startup investors panic

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

“The devaluation of the rupee can impact (investors’) returns. The general market sentiment is poor, and hence rupee depreciation could have a more negative impact. Right now, there is a more controlled flow of funds outside India, and a lot of funds could see that side effect,” said Nagananda Doraswamy, CEO and managing partner of IdeaSpring Capital, a Bengaluru-based venture capital fund that is in its early stages. Told. B2B venture investment.

Foreign investors’ returns are impacted because they had invested at one point in time, another investment banker said, because the company is today low in dollar terms, even though it has grown. Hence, exiting the investment at current rupee levels would mean that the money they send back in dollars would be less.

Comparatively, for a domestic investor to achieve the same exit price, his internal rate of return (IRR) in rupee would be higher than the dollar IRR of foreign funds.

“It is not yet a systemic issue, but the hit could be to the extent of forex movement beyond the budgetary defense of the apparently 4-5% rupee-dollar movement. So, the impact can happen if investors have come long back and the rupee depreciation is more than 4-5%,” said the banker quoted above, who did not wish to be named.

Since January, the rupee has fallen over 9% against the dollar, hitting its lowest level at 81.9 on Thursday. The Finance Ministry recently cited RBI data to show that the rupee has depreciated continuously since 2018. The local unit has fallen from 69 in 2018 to over 71 levels by the end of 2019. It has fallen to 74.30 by the end of December 2021 and is near. 82 level now.

According to Doraswamy, small funds may face a major setback. He said that when the rupee was at 65-70 per dollar, many high net worth investors are sitting on low returns.

Alok Mittal, co-founder and CEO, Indifi Technologies, a fintech lending platform for micro, small and medium businesses (MSMEs), said, “Although long-term funds may remain unaffected, investors may be concerned about the future depreciation rate. and therefore, if the currency continues to decline over the long term, the return promise may see some moderation.” The capital coming from foreign funds would be slightly better now, he said.

However, investors are currently in wait and watch mode. Many experts believe that investors will wait for the rupee to stabilize before pledging more money.

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

Many VC firms have begun signing small checks for early-stage startups, at a time when growth-stage funding is losing steam.

“Overall, the investment community is also looking for uncertainty and then look at new investments or exits if the market is not volatile. They also don’t want to overexpose right now. Large rounds like Series D are also taking place at a discount, and hence, given the sentiment and uncertainty in the currency, overall trading will slow down,” said Doraswamy of IdeaSpring Capital.

Many PE and VC funds are finding it difficult to offload unlisted investments in the last few months of their life cycle, as the liquidity position is tight. Generally, the investment tenure of the fund is 3-10 years.

Capital markets regulator SEBI is considering an extension of another two years for the fund to hold its investments to sell at better valuations. The market is already seeing delays in initial public offerings by PE-and-VC-backed firms such as Pharmeasy, Mobikwik and Wellness Forever.