Startup founders have learnt to prioritise fundamentals over growth, says Good Capital’s Rohan Malhotra

Amidst a challenging two-year period, Good Capital, a seed-stage India-focused VC fund, has observed a significant pivot toward prioritising 'sound business fundamentals over the pursuit of growth at any cost.'

According to Rohan Malhotra, Managing Partner of Good Capital, this shift is not merely a reaction to the economic climate but also a recognition of the enduring viability of ventures. Consequently, the firm finds itself presented with increased opportunities to invest in companies boasting robust business models and clearer paths to profitability.

Having been an early investor in unicorns like Meesho and LEAD School, Good Capital recently unveiled a $50 million fund dedicated to early-stage startups. With a diverse portfolio of over 30 startups, including simsim, Orange Health, Entri, and Wealthy, the firm manages a total capital of $100 million across three funds and has reported 8 successful exits.

In an exclusive conversation with Rohan Malhotra, Managing Partner of Good Capital, we delve into the nuances of their investment philosophy and outlook for 2024.

: In the transition from the apprehensions of a funding winter in 2022 to the survival challenges witnessed last year, the funding landscape for Indian startups took a notable hit, reaching a five-year low in 2023. With a staggering 65% drop to approximately $8.5 billion from the $25 billion recorded in 2022, as per Tracxn data, Q3 of 2023 marked the worst quarter in five years. Despite this, the past two years have seen an unprecedented accumulation of dry powder, with a record $20 billion in new India-dedicated funds and an additional $40 billion expected to be allocated by global private equity and venture capital investors to Indian startups. Many home-grown VCs have also witnessed substantial growth in fund sizes. Against this backdrop, and considering the contrasting scenarios, how would you evaluate the funding environment for venture capital investors?

Rohan Malhotra, Good Capital: 2023 has been a tough year for fundraising for both startups and funds. The data you mention is essentially for funds that are 2021/2022 vintages and even some of them have not been able to hit their target corpus. Top-tier funds with global brand names run a well-oiled machine for fundraising, but further downstream, even marquee crossover funds have seen their sets of issues with both redemptions and fundraising. Home-grown funds could have grown dramatically had things been on a larger upswing, but most Family Offices and allocators in India have considerable exposure into the asset class across several managers and are now waiting on liquidity.

While there is global capital available and it is evident that India is the most exciting place in the world to invest, there has been a lot of fence-sitting in terms of committing to India, primarily due to some of the recent implosions. Most allocators are happy to wait and watch. A lot of managers are at a crossroads where they have tapped out their prior LPs (who are waiting on liquidity to redeploy) and are forced to look to raise in other markets but may not be large or mature enough to raise from E&Fs yet.

Q: How do you foresee the landscape unfolding for startups and investors in 2024? When can we expect clarity, and what notable developments are on the horizon?

Rohan Malhotra, Good Capital: While India’s public markets have held strong, there’s some amount of uncertainty as to when liquidity events will happen for a lot of unicorns. Given high-interest rates and macro uncertainty, the venture landscape is going through a global shake-up. Thankfully, lots of funds in India are well capitalised and there’s no shortage of exceptional talent or capital in the country. In terms of clarity, I expect some amount of normality creeping in post-election. A sense of further stability will give global institutions more comfort and confidence in India.

Rohan Malhotra, Good Capital

In terms of notable developments, in the last year, we witnessed how the economic downturn has given rise to a breed of entrepreneurs who embody unparalleled resilience. This has fuelled our excitement as investors as we see a steady stream of exceptional deals flowing through our pipeline. One of the most striking aspects of this trend is the newfound emphasis on sound business fundamentals over the pursuit of growth at any cost. Founders are recognizing the value of building a solid foundation rooted in sustainable practices and strong business practices. This shift in mindset is not only a response to the economic climate but also an acknowledgement of the long-term viability of their ventures. As a result, we are increasingly presented with opportunities to invest in companies with robust business models and clearer paths to profitability.

Global sentiment has certainly made investors more judicious with their capital. Entrepreneurial teams of senior operators from unicorns and successful businesses who would’ve been able to raise money with just a pitch deck during 2021-2022 are now hunkering down for a longer fundraising period. There is also greater pressure on these teams to construct reasonable deal terms and display a clear plan for the use of funds. With investors at Series A becoming more stringent with their requirements (and capital!) for what constitutes a business with traction, there is an even greater pool for us to evaluate at the pre-seed and seed stages and deploy at the right entry prices.

Rohan Malhotra, Good Capital

We continue analysing the exciting opportunities that we are seeing from our expansive sourcing networks and evaluating the proximity of the founder(s) to the problem. By identifying founders who demonstrate a deep understanding of their market, exhibit strong leadership skills, and prioritize sustainable growth, we are confident in our ability to cultivate successful ventures that can withstand these short-term fluctuations in the market.

Q: Could you provide insights into your current fund size and shed light on the strategic areas where you are allocating capital?"

Rohan Malhotra, Good Capital: We are at $100 million in AUM and recently launched a $50 million fund focused on early-stage startups. We aim to invest up to $1.5 million per startup and prefer leading every pre-seed or seed transaction that we invest in.

Our core areas remain Bharat-focused opportunities, solving real problems in underserved markets. Since we don’t have a top-down approach to investing, we don’t have any one sector that we focus on more than the other and are instead looking to partner with founders who approach problems from unexpected angles. We look for unconventional business models that challenge assumptions and see possibilities where others see limitations.

Q: Which startups and sectors are grabbing your attention in 2024? We'd love to hear your insights on emerging trends and potential disruptors.

Rohan Malhotra, Good Capital: We don’t have a top-down view of specific sectors or companies. Our philosophy is to look for business opportunities that serve underserved markets and work with founders who are near the problem they are solving. We have been big believers in enablement as a theme- to ensure trust and deliverability we believe in enabling intermediaries vs. cutting them out of transactions. We have seen this work across different sectors through our seed investments - Meesho in commerce, simsim in social

commerce, Wealthy in the financial advisory space etc.

Q: Are there any specific IPOs in 2024 that have captured your interest? What factors stand out to you in these IPOs?

Rohan Malhotra, Good Capital: There is no doubt that today’s global environment is a challenging backdrop for Indian startup IPOs. Towards the end of last year, we started seeing a lot of companies adopting a wait-and-watch approach given the volatility in the West. However, given that India was already an insulated market from the global sentiment, we are seeing some positive signs emerge.

Recent startup IPOs of companies like Mamaearth and IdeaForge are holding steady. Businesses with strong fundamentals will shine through in 2024 as the markets are still apprehensive of loss-making digital business models and high valuations relative to profits. There is an expectation that the election season will also bring some buoyancy in the system, especially if the current government comes to power again. IPO plans remain on the horizon for companies like Meesho, Ola and Pine Labs but getting the timing right will be critical to their public market success.

Q: What's your perspective on the future of AI? In which directions do you see it expanding? And, in your view, can any business remain unaffected by the impact of AI?

Rohan Malhotra, Good Capital: AI is now table stakes for any startup. Much like the platform shift to mobile in the past, the success of tech businesses will depend on how they leverage AI. Startups leveraging AI intelligently will have the right to win, regardless of the sector they are building in. Our newest fund is a recognition of this momentum in AI adoption. We don’t look at AI as a vertical opportunity as much as a horizontal one. Businesses can drive significant improvements to their operations by leveraging AI to enhance productivity, customer experience or personalisation.

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