Y Combinator’s Arnav Sahu confident early-stage deals will remain active through funding winter

Arnav Sahu, Principal at Y Combinator, said he is excited about India’s fintech revolution, and is bullish about the country’s software-as-a-service (SaaS) sector.

Y Combinator’s Arnav Sahu confident early-stage deals will remain active through funding winter

Tuesday February 14, 2023,

5 min Read

It’s obvious why Arnav Sahu would be gung-ho about the early-stage startup space, given his role at Y Combinator, the accelerator programme for new-age tech companies still figuring their way. His reasoning goes beyond that. 

The seasoned investor says growth-stage investments will likely be tepid at least in the first half of this year. “The best late-stage startups won’t raise (capital) because it does not make sense to do so in an environment where valuation multiples have corrected,” Arnav says in an interview with YourStory.

For early-stage startups, though, there’s a huge stock of capital that’s piled up for investors to deploy. “Because of the valuation slump, most growth investors are also chasing early-stage deals,” he says.

He also says the economy is still strong for startups to thrive.

Arnav’s optimism in Indian fintech has anecdotal backing. At Y Combinator’s Summer 2022 cohort, 11 of the 19 Indian startups selected were fintech companies. There’s also the unmistakable global attention on India’s UPI, or Unified Payments Interface for real-time bank transactions, that’s gradually spreading its wings to multiple international destinations. Several domestic fintech startups are also pushing innovation and business models are nonexistent elsewhere. 

Even so, Arnav, an alumnus of the prestigious Doon School in Dehradun, believes India’s fintech revolution is at a very nascent stage.

Arnav, now based in Silicon Valley, primarily leads investments in enterprise infrastructure startups and serves on the boards of companies including Mattermost and SoftSecurity. He’s also an adviser to startups in sectors such as artificial intelligence and machine learning, cybersecurity, IT infrastructure, data infrastructure, developer platforms, and cloud and data centres. 

In this interview, Arnav offers his take also on the investment momentum in Indian SaaS companies, sectors that are poised for growth, and what entrepreneurs should be doing to survive the ongoing slump.

Edited excerpts:

YourStory (YS): For how much longer do you think the funding slump will persist? 

Arnav Sahu (AS): We are in an unprecedented situation in the United States with high inflation. India is more accustomed to high inflation, unlike in the United States. However, if you look at key US macroeconomic indicators such as wage growth, jobs, and the earnings of major tech companies such as AWS (Amazon Web Services), we are not in a deep recession. It’s still a strong economy for startups to thrive in.

Counterintuitively, the stock market performs poorly when economic indicators are strong. The reason is, the stock market is mostly responding to interest rates. If economic data such as job growth is strong, the market responds adversely because the (US) Federal Reserve Board can continue to raise interest rates to combat inflation without inducing a recession. The stock market slump is not necessarily responsive to key economic indicators.

I expect the first half of 2023 to be subdued for growth investments, mainly because the best startups have already raised a lot of capital and at valuations that are not justified relative to traction. So the best late-stage startups won’t raise (capital) because it does not make sense to do so in an environment where valuation multiples have corrected. 

For early-stage founders, I expect the (venture capital) market to be active. There is a lot of investment capital, and because of the valuation slump, most growth investors are also chasing early-stage deals.

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YS: What advice do you have for entrepreneurs in this situation?

AS: The same advice I would give in a bull market: talk to users, build good products, and hire great people that are high energy, take ownership and want to build something big with you.

It’s uncertain where markets will head in 2023, and hard to predict valuations. But the fundamentals of company building don’t change in a downturn.

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YS: What is your view on Indian SaaS companies? Will the investment momentum in them continue?

AS: We continue to be bullish on SaaS in general, and SaaS in India. While we are seeing a market slowdown in budgets (spending on software), there are still a lot of opportunities to build disruptive SaaS products, particularly in enterprise infrastructure. Only 50% of workloads are still on the cloud. Public company earnings of companies like AWS and Snowflake continue to be very strong (indicating that companies are continuing to spend on cloud-based infrastructure, or software.)

On investment momentum, broadly, I expect a slowdown in the growth-stage market. I expect the early-stage market to be active as it has been.

There is a lot of investment dry powder (funds raised by investors to deploy in startups). VCs raised record amounts of capital in 2021 and 2022. What’s changed in the past year is valuation expectations. But I still expect the best teams and best companies at the early stages to be able to raise funds quite easily.

A lot of great startups also get built in recessions, as founders don’t need to raise a lot of capital to get to product-market fit. Startups often start by building a simple product and you don’t need to raise a mega round to validate the product with users. Moreover, if people pay for your product during a recession, it’s a higher signal that you built something people really want.

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YS: What sectors do you see growing and evolving in 2023?

AS: If I look at the major platform shifts over the past 10 years, those were mostly in mobile, cloud, online payments, and crypto. These four big waves created massively successful and disruptive companies. I believe AI could be the next big shift. I expect all existing SaaS apps would have to embed AI into their existing use case until it becomes table stakes (like with the cloud).

In India, I am still excited about fintech. There are a lot more open, accessible fintech infrastructure platforms that need to be built in payments, like credit card issuing and cross-border payments. Also, credit-card penetration is still low in India and will continue to grow. We are still very early in the fintech revolution in India.

Edited by Feroze Jamal