The Indian startup ecosystem has undergone a dynamic evolution over the past decade, with major changes reshaping how private equity (PE) and venture capital (VC) firms strategise their exits from startups.
Traditionally, Indian stock markets were perceived as places for large, established companies to list and raise capital. However, they are now offering diverse opportunities for new-age startups to tap into public funding and provide impressive exits for early backers and investors, such as angel investors and venture capital firms.
The surge in exit activity via the public markets is a testament to this transformation, shaping exits 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 marquee year for Indian exits. Exit value soared by 15 per cent to $29 billion, accompanied by a rise in exit volume from 210 to 340 exits.
Notably, public market sales (primarily block trades) comprised half of exits by value. Block trades, by definition, are large transactions executed outside the open market, typically between institutional investors.
These transactions are increasingly becoming a popular exit mechanism for early-stage investors. However, the major players in the VC ecosystem point out that, although large corporate buyouts have historically dominated exits, MSME Initial Public Offerings (IPOs) and full-fledged IPOs are now emerging as more attractive routes, particularly for providing liquidity to startups.
Dhruv Dhanraj Bahl, Founder and Managing Partner of Eternal Capital, highlights, “The age 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 exchange, and aggressive corporate M&As.” He notes that these new structures, including block deals, are providing much-needed liquidity to the startup ecosystem, allowing investors to exit while bypassing the prolonged and costly process of public listings.
Echoing this sentiment, Archana Jahagirdar, Founder and Managing Partner of Rukam Capital, points out, “We have a whole new set of retail investors who are now participating in the public markets, and they are far more flexible and nimbler as investors. They’re trying to find value, which, of course, exists to unlock before a company tends 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.Observing the new trends, Jitendra Kumar, MD of BIRAC, notes, “India’s public markets have matured significantly, with a broader investor base and deeper liquidity.”
“Strong domestic demand, the role of the digital economy, participation by retail investors, and India’s strength in the global IPO markets are driving high-growth start-ups to launch their IPOs in the Indian public markets,” stated Manish Goel, Founder and Managing Director, Equentis, Wealth Advisory Services. VC players believe that to sustain this trend, there needs to be a continued evolution of market infrastructure and investor behaviour.
Jahagirdar emphasises that the key lies in the “depth and quality of the companies that get listed.” As India’s startup ecosystem continues to grow, the demand for new technologies and innovative business models will drive investor interest, according to VCs. Representatives of VC firms also suggest that the ecosystem could potentially see the emergence of newer ways to provide the much-needed liquidity for startups. Appalla Saikiran, Founder and CEO of SCOPE, adds that new exit models could emerge, such as direct listings, which bypass the traditional IPO process and allow startups to go public without raising fresh capital.
“Another promising model is Special Purpose Acquisition Companies (SPACs), which are gaining traction globally and could find a niche in India for startups with high growth potential,” Saikiran adds. Highlighting the nature of bulk trades, Rajeev Kalambi, General Partner at Cactus Partners, explains that non-IPO block and bulk trades are still nascent and are restricted to very high-profile startups. He adds that these trades are typically distributed by wealth management firms, private banking firms, and investment banks. The mechanism is similar to traditional banking or broking processes.
“However, we see green shoots in the emergence of secondary funds (which typically do large-ticket transactions where they buy out sizeable stakes of investors on the cap table) and tech-enabled secondary platforms that conduct a matchmaking exercise for investors looking to acquire bite-sized chunks (typically from smaller minority investors, angels, and ESOP holders seeking liquidity),” Kalambi states. In a testament to the strength of the market, Bain & Company’s report highlights that Indian public markets have outperformed those of most major economies, with a significant increase in domestic investor participation, both retail and institutional, across sectors and companies.
