Indian Startup Funding Reaches $134 Bn, But Can It Regain The Old Momentum?

The year 2021 was a historic one for the country’s startup ecosystem as startups raised the highest-ever funding of $42 Bn across 1,500+ deals. The year also saw 44 startups joining the unicorn club, raising combined funding of $21.8 Bn.

According to Inc42’s latest ‘Indian Startup Funding Report Q3 2022’, Indian startups have raised a total funding of $134 Bn to date, almost 2X of $58 Bn raised by the end of the calendar year 2019. The funding raised by Indian startups during the 2014-2021 period rose at a CAGR of 49%.

However, the ongoing funding winter amid a global economic slowdown has crippled this funding momentum. The funding raised by Indian startups during January-September stood at $22 Bn, 19% lower than $27 Bn in the corresponding period of 2021 and almost 50% of $42 Bn raised in 2021.

The funding raised in Q3 2022 was 82% lower than the historical $17.1 Bn raised by the Indian startups in Q3 2021. The average ticket size also dropped to $11 Mn in Q3 2022, a 54% year-on-year decline.

Funding Winter Hitting Hard 

The massive decline in funding raised by Indian startups in 2022 has brought it at par with 2020 levels and is showing how the funding winter is wreaking havoc. The weakening value of rupee against the US dollar is further expected to change the status of many unicorns by leading to a correction in their valuations.

Even late-stage funding dropped 91% in Q3 2022. In an earlier interaction with Inc42, Krishna Vinjamuri, partner at Kae Capital, said that the economic slowdown and rationalisation of valuations in the public market has had a direct impact on investment in growth stage firms.  Late-stage investors have become cautious and are taking a closer look at the sustainability of business models.

The startup ecosystem is now seeing layoffs, consolidation, valuation cuts and even deal reversals. According to Inc42’s layoff tracker, Indian startups have laid off 12,500 employees so far in 2022 amid the funding winter. Of these, over 8,000 employees were laid off by just 15 unicorns, citing cost-cutting and restructuring as primary reasons.

There have been 203 mergers and acquisitions (M&As) in the Indians startup ecosystem in 2022, and looks set to cross last year’s record of 210 M&As.

Besides, the funding winter has also affected the IPO plans of startups. While epharmacy PharmEasy shelved its IPO plans and withdrew its DRHP, hospitality major OYO is also reported to have been mulling a reduction in its IPO size to $800 Mn from the previously planned $1.2 Bn.

The failure of the $4.7 Bn PayU-BillDesk deal is another example of the havoc wreaked by funding winter on the Indian startup ecosystem.

Can Indian Startup Funding Regain Momentum?

According to Inc42’s ‘The State of Indian Startup Ecosystem Report, 2022’, Indian startups are set to see reduced funding in 2022 and 2023 as compared to 2021. As such, the cumulative funding raised by Indian startups is expected to reach $180 Bn by the end of 2023.

As per the report, Indian startups are expected to raise $33 Bn in 2022 and $35 Bn in 2023 across 1,692 and 1,527 deals, respectively.

The investors are optimistic about investing at seed stage and growth stage in the Indian startups and the angel investor ecosystem is particularly bullish. Sanjay Mehta, partner at 100X.VC, believes that the fluctuations in funding are temporary. Meanwhile, Madhu Shalini Iyer, partner at rocketship.vc, advised founders that this is not the time to get paralysed with fear.

Experts believe that amidst the current market volatility, the continued risk of higher inflation and need for currency management, the most important factor to take into consideration is protecting the capital outflow from the ecosystem to other economies.

Last week, the Reserve Bank of India (RBI) increased the repo rate by 50 basis points (bps). Citing the central bank’s forecast, Lentra Chief Operating Officer Shrihari Gokhale said that inflation in the January-March quarter of 2023 is estimated at 5.8%, and is expected to further fall to 5% in April-June.

This implies that there might not be any need for a rate hike post January. Additionally, while the GDP grew roughly at 4% in the last two fiscal years, RBI expects the economy to grow at 7% in FY23.

“In the coming months, we can expect excess liquidity in the system to be drained out and deposit rates to go up,” Gokhale added.

Narayan Ramamoorthy, Chief Revenue Officer at Global PayEx, said that the startups would need to realign their strategy and prioritise working capital management by optimising their operational and financial expenditures in the current fiscal.

“The demand of goods and services will also be affected as consumer affinity will decline towards high priced/ discretionary products, possibly leading to higher inventory holding costs through the supply chain. Hence, businesses need to optimise inputs costs/ quantity, product mix, and might need to provide additional support to dealer/ distributors to optimise sales and revenues,” he added.

Nevertheless, the funding winter has already kicked in. In the next 12-18 months the ecosystem stakeholders’ primary focus will be on gaining stability, earning revenues and achieving profitability. So, while we may not see the startups crossing 2021’s record broken any time soon, the momentum will continue.

Compared to the annual total of the year 2021, the number of new VC Funds was 2.2x higher this year – from 33 in 2021 to 71 up to the third quarter of calendar year 2022, raising more than $15 Bn. In our next coverage we will go further deeper into how all this dry powder from investors will be invested in next year, thereby building up a surge in funding amount as well as average ticket size of funding by Q2-Q3 2023.