Indian Startups Face Significant Funding Contraction in the First Half of 2023

Several high-flying Indian startups, including Byju’s, Swiggy, and PharmEasy, have seen a drastic decrease in their valuations, reflecting the broader public market instability’s impact on young companies in emerging regions.

Funding Decline and Lack of New Unicorns

According to data shared by market intelligence agency Tracxn, Indian startups raised only $5.46 billion in the first six months of 2023, marking a significant 68% decline from the $17.1 billion raised during the same period in 2022. This funding contraction also represents a drop of $134 billion compared to the first half of 2021.

This year, the Indian startup ecosystem has not produced any new unicorns, which is a sharp contrast to the 18 new billion-dollar companies that emerged in the first half of 2022. Additionally, there were 16 new entrants during the same period in the previous year.

Drought in Seed and Early-stage Funding

The funding drought is affecting startups at different stages. In the first half of 2023, there were only 325 seed funding deals, a significant decrease from the 936 deals in the same period in 2022 and the 921 deals in the first half of 2021, based on Tracxn data.

Other early-stage funding rounds, mainly Series A and Series B, also experienced a decline. There were only 108 such deals in the first half of 2023, compared to 296 in 2022 and 211 in 2021. Late-stage funding deals were similarly affected, dropping to 36 from 137 and 114 in the equivalent periods of previous years.

Retreat of Late-stage Investors

The slowdown in funding coincides with a retreat of many late-stage investors who were previously active in backing Indian startups. Tiger Global, for example, has made only one deal in India this year. SoftBank, which deployed over $3 billion in India in 2021, and Insight Partners, which backed several late-stage startups, have also reduced their investments.

SoftBank has been accumulating liquidity recently, selling part of its stake in Paytm daily. However, SoftBank’s CEO, Masayoshi Son, stated that the company plans to resume investments in AI soon. On the other hand, Tiger Global is unlikely to make investments in Indian startups for a few months.

The funding vacuum left by these retreats has been partly filled by sovereign wealth funds from the Middle East, which have financed the majority of late-stage deals in India in recent quarters.

Valuation Adjustments for High-Flying Indian Startups

Amidst the lack of late-stage backer involvement and the absence of IPOs, many high-flying Indian startups have experienced significant downward valuation adjustments. Byju’s, Swiggy, and PharmEasy, among others, have seen their valuations decrease by 50% or more.

For example, Invesco has reduced Indian food delivery giant Swiggy’s valuation to $5.5 billion. These adjustments reflect the challenges faced by Indian startups in maintaining their high valuations in an uncertain funding environment.

Hope Amidst Capital Reserves

Despite the setback, there is a ray of hope for Indian startups through the availability of considerable “dry powder” or untapped reserves of capital in the hands of venture capitalists. Many VC firms active in India, such as Peak XV Partners, Lightspeed, Accel, Elevation Capital, Matrix India Partners, 3One4 Capital, and Blume Ventures, have secured new and larger funds in the last 18 months.

Rahul Chandra, a seasoned investor and co-founder of Arkam Ventures, believes that the pace of investment is likely to pick up in the coming months. He anticipates that the availability of capital will lead to rational investment decisions benefiting good founders.

Conclusion

The funding contraction in the first half of 2023 has posed significant challenges for Indian startups. However, the availability of capital reserves and the potential resurgence of late-stage investments offer glimmers of hope. As the ecosystem adapts to the changing funding landscape, it is crucial for startups to focus on sustainable growth strategies and demonstrate investor value to navigate these challenging times.

Navigating the Changing Landscape of Indian Startup Funding

The Impact of Public Market Instability

The decrease in valuations among high-flying Indian startups reflects the ripple effects of broader public market instability on emerging companies. Volatility and uncertainty in global markets have made investors more cautious, leading to a decline in funding for startups in India.

Late-stage Investors’ Retreat and Its Consequences

The retreat of late-stage investors, such as Tiger Global, SoftBank, and Insight Partners, has created a void in the Indian startup funding ecosystem. With these investors slowing down their investments, startups are finding it challenging to secure late-stage funding rounds, which affects their growth potential and ability to scale.

The Rise of Sovereign Wealth Funds

Amidst the funding drought, sovereign wealth funds from the Middle East have emerged as significant players in the Indian startup ecosystem. These funds, with their substantial financial resources, have financed the majority of late-stage deals in recent quarters. Their involvement has provided stability and continued funding support when traditional investors have pulled back.

Valuation Adjustments and the Struggle for Sustainable Growth

The downward adjustments in valuations for high-flying Indian startups like Byju’s, Swiggy, and PharmEasy indicate the need for sustainable growth strategies. Startups must focus on building solid business models, demonstrating profitability potential, and differentiating themselves from competitors to maintain investor confidence and attract funding.

