startup valuations: Catamaran president Deepak Padaki sees startup valuations falling further

Startups must brace for further down rounds in 2024 as valuations could fall by nearly a third compared with 20-25% now amid a lingering funding winter and an increase in the number of companies looking to raise cash, says Deepak Padaki, president of Infosys founder NR Narayana Murthy’s investment firm, Catamaran Ventures. The family office has backed around 27 private firms including Acko, Udaan, PaperBoat and Elon Musk’s SpaceX. In an interview with ET’s Beena Parmar, Padaki, who joined the company last August, also talks about its investment exits, deal sizes and corporate governance at startups. Edited excerpts:

Private investments have slowed down. Where is growth coming from for Catamaran?

So far, we had good returns on our public markets portfolio in 2023. And all indications are that it will continue to be healthy in 2024. Broadly, our allocation framework is one-third each in public, private and fixed-income markets. We have a 15% overall return target on our complete portfolio, and aim to double our AUM (assets under management) in five years ($2 billion by 2027).

Also read | Startups write a $1.5-billion twist in winter’s tale

What sectors look promising for investments in 2024?

In 2023, we built a thesis around investing in manufacturing in India – not so much the final equipment makers but growing the supply chain below it… We are looking at startups with intelligent manufacturing like how do you make the factory floor intelligent, some amount of robotics there, predictive analytics, maintenance, etc. We hope to see more deeptech on material science, a combination of hardware and software.

We are starting to see startups looking at the tooling required around AI applications. But B2B use cases on AI, generative AI in particular, are still weak and evolving… I hope to see more ideas where entrepreneurs write good AI-based software, algorithms that are able to do things like predictive analysis, insightful pattern matching, etc. Most funds in India are generalist funds today, but maybe 2-3 years down the line, you will get more deeptech-specific funds as the depth builds.How is your sweet spot changing?

We are moving a little bit further upstream into more PE kind of deals, especially because we focus on manufacturing where the investments have a longer gestation and it needs more capex. It is difficult for VC funds to support these, because you have an obligation to return a fund within a specific time period. That’s where, as a single LP (limited partner) family office, we can support this ecosystem better. Our ticket sizes can vary between Rs 75 crore and Rs 200 crore. (it was lower in the range of Rs 30-70 crore around 2020).

What about exits in 2023?

It has been a bit of a challenge. We made only a few partial exits in the private market in 2023 and are hoping for some more in 2024.

Also read | 2023 Year in Review: Secondary rounds may headline deal flow at startups next year too

How do you view episodes of corporate governance lapses?

Bad apples exist in every market. Unfortunately, in India, we are at a stage now where one bad apple can spoil the party. We talked to many foreign LPs, and at some level they are worried when they hear all the stories. There’s certainly some conflict about how boards are run in small private companies, because you have the biggest investors as board members. Most of these companies don’t have an independent director on the board. That’s a problem.

We really need to look at the structuring and reporting obligations of private companies’ boards and put more onus on the funds invested in them to ensure governance is transparent. Where we can, we influence our portfolio companies to set up good finance and compliance functions early. In the early stages, that typically is a low-priority item for firms as they have to focus on product and sales. But it is equally important to have a good CFO or accounting person, transparency and MIS (management information system) in place from the beginning. We see many such gaps when we do diligence on companies today. Even in Series-B and -C companies.

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Startups must brace for further down rounds in 2024 as valuations could fall by nearly a third compared with 20-25% now amid a lingering funding winter and an increase in the number of companies looking to raise cash, says Deepak Padaki, president of Infosys founder NR Narayana Murthy’s investment firm, Catamaran Ventures. The family office has backed around 27 private firms including Acko, Udaan, PaperBoat and Elon Musk’s SpaceX. In an interview with ET’s Beena Parmar, Padaki, who joined the company last August, also talks about its investment exits, deal sizes and corporate governance at startups. Edited excerpts:

Private investments have slowed down. Where is growth coming from for Catamaran?

So far, we had good returns on our public markets portfolio in 2023. And all indications are that it will continue to be healthy in 2024. Broadly, our allocation framework is one-third each in public, private and fixed-income markets. We have a 15% overall return target on our complete portfolio, and aim to double our AUM (assets under management) in five years ($2 billion by 2027).

Also read | Startups write a $1.5-billion twist in winter’s tale

What sectors look promising for investments in 2024?

In 2023, we built a thesis around investing in manufacturing in India – not so much the final equipment makers but growing the supply chain below it… We are looking at startups with intelligent manufacturing like how do you make the factory floor intelligent, some amount of robotics there, predictive analytics, maintenance, etc. We hope to see more deeptech on material science, a combination of hardware and software.

We are starting to see startups looking at the tooling required around AI applications. But B2B use cases on AI, generative AI in particular, are still weak and evolving… I hope to see more ideas where entrepreneurs write good AI-based software, algorithms that are able to do things like predictive analysis, insightful pattern matching, etc. Most funds in India are generalist funds today, but maybe 2-3 years down the line, you will get more deeptech-specific funds as the depth builds.How is your sweet spot changing?

We are moving a little bit further upstream into more PE kind of deals, especially because we focus on manufacturing where the investments have a longer gestation and it needs more capex. It is difficult for VC funds to support these, because you have an obligation to return a fund within a specific time period. That’s where, as a single LP (limited partner) family office, we can support this ecosystem better. Our ticket sizes can vary between Rs 75 crore and Rs 200 crore. (it was lower in the range of Rs 30-70 crore around 2020).

What about exits in 2023?

It has been a bit of a challenge. We made only a few partial exits in the private market in 2023 and are hoping for some more in 2024.

Also read | 2023 Year in Review: Secondary rounds may headline deal flow at startups next year too

How do you view episodes of corporate governance lapses?

Bad apples exist in every market. Unfortunately, in India, we are at a stage now where one bad apple can spoil the party. We talked to many foreign LPs, and at some level they are worried when they hear all the stories. There’s certainly some conflict about how boards are run in small private companies, because you have the biggest investors as board members. Most of these companies don’t have an independent director on the board. That’s a problem.

We really need to look at the structuring and reporting obligations of private companies’ boards and put more onus on the funds invested in them to ensure governance is transparent. Where we can, we influence our portfolio companies to set up good finance and compliance functions early. In the early stages, that typically is a low-priority item for firms as they have to focus on product and sales. But it is equally important to have a good CFO or accounting person, transparency and MIS (management information system) in place from the beginning. We see many such gaps when we do diligence on companies today. Even in Series-B and -C companies.

Stay on top of technology and startup news that matters. Subscribe to our daily newsletter for the latest and must-read tech news, delivered straight to your inbox.