Inflexor Ventures: Avoiding Overfunding and Focusing on Business Fundamentals

The domestic start-up ecosystem in India has seen one of the longest lean periods since 2016 as no new unicorns have emerged in the last two quarters of FY23. In contrast, following the VC financing boom of 2021, 30 new unicorns were created in the latter two quarters of FY22. There is no doubt that the "financial winter" will last for some time, and things may get worse before they get better. Many venture capital firms that still engage in some transactions are advising their portfolio companies to concentrate on unit economics and avoid inflated values.

“No matter the state of the market, overfunding is a risky tendency. Sure, it does give the management team more flexibility in terms of the availability of cash flow, but eventually the company must expand into its absurd valuations. At boom times, we frequently notice that this component is disregarded,” says Venkat Vallabhaneni, founder and managing partner of Inflexor Ventures, in an exclusive interview with Business Today. A domestic early-stage venture capital fund called Inflexor Ventures was established during the pandemic.

The investment fund looks for deals in industries like telecommunications, biotechnology, logistics, finance, cybersecurity, computational bioinformatics, and so on. Inflexor Ventures supported 12+ start-ups between the seed and Series B stages last year, allocating over 15% of its fund corpus of Rs 600 crore, despite the decrease in fundraising. GramCover, A5G Networks, BioPrime, Kale Logistics, Awiros, etc. are a few of its major investments. Additionally, Inflexor Ventures has increased its investment in a number of the firms that make up its Fund 1 (Parampara Capital), such as Atomberg, PlayShifu, Entropik, and Bellatrix.

"80% of our portfolio firms have raised at least one subsequent round, and nearly half have raised two or more rounds," noted Vallabhaneni. “The piece of advise we always provide to founders is that creating a successful company takes decades rather than just years.”

According to Inflexor Ventures, the continued unfavourable climate in the capital markets will have an influence on the VC industry's ability to raise money and deploy it. In spite of this, more money has been raised by domestic VCs than ever before, which is more of a testament to the optimism surrounding the Indian start-up ecosystem, according to Vallabhaneni. "LPs are cautiously watching the developments but they also understand the nature of VC investment as long term," he continued.

Large Indian financial institutions, well-known Indian family offices, some successful angel investors, and other modern investors are among the LPs of Inflexor. A few of them are first learning about venture capital as an asset class.

The protracted funding winter has given everything new context. Since "VCs moderate their growth expectations and shift focus to business fundamentals and long-term sustainability," according to Vallabhaneni, the "growth at all costs" syndrome that was fueled by the availability of cheap funding during the pandemic years may be corrected. As a result, methods and choices must be in line with the main objective. To secure the sustainability of the company, certain challenging short-term decisions might need to be made, but that's what the job entails, the investor stated.

Naturally, the market has witnessed a rise in the use of venture debt, which growth-stage businesses increasingly prefer because it is less expensive than equity financing. Even though Inflexor Ventures views debt as "a key instrument" for entrepreneurs, it has no imminent intentions to enter that asset class. "Debt financing and equity financing are two very distinct types of businesses. It doesn't seem likely, at least in the near term, that we will create a debt fund because our DNA is in equity investing for entrepreneurs, according to Vallabhaneni.

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