Higher capital inflows for Indian tech in 2025

2024 saw renewed confidence in India's tech ecosystem as many investors took a leap of faith. This momentum is expected to continue in the coming year

By Pankaj Naik

Published: Dec 30, 2024 09:19:33 AM IST

Updated: Dec 30, 2024 09:52:14 AM IST

Image: Shutterstock

As 2024 draws to a close, the tech ecosystem is breathing easier. The year has brought a lot of hope for investors and entrepreneurs alike. After the spate of IPOs in 2021, new-age companies witnessed significant volatility. However, talented founders swiftly learnt from their past experiences, focussed on execution and improved their communication with public investors. This, coupled with the overall public market buoyancy, led to the return of the IPO market this year, culminating in successful listings.

Private markets were not left far behind. Unlike 2023, when investors were hesitant despite abundant dry powder, 2024 saw renewed confidence, with most of them taking a leap of faith. We expect this momentum to continue into the new year, fuelled by several key reasons.

A clearer path to profitability: The quality of businesses has seen substantial improvement over the last two years. Operations are leaner, profitability is near, and even though growth is moderate, it is still much higher than in some traditional sectors. Companies are well on their path to profitable growth and eventual IPO listings.

Realistic valuations: The valuation gap between expectations and reality has come down, with more widespread acknowledgement of the 'new normal'. The need for early investors to seek DPIs (Distributions to Paid-In) is paving the way for lower valuations in secondary deals while keeping primary valuations closer to the last round of funding.

Abundant dry powder: Growth equity, private equity, sovereign and pension funds have been sitting on significant dry powder. They hoped to get "steal" deals in 2023, but companies and sellers demonstrated resilience by not selling "cheap" and holding on. Now, investors are under pressure to deploy at "fair" valuations rather than wait for a "bargain deal". We expect that capital availability will remain high for fairly priced deals in good assets.

Encouraging exit trends: Robust capital markets, successful IPOs, and active block trade trends have reassured private investors about their exit thesis. The rise of private secondary exits and the emergence of HNIs as a new investor class have further bolstered confidence in exit possibilities.

We see two key trends with respect to the capital-raising environment as we head into 2025.

Rise of secondaries: Secondary exits by early-round investors will continue to dominate private rounds, and the need for DPIs will remain strong. Large private secondary deals and IPOs with substantial offer-for-sale components will persist. Even though DPIs are important, secondary investors must conduct the exercise with close cooperation from the company and founders. Hence, we will see more structured processes for secondary exits with some combination of small primary investments. 2024 witnessed some good transactions via portfolio secondary offerings. The secondary baskets and continuation vehicles of VC/PE portfolios will become even more mainstream, though sellers have to adjust to discounts in GP-led secondary processes.

Road to IPO: Encouraged by the success of capital markets, more companies will start preparing for their public market journey, allowing many of them to get their house in order. As more tech companies get listed, scarcity premiums will likely come down. The "also ran" companies will fall prey to volatility and the brutality of public markets, especially those who cannot manage a predictable and sustainable financial performance. The companies will also realise that public market investors have no respect for their past private round valuations.

We are feeling quite enthusiastic about deal activity across sectors in 2025.

Consumer platforms and D2C: These companies will continue to attract capital. Even though larger incumbent consumer companies are witnessing a demand slowdown, the new-age ones are exhibiting good growth. We will see consolidation as incumbency and distribution prowess no longer guarantee market leadership in a few crowded D2C segments.

Fintech and gaming: Investors will monitor the regulatory environment for some time. Leading companies that emerge winners from this period will see high investor attention. Fintech SaaS and Fintech Infrastructure will continue to attract high interest.

SaaS: Companies struggling to cross the growth barrier will be forced to consider some consolidation. The new crop of SaaS companies is more capital efficient and hence will see good deal momentum in series B and C. Larger successful companies will see capital markets and secondary deals. Re-domiciling to India is a key trend in this sector.

B2B and logistics: These sectors will continue to see large player domination.

Edtech: Companies in the sector will rapidly evolve into hybrid models, attracting investor interest as people move on from the poster boy of disaster.

Overall, 2025 will be the year of significant deal momentum, both in private and public markets, and the churn of capital will be substantial as early investors take exits and new investors look to deploy substantial money in the ecosystem.

Pankaj Naik is managing director and co-head for digital & technology investment banking at Avendus Capital.