• Founders are leveraging Alibaba, 9Unicorns track records for USD 120m fundraise
• Conditions in India are becoming more investor-friendly as valuations moderate
• GP is targeting consumer, healthcare, software start-ups with strong product-market fit

VC investor Promaft Partners wants to add more global LPs to its current investor base of Indian family offices and founders, but Raghav Bahl, one of two founding general partners, admits that reaching the Fund I target of INR 10bn (USD 120m) is not straightforward in the current environment.

“It’s a tough market for fundraising. However, I would always choose an easier deployment period and a harder fundraise than the other way around,” said Bahl, a former head of India and Southeast Asia investments for China’s Alibaba Group [NYSE:BABA], who established Promaft with Soham Avlani, previously a partner at 9Unicorns.

“And this is a fantastic vintage to invest. Back in 2021, burn rates were so high, any cash you put into a company didn’t last long and valuations were crazy. This came to a screeching halt as interest rates went up. Today, the amount of capital going into India’s private markets is below 2017 levels. Valuations have gone down. Business models are more prudent and capital efficient.”

Bahl believes the “markets have been kinder to us on a relative basis” because of the approximately USD 1bn in proceeds he and Avlani have generated from previous investments. For Bahl, much of the harvesting happened during the boom period circa 2021 as Alibaba began to pare its portfolio of minority equity positions in Indian start-ups.

Paytm [NSE:PAYTM] went public, enabling the tech giant to execute block trades, BigBasket was acquired by Tata Group, and there was a partial exit from Xpressbees. “While some investors were doing a deal a day, I decided to take money off the table,” he explained.

Up rounds have gradually been replaced by flat rounds, down rounds, and wipeouts – and that is before some of the most well-capitalised start-ups, that so far haven’t needed new capital, return to market. Growth capital investment in India’s technology sector peaked at USD 23.6bn in 2021 and then collapsed to USD 11.8bn in 2022 and USD 4.4bn in 2023, according to AVCJ Research.

Early-stage deals followed a similar trajectory: from USD 12bn to USD 8.3bn to USD 2.9bn. The market appears to have levelled out, with USD 2.2bn put to work so far this year, but sentiment is a fraction of what it was. Bahl noted that Series A rounds used to come in at USD 20m-USD 30m. Now, company valuations are in the USD 20m range for companies at the same stage.

Promaft – which was established six months ago and has yet to achieve a first close on its debut fund – will operate in the Series A and B space, although the founders are reluctant to adopt such labelling. The emphasis, suggested by the firm’s name, is on identifying start-ups with a strong product-market fit. Sensible entry valuations and sustainable competitive advantage are the other key considerations.

The plan is to build a concentrated portfolio of 10-12 investments to maximise time spent with management teams. “I call myself a venture capitalist but in the last 12 years I’ve only made nine investments,” Bahl observed wryly.

While Promaft is sector-agnostic, it expects to be most active in consumer, healthcare, and software. The firm’s outlook is guided by several overarching themes, such as the role of technology in preventative healthcare, expanding India’s circular economy – distributing used consumer electronics in lower-tier cities – and emerging consumers in those lower-tier cities.

“People are coming online in these cities because of cheap handsets and cheap data. Their preferences, given their income levels, education levels, and language levels, will be different. How are they looking for jobs? It won’t be LinkedIn. How will they look for education? They don’t want to do an AI [artificial intelligence] course. They want to learn English because that drives their economic status,” said Bahl.

Consumption patterns – across commerce, content, and logistics – are not the only difference between lower-tier and first-tier cities in India. According to Avlani, entrepreneurs are more conditioned towards building profitable, scalable businesses, using their parents as guiding lights rather than the scale-at-any-cost mentality prevalent in tier-one cities at the height of the boom.

Promaft’s value proposition, in this context, is helping them navigate the pain points that come with accelerated growth. “Companies in India don’t always understand the strategic, operational and financial challenges their counterparts in China, Southeast Asia, and Europe experienced. Given our global expertise, we could bring this to them,” Bahl added.

Founders of companies previously backed by Bahl and Avlani who are participating as LPs in Fund I will support these efforts. They sit alongside family offices that Promaft has found to be increasingly knowledgeable about private equity and comfortable committing to the asset class.

“We’ve not tapped into any global sources of capital to date; we have relied on Indian family offices,” said Avlani. “But most of the capital is still long-term patient capital. They understand the risk-reward of venture. Often, you find the second generation has gone abroad and got some experience of alternatives, and now they are diversifying beyond equities, real estate, and gold.”