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Sunday, December 10, 2023

Funding in Indian startups sinks to its lowest since 2017

Funding ↗ to Indian startups ↗ fell steeply in calendar year 2023 to $7 billion — less than one-third the estimated $25 billion received in the previous year, industry data showed.

This marks a seven-year nadir for the sector since 2017, amid a worsening global macroeconomic environment buffeted by geopolitical conflicts.

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Pointing to a deepening of the ‘funding winter,’ equity investment received by new-age ventures in the fourth quarter of 2023 was the lowest since the dismal showing in the third quarter of 2016, research platform Tracxn data as of December 5 showed.

Several startups have also shut shop in 2023, including buy-now-pay later online lender ZestMoney, ↗ upskilling edtech company Frontrow ↗ and fintech platform Akudo.

“There will be more casualties in the startup ecosystem as funding is still hard to come by in growth- and late-stage companies. Business models that were contingent on frequent capital raises will find it hard to survive,” said Siddarth Pai, founding partner, 3one4 Capital. “The VC (venture capital) playbook has been rewritten for the high interest rate environment as operational cash flows trump the growth-at-all-costs mindset.”

Fintech, retail and enterprise applications (includes software-as-a-service) were top sectors attracting capital this year.

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Only Two New Unicorns

Only two new unicorns (over $1-billion valuation) were minted — quick commerce startup Zepto ↗and e-lender Incred. ↗This is compared to 23 in 2022, a 91% drop, and 39 in 2021, nearly a 95% fall.


Several late-stage startups such as Udaan, Byju’s and Dunzo had to raise new financing through debt instruments like convertible notes and term loan B facilities. Edtech firm Byju’s ↗ and quick commerce company Dunzo have been struggling to raise afresh this year ↗. They have undertaken multiple rounds of layoffs and even had to delay salaries amid the cash crunch.

Drying up venture capital this year has proven to be a stark comedown after the excesses of 2021, when $41.6 billion was invested in Indian startups, with a record number of companies turning unicorns.

Additionally, a slew of late-stage startups such as Zomato ↗, Nykaa ↗, PolicyBazaar and others had listed successfully that year, amid widespread positive sentiment.

Decline in Fortunes

However, the sharp drop in demand for technology services and digitisation in the aftermath of the Covid-19 pandemic, worsening geopolitical conflicts and tightening of financial liquidity in the US have triggered a broader correction in public markets worldwide.

“The seven-year low in India funding is not something specific to India but seen across the major geographies, including the US, the UK, China and Southeast Asia, as well as globally, (with) similar lows in funding,” said Neha Singh, cofounder, Tracxn.

In turn, private market investors have become circumspect about doling out capital, choosing to conserve committed-but-unallocated cash, referred to as “dry powder” in VC parlance.

“With this entire funding winter, valuations have become far more reasonable and business models have become robust, which is leading some mid-stage funds to start writing cheques and signalling a pick-up in activity. And while this is anecdotal, the data will start showing it in the early half of 2024,” said Arpit Agarwal, partner, Blume Ventures.

Further, several startups have had to raise money to provide partial exits to existing and long-standing investors.

For instance, Lenskart’s $600-million raise ↗from sovereign wealth fund Abu Dhabi Investment Authority and private equity major ChrysCapital this year, included a $450-million secondary sale by existing investors including SoftBank, Premji Invest and Chiratae Ventures.

In a secondary share sale, the capital does not go to the company’s coffers.

Late-stage Flux

Mature startups have been the most affected by the slowdown, as big-ticket investors such as Tiger Global and SoftBank, known for their aggressive deal-making, took a backseat. Investors also took longer to write new cheques, turning cautious after questions were raised over corporate governance at several venture-backed startups.

According to Tracxn, the domestic technology ecosystem saw only 17 deals that were each worth $100 million or more, including the likes of digital fintechs PhonePe and Perfios, as well as quick commerce delivery startup Zepto, among others.

In contrast, during 2022, there were at least 55 deals worth $100 million or more in size.

“As late-stage investors continue to sit out of investments, companies have figured out ways to increase runway,” said a banker in the know of startup dealmaking. “Further, several startups are refusing to take a downround and hit the fundraising markets.”

In an interview with ET in August, ↗ Sumer Juneja, managing partner for India & Europe, Middle East and Africa, at SoftBank Investment Advisers, said most of the top technology companies in India are well-capitalised and have cut costs over the past year, leading to their unwillingness to opt for a downround, where their valuation will be corrected.

Among all startups, funding saw the steepest fall this year in late-stage companies, by over 73% to $4.2 billion in 2023 as of December 5, compared to $15.6 billion invested in the same period in 2022.

In early-stage funding too, there was a drop of 70%, with startups attracting $2.2 billion in 2023, against $7.3 billion in 2022. Seed-stage firms also saw a sizeable drop of 60% in funding, dropping to $678 million in 2023 from $1.7 billion a year ago.

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Kaylie Pferten
Kaylie Pferten
A pilot of submersible crafts in a former life, now married to my husband David and writing about investment advice.

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