The Opportunity of “Dry Powder” in Venture Capital

The availability of “dry powder” or untapped capital reservoirs held by venture capitalists presents an opportunity for Indian startups. Venture capital firms, both domestic and international, have secured new and larger funds, indicating their continued interest and belief in the long-term potential of the Indian startup ecosystem. Startups should actively seek out these investors who have reserved capital for growth-stage opportunities.

Looking Ahead: A Roadmap for Indian Startups

While the funding contraction presents challenges, it also serves as a wake-up call for Indian startups to rethink their strategies and focus on sustainable growth. They need to adapt to the evolving funding landscape by exploring alternative funding sources, fostering partnerships, and leveraging technology to optimize operations and improve efficiencies. By demonstrating resilience and agility, Indian startups can overcome obstacles and emerge stronger in the ever-changing startup ecosystem.

Summary

The first half of 2023 has seen a significant funding contraction for Indian startups, leading to a decline in valuations and limited access to late-stage funding rounds. Retreating late-stage investors and the absence of IPOs have further impacted the ecosystem. However, the availability of “dry powder” and the potential resurgence of late-stage investments offer hope for Indian startups. To navigate these challenging times, startups must focus on sustainable growth strategies, build robust business models, attract alternative funding sources, and leverage partnerships and technology to optimize operations.

Several high-flying Indian startups, including Byju’s, Swiggy and PharmEasy, have seen their valuations drastically lower.

Experienced Indian Startups a significant contraction in funding in the first half of 2023, revealing the knock-on effect of broader public market instability on young companies in emerging regions.

In the first six months of 2023, Indian startups raised just $5.46 billion, a substantial 68% decline from $17.1 billion over the same time period in 2022, and a drop of $13 4 billion in the first half of 2021, according to data shared by market intelligence agency Tracxn. with TechCrunch.

So far this year has produced no new unicorns in India’s startup ecosystem, a stark contrast to the 18 new entrants to the billion-dollar club in the first half of 2022 and the 16 minted during the corresponding period. from the previous year.

The funding drought is permeating startups at different stages. A total of 325 seed funding deals were reached in the first half of 2023, a dramatic drop from 936 in the same period in 2022 and 921 in the first half of 2021, according to Tracxn data.

Other early-stage funding rounds, mainly Series A and Series B, dropped to 108, compared with 296 and 211 in the equivalent periods in 2022 and 2021, respectively. Late-stage funding also took a hit, falling to 36 deals from 137 and 114 during similar periods in previous years.

The slowdown comes as many late-stage investors, previously prolific backers of Indian startups, have taken a step back. Tiger Global has made only one deal in India this yearaccording to Tracxn and Crunchbase, while SoftBank, which Deployed over $3 billion in India in 2021and Insight Partners, which backed several late-stage startups last year and in 2021, wrote virtually no checks.

Instead, SoftBank has been accumulating liquidity. For the past few weeks, SoftBank has been selling part of its stake in Paytm every day, according to a market source familiar with the matter. Chief Executive Masayoshi Son told the company’s annual general meeting last week that SoftBank, which has invested just $650 million through Vision Funds worldwide in the last two reported quarters, plans to move to the “counteroffensive” soon by resuming investments in AI.

Tiger Global is highly unlikely to forge investments in startups in India for a few months, a partner at the firm recently told a founder. Sovereign wealth funds, especially from the Middle East region, have financed the vast majority of late-stage deals in India in recent quarters.

Rahul Chandra, a seasoned investor and co-founder of Arkam Ventures, said he doesn’t anticipate some prolific late-stage investors returning to business as usual investing for at least another two years in India.

A lack of late-stage backer involvement and virtually no IPOs have also dampened the appetite of many mid-stage investors, who are scrambling to design new underwriting models that reflect today’s vision of the public market. Several high-flying Indian startups, including by juSwiggy and PharmEasy, have experienced a dramatic downward adjustment in their valuations, by a staggering 50% or even more.

Despite this setback, a ray of hope remains for Indian startups in the form of considerable “dry powder”: untapped reserves of capital in the hands of venture capitalists. Almost all of the VC firms active in India, including Peak XV Partners, Lightspeed, Accel, Elevation Capital, Matrix India Partners, 3One4 Capital, and Blume Ventures, have secured new and larger funds in the last 18 months.

Chandra said the pace of investment is likely to pick up in the coming months.

“What holds us back is mostly locally available capital, which I expect to behave rationally because there is no irrational exuberance driving up valuation. It will still mean people chasing each other for term sheets for good founders because in the next couple of years there will be more capital coming in,” he told TechCrunch in an interview.

In fact, Peak XV, Lightspeed and Accel have stepped up their deal deliberations and are on track to close nearly 50 early-stage deals since mid-March, according to people familiar with the matter.