India currently stands as the world’s third-largest startup ecosystem, boasting over 68K startups. In the period spanning between 2014 and 2023, this burgeoning ecosystem witnessed the emergence of over 5,700 funded startups, collectively amassing a staggering $143 Bn in funding. Remarkably, this surge also gave entry to 111 new-age ventures into the esteemed unicorn club.
In most years, due to the sheer size of the transactions, late-stage funding deals (those above $100 Mn) accounted for almost 70% of the funds infused into the market. However, 2023 has been an exception so far.
According to Inc42’s Indian Tech Startup Funding Q3 2023 report, the year has not only been a laggard in terms of the amount of funding raised at the late stage but also the number of deals.
The nine-month period between January to September saw only 17 mega deals, registering a 67% decline from 53 such deals a year ago. Some of the major deals raised during the period under review are PhonePe ($850 Mn), Lenskart ($600 Mn), Builder.ai ($250 Mn), and Perfios ($229 Mn).
It must be noted that from the highest point of 41 deals in Q4 2021, the mega deals numbers have remained largely under five on a quarterly basis, sans Q1 2023, which witnessed nine such deals.
Unicorns Take A Break
The continued reduction in mega deals has majorly led to a fall in the number of unicorns minted in the country. The state is such that only one unicorn has been born since September 2022.
Despite the momentum gained during the COVID-19 years, which witnessed the emergence of 65 unicorns between 2021 and most of 2022, the number of companies joining the billion-dollar club has come to a screeching halt.
Interestingly, some companies did secure funding on a higher valuation, however, could not cross the $1 Bn valuation threshold. A case in point is Bizongo, which raised $50 Mn last week at a valuation of $980 Mn.
Further, it is crucial to note that many late-stage deals have been announced without valuation details. For instance, DMI Finance, Builder.ai, Perfios, declined to share the valuations when they announced their large fundraise announcements.
The continuous media scrutiny and increased investor pressure on profitability can be seen as one of the key reasons for this trend. So far in 2023, the Indian startup ecosystem has witnessed a total of 65 late stage funding deals, accumulating a sum of $3.9 Bn, compared to 156 such deals which took place from January to September 2022, amassing $12.8 Bn.
The current decline can be chiefly linked to the ongoing economic challenges, a heated discussion on profitability versus valuation, and a noticeable dip in investor trust. Factors such as unsustainable cash expenditures and business closures have further intensified these concerns.
Funding Distribution Shifts Towards Early Stage
Over the past five years, an interesting trend has emerged in funding distribution across various stages. In 2019, 62% of the total $9.2 Bn raised in the initial nine months went into late-stage startups. This figure surged to an impressive 77.8% in 2021.
However, a shift occurred in 2022, with the percentage dropping to 59%, and a further decline to 54% in 2023 for the period spanning January to September.
Upon closer examination, while the total funding raised by startups experienced continuous fluctuations, the stake of seed funding in the overall funding pie saw a dramatic increase from 2019 to 2023, rising from just under 2% to over 9%.
“The economic downturn initially impacted public markets, subsequently affecting late and growth stage startups. This redirected investor attention towards seed and bridge stage startups, providing them with opportunities to experiment in burgeoning sectors with smaller ticket sizes, and presenting an avenue for exits in subsequent funding rounds,” said an analyst who spoke with Inc42 earlier this year.
But, Not All Hope Is Lost
After three quarters (Q4 2022 to Q2 2023), Q3 2023 saw the emergence of India’s 111th unicorn – Zepto. The Mumbai-based quick commerce delivery startup raised $200 Mn in its Series E funding round at a valuation of $1.4 Bn and is now planning to go public by 2025.
At the same time, the average ticket size at late stage funding for the period between January and September has continued to remain healthy. The average ticket size for late stage startups in 2023 was recorded as $60 Mn, which is slightly higher than $55 Mn for the same period in 2022. Although, in comparison to $86.4 Mn in 2022, it fell by 36.34% on a year-on-year basis.
This indicates that even though the deal flow is slow, investors are still making healthy bets on the potential late stage startups. Also, as the market correction is now slowing down and startups are now increasingly becoming adamant about scoring a path towards profitability, investors sitting with billions of dollars of dry powder are now expected to return to the startup ecosystem.
“We can see that early stage companies who might have raised seeds or Series A in 2021 might be looking for Series A or B now. With almost $10 Bn dry powder sitting in the hands of the tech-focussed investors, it’s possible to see more soonicorns and unicorns emerging in the next 18 months in the Indian startup ecosystem,” said Pranav Pai, founding partner and chief investment officer at 3one4 Capital, in a recent interaction with Inc42.
The Journey Ahead for Late Stage Startups?
Investors are now placing a stronger emphasis on profitability and prioritising cash reserves over cash burn. For many investors, higher-risk bets no longer hinge solely on the total addressable market (TAM) and future potential; instead, they consider how effectively a company has utilised its funds in previous years.
Investors are now seeking key metrics like profitability, return on equity (RoE), and return on ad spend (RoA), which was not a common practice in the past. Nevertheless, numerous late stage companies have shifted the paradigm and are able to demonstrate profitability.
For instance, foodtech major Zomato turned profitable in the first quarter of the financial year 2023-24 (FY24) with a consolidated profit after tax (PAT) of INR 2 Cr. Trading platform Paytm Money turned profitable in the financial year 2022-23 (FY23), posting a net profit of INR 42.8 Cr. CarTrade, Droneacherya, EaseMyTrip, Fino, Ideaforge, IndiaMart, Indifi, JustDial, MapMyIndia, Matrimony, Nazara, Neogrowth, Rategain, Tracxn, True Balance, Nykaa, Oxyzo, Zerodha are other top startups to showcase profitability for FY23.
It is believed that the next six to nine months will be pivotal for investors as they begin deploying a significant portion of their raised funds. This has the potential to alter the landscape of the current funding drought, especially at the early and growth stages.
According to an Inc42 analysis, there are currently 100+ soonicorns poised to make the leap into the unicorn club. Some of the notable names include Bira91, Bizongo, Axio (formerly CapitalFloat), and others. So far, the soonicorns tracked by Inc42 have collectively raised over $15 Bn in funding, with fintech exhibiting the highest potential to produce future unicorns.
Furthermore, a recent survey conducted by Inc42 revealed that more than 50% of investors believe that funding for Indian startups in the calendar year 2023 will not surpass the total capital influx seen in 2022. In such a scenario, late stage startups will need to demonstrate exceptional prowess to regain investor confidence.
The post Where Are The Unicorns? Mega Deals & Late Stage Funding Crunch Stalls Startup’s $1 Bn Dreams appeared first on Inc42 Media.
