Gaming ban leaves venture backers leaning on deal clauses, not business models

BENGALURU: India’s sudden ban on real-money gaming has gutted one of the country’s most lucrative consumer internet sectors, but venture capitalists say they are not staring at complete losses. Instead, they are falling back on contractual protections built into startup financings.

“Most deals in this category had a standard one-times liquidation preference,” one investor told TOI. “If a company raised $200 million and still has that much in the bank, it goes straight back to investors before founders or employees see a rupee. That ensures capital is not fully wiped out even if the business is shut down.”

Liquidation preference is a clause common to venture financings: when a company is sold, wound down or liquidated, investors are first in line to recover their principal investment, sometimes more, depending on the terms, before any other shareholder.

For companies trying to pivot rather than shut down, another clause comes into play. “Down rounds will trigger anti-dilution protections,” the investor said. These mechanisms reprice earlier investments if new funding is raised at a lower valuation. A full-ratchet clause resets all prior share prices to the lowest new price, while a weighted-average formula smooths the adjustment across different financing rounds. “It doesn’t solve the underlying business problem,” the investor added, “but it compensates backers with extra shares for the value they lose.”

Another investor, who has backed an e-sports platform sans cash-outs, argued that the real-money sector was always closer to gambling than gaming. “Games of luck have always been suspect in India. I’m surprised it got this big before being pulled back,” the person said. “Once the biggest player in the market said it wouldn’t fight the ban, it became clear the sector wasn’t coming back.”

That investor described three categories of outcomes: companies that shut down and return money under liquidation preference; firms that pivot into adjacent categories such as casual gaming, esports or even non-gaming businesses; and startups that conserve their cash piles and attempt to “grow into” past valuations rather than raise new capital immediately. “The good news for many is they are sitting on large reserves,” the investor said. “The bad news is they now have to build an entirely new business to justify their valuations.”

Some are already experimenting. Dream11 has piloted a wealth-management app alongside its sports products. WinZO has rolled out ZO TV, a short-form video platform for episodic micro-dramas.

The fallout is uneven: compliant gaming studios have begun receiving “a ton of resumes,” the investor noted, as employees from banned platforms look for safer ground. Investors themselves are cautious. “You might see M&A, you might see acquihires, you might see teams spinning out to start new companies,” the person said. “But new funding will likely wait six months while people watch whether there’s another round of regulation.”

Both investors drew parallels with China’s crackdown on edtech in 2021, when regulators banned for-profit tutoring overnight. “In one swoop, billions of dollars of value were gone,” one of them said. “The same thing has happened here. If a company had money in the bank, investors could get some of it back. If not, they were simply wiped out.”

The message for India’s startup ecosystem is clear, said one of the investors: regulatory risk is no longer theoretical. “Founders have not paid enough attention to regulation in India,” the person said. “This is the most brutal reminder you can get that your term sheet clauses might save you, but they won’t grow the business.”