Call it the impact of the ongoing funding winter or the end of funding mania that the world’s third-largest startup ecosystem is experiencing back-to-back corrections in the form of valuation cuts and a decline in capital infusion and deals.
While several unicorns, including Swiggy, BYJU’S, Meesho, and PharmEasy, have lately witnessed substantial valuation cuts in the books of their respective investors, many others are left with no choice but to layoff, shut down, or get acquired, as investors continue to shy away from deploying dry powder, fearing cash burns.
The situation is such that the Indian startup ecosystem has minted only one unicorn, Zepto, so far this year, against 21 unicorns in 2022 and 44 in the funding mania-led 2021.
According to Inc42’s latest “Indian Startup Funding Report Q3 2023”, the funding winter seeped into the third quarter (Q3) of 2023 as well, marking its now 18-month-long journey. Startup funding stood at a mere $1.7 Bn in Q3 2023 (July to September quarter), the lowest in the past three quarters. On the year-on-year (YoY) basis, funding in Q3 2023 fell 43.8%, while the number of deals declined 38.6% to 205 from 334 deals in Q3 2022.
In Q3 2023, seed stage startup funding continued to spiral downward. India’s seed stage startups recorded a massive funding influx during the second half of 2022, raising $1.02 Bn, but H1 2023 saw seed funding fall by about 53% to $479 Mn. The seed stage funding further plummeted to $159 Mn in Q3 2023, recording a 55% YoY fall.
Further, the late and growth stage funding figures have not been a consolation either. While the growth stage startup funding nosedived 71% YoY to $0.4 Bn in Q3 2023, the late stage funding remained flat at $1 Bn during the quarter versus $1.1 Bn raised in the same quarter a year ago.
Meanwhile, in Q3 2023 too, Delhi NCR and India’s own Silicon Valley Bengaluru were seen locking horns when it came to the funding amount raised by startups and the number of deals secured. While Delhi NCR-based startups raised $299 Mn across 52 deals, Bengaluru raised $594 Mn across 46 deals.
Interestingly, investors could not ignore the startups based in Chennai and Hyderabad, which ended up raising $38 Mn and $17 Mn, respectively, across seven deals each, during the quarter under review.
Indian Startups Secured $7 Bn+ In First Three Quarters Of 2023
After the onset of the funding winter in 2022, major fears started to fission out of closets in the form of weak financial performance of nearly all Indian startups.
Still, there were hopes on the horizon that the year 2023 will pave the way for renewed investor sentiments as startups will pivot from guzzling investor capital to making real money.
However, much to everyone’s chagrin, the funding winter only seemed to have stretched its legs, eating into the larger part of the current year.
Not to mention, governance issues, the inability of a majority of Indian startups to make profits, shutdowns, layoffs and headwinds emerging from global economic tensions are the major glaring issues behind the ongoing funding meltdown, which further triggered investor pessimism.
Substantiating this, the Inc42’s latest report reveals that Indian startups raised only $7 Bn between Q1 and Q3 2023 in comparison to $22 Bn raised in the same period in 2022 and $27 Bn in 2021. Also, between January and September 2023, only 17 mega deals surfaced as opposed to 53 deals in the corresponding period in 2022 and 68 such deals in the first nine months of 2021.
Sharing his insights, Ashish Fafadia, partner, Blume Ventures, said, “The ecosystem is currently more balanced in terms of valuations and for the first time, we have observed a mild slowdown in the number of companies approaching us. While not much is happening at the late stage, there has been some deal-making at growth stages as investors identify promising assets with attractive entry points.”
Meanwhile, the analysts Inc42 spoke with believe that growth stage funding may show recovery in the next two to three quarters.
“Early stage companies who might have raised seeds or Series A in 2021 might be looking for Series A or B now,” said Pranav Pai, the founding partner and chief investment officer of 3one4 Capital.
And given that Indian startup founders know investors are sitting on billions of dollars of dry powder, they will do everything needful to earn their trust back.
“Once this starts to happen, it’s possible to see more soonicorns and unicorns emerging in the next 18 months in the Indian startup ecosystem,” Pai added.
Ecommerce & Fintech Startups On Investors’ Radar
Riding on the D2C growth wave, ecommerce startups secured the maximum number of deals (45) among all sectors in Q3 2023. Notably, during the quarter under review, as many as 29 D2C startups raised $154.6 Mn in funding, accounting for 83.5% of the total $185 Mn raised in the sector. Two of the key late stage deals in the ecommerce space were Furlenco and Pepperfry, which raised $36.6 Mn and $23 Mn, respectively.
At the same time, fintech dominated in terms of the amount of funding raised, with a total of $442 Mn across 28 deals in Q3 2023. Perfios raised $229 Mn, followed by Brightmoney lapping up at $62 Mn and Credgenics securing $50 Mn.
Although the performance of the Indian fintech space has been a bit slow over the last 18 months due to an array of regulatory hurdles, experts believe that the segment will regain its strength from lending.
With a more functional regulatory regime, increased digital and financial inclusion and internationalisation of UPI, fintech is expected to make a comeback soon on investors’ list.
Further, startups that operate in sectors like EVs, climate tech and agritech will continue to be investors’ top picks. At the same time, most investors are expected to only observe segments such as crypto, B2B marketplaces, and horizontal ecommerce.
Startup Renaissance On The Cards?
In recent months, there has been a noticeable resurgence in investor confidence within the startup ecosystem.
Notwithstanding modest capital infusions and corporate misgovernance issues at startups like such as Broker Network, BYJU’S, and Mojocare, the Indian startups collectively seem to be headed towards a renaissance.
And the next quarter is expected to open doors for a renewed sense of investor optimism. This is because the investor community anticipates a surge in startup IPOs, with an increasing number of companies focussing more on stability and profitability today.
In addition, the stabilisation of global interest rates has improved liquidity, paving the way for high-net-worth individuals (HNIs) and family offices to bet big on the potential of the burgeoning space that is the Indian startup ecosystem.
[Edited by Shishir Parasher]
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