Funding Winter: Indian Startup Funding Drops 82% In Q3 To Reach 2020 Levels

The funding decline in the Indian startup ecosystem continued for the fourth straight quarter, with startups raising $3 Bn during July-September 2022, around 50% lower than the preceding quarter, according to Inc42’s ‘Indian Tech Startup Funding Report Q3 2022’.

The massive correction has brought down startup funding in India to 2020 levels and is showing how the funding winter is wreaking havoc.

The funding raised in Q3 2022 was 82% lower than the historical $17.1 Bn raised by the Indian startups in Q3 2021. 

The funding decline started in Q4 2021 when startup funding fell 15% quarter-on-quarter (QoQ) to reach $14.5 Bn. Since then, funding raised by startups has been on a constant decline.

At the same time, funding deals have also seen a sharp decline over the past few quarters. The peak of funding deals was seen in Q1 2022, with 506 deals completed between January to March 2022. The number of deals declined by more than a third to reach 334 in Q3 2022.

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Funding Trends In Q3 2022

Mega Deals Fall Sharply: Only four mega deals (worth $100 Mn or more) were recorded in Q3 2022 till September 24, the second-lowest figure since 2019. For context, Q2 2022 saw 19 mega deals, while Q3 2021 saw 39 deals.

As such, mega deals decreased 79% QoQ and 90% year-on-year (YoY) in Q3 2022. However, the year 2022 still accounts for the second-most mega deals, with 53 mega deals as of September 24, 2022.

Average Ticket Size Drops To 2020 Levels: The average ticket size in Indian startup funding fell 54% YoY to reach $11 Mn during the September quarter.

Interestingly, the average ticket size in Q3 2022 is comparable to that in 2020. In fact, in Q3 2020, the average ticket size was the same as in Q3 2022. 

During Q3 2021, the average ticket size was driven up by mega deals, as there were 39 mega deals in that quarter. However, Q3 2022 had a distinct lack of the same, driving average ticket size down.

Late-Stage Funding Freefalls, Seed Funding Rises: In Q3 2022, Indian late-stage startups raised $1.3 Bn, down 91% YoY from $13.9 Bn in the corresponding quarter in 2021. A similar fall was recorded in growth-stage funding as well. Indian growth stage startups raised $1.2 Bn in Q3 2022, down 55% YoY from $2.7 Bn raised in Q3 2021.

However, seed funding rose 21% YoY during Q3 2022. Indian seed-stage startups raised $402 Mn during the same period, more than the $331 Mn raised in the corresponding quarter last year.

Unicorn Momentum Slows Down: India’s startup ecosystem could only mint four unicorns in Q3 2022, the same number as in the previous quarter. However, the first quarter of this year saw 13 startups entering the unicorn club.

The last quarter of 2021 witnessed 15 new unicorns being minted by India’s startup ecosystem, the most in any quarter ever.

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Why The Funding Winter?

The alarming decline in funding begs only one question – why?

The entire saga began with Russia’s invasion of Ukraine at the start of the year, which has turned into a drawn-out power struggle between the West and the East. While the US imposed sanctions on Russia, the latter has threatened to shut gas supplies to the former’s European partners.

Amidst all these, inflation started edging up globally, which forced central banks, including the Federal Reserve, to raise interest rates. This in turn led to the strengthening of the US dollar. Like other currencies, the Indian rupee has also been on a free fall against the US dollar, with the exchange rate crossing the INR 81 mark per US dollar.

While the Reserve Bank of India (RBI) has tried to slow down the fall in the rupee, India’s foreign reserves have declined. The country’s foreign reserves currently stand at $551 Bn, down from $633.6 Bn at the end of 2021.

The heightened global uncertainty and negative sentiments have also made investors wary of writing big cheques, which has impacted startup funding in the country.

More interestingly, according to Inc42 figures, investors have announced or launched funds worth $16 Bn for Indian startups in 2022, 2.6X higher than in 2021. However, due to the multi-year nature of these funds, it can be said that most of these would be deployed later down the line.

The external shocks have impacted Indian stock markets and more importantly, the new-age tech stocks. The stocks of the listed startups have been pummelled by market volatility over the last few months.

In short, the global macroeconomic conditions have impacted both public and private equity markets, creating a funding crunch.

The onset of funding winter has also prompted a series of layoffs within the Indian startup ecosystem. According to Inc42’s ‘Indian Startup Layoff Tracker’, 12,526 employees have been laid off by 41 startups so far in 2022. Most of the layoffs were attributed to cost-cutting exercises or restructuring brought on by a funding crunch.

Many investors are now looking at this funding downturn as more of a ‘correction’ than a ‘slowdown’. Startup founders have shifted their focus to cost-cutting and profitability.

Experts predict that the funding winter can last for 12 months or more, which in turn can lead to consolidation in the startup ecosystem. As per a recent Inc42 survey, investors also have a negative sentiment towards startup IPOs in FY23. 

The Q3 2022 funding report takes a deep dive into the state of funding in the Indian startup ecosystem between 2014-Q3 2022. Besides, it also analyses the current state of unicorns, soonicorns, startup funds launched, VC landscape, among others.

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