AI, Cybersecurity, Looking to Invest in India: Accel's Prayyank Swaroop | Interview

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While 2021 and beyond has been a tough investment period, fundraising conditions have started improving and funding round sizes are increasing, said Prayyank Swaroop, partner at leading venture capital firm Accel. In a video interview with Peerzada Abrar, Swaroop said Accel is investing heavily in sectors such as consumer brands, fintech, software as a service (SaaS), artificial intelligence (AI), cybersecurity and India. Accel is known for its early stage investments in companies such as Meta, Slack, Dropbox, Flipkart and Swiggy. Excerpts:

How do you see the overall investment scenario amidst the macroeconomic uncertainties?

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The investment environment has remained challenging overall since 2021, and particularly in India through 2022 and early 2023. However, over the past 12 months, conditions have started to improve, with a trend towards larger funding rounds. Early stage activity remains strong, with companies like Accel particularly active. The Indian public market has seen multiple successful technology IPOs, with many more expected to go public next year. This trend is driving significant activity in both the private and public markets. The Indian economy is performing well, with many companies now profitable or close to profitability, signaling a positive change.

What kinds of companies are pursuing IPOs?

Currently, the IPO landscape favors consumer platform companies, especially those with well-known brands, as they are easier for the market to understand and value. These companies can leverage their strong consumer recognition to drive their IPOs. No major Indian software or B2B company has taken this step yet, but it is expected that they will eventually. Fintech companies, especially in the insurance space, are also gearing up for IPOs. Given this trend, it is likely that consumer brands will go public first, with B2B marketplaces and other fintechs following in the next quarters, due to digital adoption and market penetration. Many companies are gearing up for IPOs. IPOs are a sensitive issue so we cannot go into the details, but many others are raising pre-IPO fundraising or planning IPOs.

What do you think about the trend of startups coming back to India from countries like Singapore and the US?

There is an increasingly visible trend of companies relocating from the US to India. Accel’s role in this process varies from company to company. Some companies find it beneficial to be listed or acquired in the US, while others see advantages in the Indian market. A key consideration is whether listing in India aligns with the company’s goals and market conditions. This trend marks a positive change, with Indian companies leading the way back to India to take advantage of favorable domestic market conditions. New companies are more likely to base themselves in India, benefiting from a robust economy, supportive public markets, favorable taxation and a sound judicial system. This positive trajectory is expected to attract more Indian and international investors to the Indian market, with foreign institutional investor (FII) participation.

Is Accel playing any role in helping businesses return?

We support companies by providing comprehensive guidance and mentorship across multiple disciplines. Our legal, finance and corporate development teams work closely with company CEOs to prepare them for important transitions like returning to India and preparing for an IPO. We provide detailed checklists and strategic advice to help founders take informed decisions and understand what makes sense for their company. While ultimately, execution rests with the founders, our insights provide a solid starting point to explore key aspects and take a sound decision.

What investment opportunities are you looking at both nationally and globally?

While the fundraising landscape is certainly tougher in 2021 and beyond, notable trends and investment opportunities have emerged both in India and globally. In India, consumer brands have been the focus given the country’s context of a consumption-driven economy. There has been significant interest in sectors such as fashion, footwear, luggage, food and cosmetics. There is a notable trend towards premiumisation, driven by rising disposable income among millennials, with their willingness to spend more on quality products. Additionally, there is an increased focus on ‘Bharat’, targeting tier 2 and tier 3 towns where growing purchasing power is creating opportunities. This market segment is value-driven and requires a thoughtful business strategy to invest successfully. Indian manufacturing, bolstered by the Make in India initiative, is also promising, with innovations being seen in semiconductors, defence and general manufacturing. Globally, sectors such as SaaS, generative AI and cybersecurity are robust investment areas. Accel has been particularly active in these sectors, highlighting the need for Indian companies to compete globally. Access to international markets and an understanding of effective marketing and sales strategies, particularly in the United States, are essential to succeeding in these global arenas.

How do you see AI-driven innovation from Indian startups compared to the global status quo?

AI is gaining significant momentum globally, with generative AI emerging as a driver of transformation. It was a hot topic last year, but now it is shifting to practical use within the enterprise. Despite challenges such as model hallucination, AI adoption is on the rise, especially in reducing internal costs such as automating customer support. Indian startups are actively contributing to AI-driven innovation, even as they face competition from their global peers. They are exploring a range of applications, from AI in the creative economy to cyber security, reflecting a broadening scope beyond traditional sectors. Key areas of future innovation include agent-driven platforms, AI for inference, and integration of knowledge graphs for enhanced analytics and data-driven decision making. Indian AI companies need strong funding, strong teams, and compelling use cases to match those developed by their US peers. This approach is crucial as AI continues to penetrate sectors such as education, healthcare, and more, shaping the next stage of global technology evolution. In the past two years alone, we have invested in over 27 Indian AI companies.

You're also betting big on cybersecurity, why?

I believe that in the next decade, we will see a big cybersecurity unicorn emerge from India. Despite the huge potential of the cybersecurity sector globally, we have not seen any notable Indian companies that have grown to unicorn status in this space. Globally, cybersecurity is a robust market with significant investments, mergers and acquisitions, but India is missing similar success stories. Recognizing this opportunity, Accel recently announced a European fund focused on AI and cybersecurity startups, highlighting the growing interest in the space. Well-known names such as Sprinto and recent acquisitions such as Pingsafe highlight promising developments. While understanding the cybersecurity market is challenging, especially for Indian investors, we are seeing a growing group of Indian-origin founders coming forward. This includes companies that are generating significant revenues in the country, indicating that the market is maturing. However, the transition from service-oriented cybersecurity companies to scalable product-led ventures remains a significant gap. Going forward, the Indian cybersecurity landscape holds immense potential. “With supportive investors and a burgeoning ecosystem, the groundwork has been laid for groundbreaking cybersecurity startups to emerge. This effort aligns with a broader global trend that cybersecurity remains a vital area of ​​innovation and investment.”

With many top startups seeing falling valuations and regulatory and governance issues galore, has that changed the way you invest?

All investors have become more cautious. Legal and financial due diligence has become longer and deeper. Investment terms have become stricter to prevent fraud, and board reporting and financials have become more stringent. However, while a few large companies have gained traction, the majority of Indian companies we have funded over the past five years have done well. Early-stage activity in the startup ecosystem is now booming, with a notable increase in the number of companies seeking early stage funding. It has become relatively easier for startups to raise rounds in the $5-10 million range compared to larger rounds of more than $5 million. This trend is partly driven by changing investor sentiment, with valuations being revised downward by around 20%-30%. As a result, investors are perceiving these earlier stage companies as more valuable. There has been a notable increase in start-up formations over the past year compared to the two years prior to that. However, it remains difficult to secure larger funding rounds, reflecting investors’ more cautious attitude towards committing large amounts of capital.

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