Ashvin.
Another of its portfolio companies, Wow! Momo (also backed by Tiger Global), raised Rs 40 crore debt capital from Anicut at the end of 2020. And that’s all it takes – ‘a few bargains’ – to build a fund, the company believes. ‘company.
Ashvin says, “In each fund, you need 2-3 bargains, and that’s it. Not every deal will be a home run. We are reassured that we will lose some business, that people will outbid us and go faster than us. We know that it is not possible for us to do all the good business. Due to our debt pedigree, we are the Rahul Dravid of investing where singles and twos are enough for us. Over time we will have a bad ball and we will hit a six.
Future bets and funding climate
So where does Anicut Capital look next for its next bargain?
Anything sustainable — electric vehicles, mobility, climate tech — is getting a lot of action right now, the company says. “We are also seeing a lot of interest in B2B SaaS businesses that are being built in India for the world,” Ashvin reveals. “The mindset of investors has changed over the past year. Today, they want to see high growth margins and EBITDA profitability. You can create these things faster in B2B sectors than in mainstream businesses. »
As equity has dried up over 12-15 months, subprime debt has obviously grown in popularity. But it’s not without its challenges either.
Ashvin says, “I always tell founders that debt comes with a lot of strings attached. You may work 8-10 hours a day, but your interest meter is running 24 hours a day. That said, profitable businesses will always want to take on debt rather than equity.
Will equity financing then return to its exuberant pandemic highs of 2020-2021? If so, when is winter likely to end?
“Hopefully it doesn’t come back anytime soon because we end up making more mistakes in this kind of buzz,” Ashvin says.
He adds: “Guys who were poorly rated last year are now struggling to raise funds. Which is good because the system requires cleaning.
Also read: Anicut Capital Marks First Close of Rs 500 cr Opportunity Fund
Also Read: Wheelocity Raises $12M in Funding Led by Lightspeed, Anicut Capital