The Indian startup ecosystem has undergone a dynamic evolution over the past decade, with major changes reshaping the way private equity (PE) and venture capital (VC) firms plan their exits from startups.
Traditionally, Indian stock markets have been seen as places where large, established companies could list and raise capital. However, they now offer several opportunities for new-age startups to tap public funding and offer impressive exits for early backers and investors, such as angel investors and venture capital firms.
The surge in exit activity through public markets is a testament to this transformation, with exits taking shape in ways that have profound implications for Indian PE-VC strategies.
According to a Bain & Company report, despite the slowdown in dealmaking, 2023 emerged as a big year for Indian exits. The exit value increased by 15 percent to $29 billion, accompanied by an increase in exit volume from 210 to 340 exits.
Notably, public market sales (mainly block trades) accounted for half of the exits by value. By definition, block trades are large transactions executed outside the open market, usually between institutional investors.
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These trades are increasingly becoming a popular exit mechanism for novice investors. However, key players in the venture capital ecosystem point out that while large corporate acquisitions have historically dominated exits, MSME Initial Public Offers (IPOs) and full-fledged IPOs are now emerging as more attractive routes, especially for providing liquidity to startups.
Dhruv Dhanraj Bahl, founder and managing partner of Eternal Capital, emphasizes: “The era of mega-exits as a standalone option is coming to an end. This is now changing with the proliferation of MSME IPOs, the launch of the startup stock market and aggressive corporate mergers and acquisitions.” He notes that these new structures, including block deals, provide much-needed liquidity to the startup ecosystem, allowing investors can exit while bypassing the lengthy and costly public listing process.
Echoing this sentiment, Archana Jahagirdar, founder and managing partner of Rukam Capital, points out: “We have a whole new group of private investors who are now participating in the public markets, and they are much more flexible and agile as investors. We are trying to capture value which obviously needs to be unlocked before a company is inclined to go for an IPO.”
She explains that this shift is changing the narrative around exits for startups, as PE and VC firms look to leverage block trades to realize returns before taking companies public. Jitendra Kumar, MD of BIRAC, notes that India’s public markets are observing the new trends. have matured significantly, with a broader investor base and deeper liquidity.”
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“Strong domestic demand, the role of the digital economy, private investor participation and India’s strength in the global IPO markets are driving fast-growing startups to launch their IPOs in the Indian public markets,” said Manish Goel, Founder and company founder. Managing Director, Equentis, Wealth Advisory Services. VC players believe that to sustain this trend, there will need to be a continued evolution of market infrastructure and investor behavior.
Jahagirdar emphasizes that the key lies in the ‘depth and quality of the companies that become listed’. As the Indian startup ecosystem continues to grow, demand for new technologies and innovative business models will increase investor interest, venture capital funds said. Representatives from venture capital firms also suggest that the ecosystem could potentially see the emergence of newer ways to provide much-needed liquidity for startups. Appalla Saikiran, founder and CEO of SCOPE, adds that new exit models could emerge, such as direct listings, that bypass the traditional IPO process and allow startups to go public without raising new capital.
“Another promising model is the Special Purpose Acquisition Companies (SPACs), which are gaining popularity globally and could find a niche in India for startups with high growth potential,” Saikiran adds. Rajeev Kalambi, General Partner at Cactus Partners, emphasizes the nature of bulk transactions, explaining that non-IPO block and bulk transactions are still nascent and limited to very high-profile startups. He adds that these transactions are typically distributed by asset managers, private banking firms and investment banks. The mechanism is similar to traditional banking or brokerage processes.
“However, we are seeing green shoots in the emergence of secondary funds (which typically execute large trades where they buy out significant shares of investors on the cap table) and technology-based secondary platforms that perform a matchmaking exercise for investors looking for acquisitions. bite-sized chunks (usually from smaller minority investors, angels and ESOP holders looking for liquidity),” says Kalambi. In evidence of the market’s strength, Bain & Company’s report highlights that India’s public markets have outperformed those of most major economies, with significant increases in domestic investor participation, both private and institutional, across all sectors and companies.
