India's abrupt gaming ban has sent shockwaves through the country's startup ecosystem, with venture capital (VC) investors trying to protect the slivers of their investments. At a time when they are less inclined to believe in the long-term upside of business models, investors are shifting their approach.
They are increasingly seeking deal protections such as liquidation preferences, ratchets, and exit rights. The goal is to minimize losses in an environment where regulatory uncertainties significantly impact emerging sectors.
The prohibition, which targets real-money gaming and betting sites, has shut down revenue streams for several dozen high-flying startups that had already raised significant amounts from domestic and international funds. Estimates place more than $2 billion of venture capital investment locked up in India's online gaming sector, much of which was invested during the pandemic boom when usage exploded.
"Business models have been effectively rendered obsolete overnight," a Bengaluru-based VC firm's partner said. "Scaling is not our priority for the moment, but to protect capital through contractual protections inbuilt into the agreement terms."
Liquidation preference clauses are first amongst these protections as they allow investors to be at the front of the queue to recover value in forced sales. Anti-dilution support is also a newly discovered mechanism that enables supporters to preserve their ownership percentage when values have been cut to the bone.
Exit rights were previously thought of, in a buoyant market, as almost irrelevant, and now investors are taking them very seriously as they think about a secondary trade or strategic takeout as their last chance.
Founders, though, are confronting a brutal new reality. Startups that had guaranteed exponential growth by means of online poker, rummy, and fantasy sports apps are now grappling with the ballooning cost of compliance as well as fast-depleting user bases. A few have already started slashing jobs, while others are in talks with offshore investors to relocate operations out of the country.
The regulatory uncertainty has also cooled off new fundraising. Venture capitalists, who had previously been optimistic about India's gaming prospects, are now focusing on neighboring spaces such as esports streaming, casual gaming, and Web3-enabled entertainment, which are beyond the immediate scope of the ban.
Industry players believe that the clampdown may snuff out innovation in one of India's most vibrant digital sectors. "The gaming industry was poised to contribute meaningfully to the digital economy," stated a founder of a startup whose firm recently slowed growth. "Lacking policy clarity, both entrepreneurs and investors are left hanging."
As the policy wrangles and courtroom dramas unfold, VCs will have to play defense, not offense—reluctantly relying less on the solidity of business models and more on the intricacies of their contracts. For most, the gaming ban has become a test of legal protections, not visionary wagers.