[2022 In Review] $25 Bn Funding, 21 Unicorns: Decoding Indian Startup Funding Landscape

The year 2022 was all about market correction for the Indian startup ecosystem. The year began on a high note, but the euphoria of 2021, in which Indian startups raised $42 Bn in funding, died down soon. According to Inc42’s latest ‘Annual Indian Startup Funding Report 2022’, Indian startups raised $25 Bn in funding in 2022, a decline of 40% from the previous year.

While seed-stage startups grabbed investors’ attention in 2022, valuations for growth and late-stage startups saw correction and are still undergoing a reset. In 2022, 13 startups turned unicorns in the first 3 months as against 8 startups in the first 4 months of 2021. However, as the funding winter set in, the pace of startups turning unicorns dropped and only 21 of them entered the coveted club in 2022 as against 44 in 2021, a decline of over 50%.

According to many investors, the decline in funding in 2022 was part of a natural cycle which gave an opportunity to innovative business models to emerge. The market correction also brought focus on the profitability of startups.

On the other hand, the year also saw India continuing being one of the fastest-growing digital economies in the world, with the overall economy now clearly on the path towards $5 Tn GDP by 2030 (2027-28 as per some estimates). Amidst the macroeconomic headwinds, the Indian economy demonstrated resilience and growth, while the penetration of internet and digital services also continued to rise. This helped startups with right product-market fit increase their revenues and make progress towards their profitability goals.

As Artha’s Managing Partner and Director Anirudh Damani said, 2022 was a much-needed year to bring back sanity. Far too many founders were showcasing unviable business models and getting funded because there seemed to be an unlimited supply of capital. The funding winter was needed to separate the businesses thriving on customer capital and those surviving on investor capital.

According to Pranav Pai, founding partner and chief investment officer at 3one4 Capital, “This year, we saw a gradual reversion to the mean for tech funding globally. As the macroenvironment corrected, investor selectivity was the theme of the year in India. High-burn models are no longer tolerated, and the post-COVID rush of adoption is now replaced by a question of retention and increasing revenue per user.”

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Key Funding Trends Seen In 2022

Bearish Funding, But Investor Sentiment Positive

Despite Indian startups raising lower funding in 2022 compared to 2021, there was not a big difference between the number of funding deals in 2022 (1519) and 2021 (1,584). This indicates that although the investors were bearish in terms of ticket size, they continued to explore and test the water in different segments, and the funds kept flowing in. Perhaps, this is the reason behind the 18% fall in average ticket size in 2022 from 2021.

Mega Deals Go Down

The number of mega deals – deals above $100 Mn – plunged 45% in 2022. Besides the global economic scenario and meltdown, the low participation of SoftBank and Tiger Global in large funding rounds was also a reason for the fall in mega deals.

Both Tiger and SoftBank participated in over 40 such deals in 2021 which came down to 18 in 2022.

Some of the key mega deals this year were of media and entertainment company Verse ($805 Mn); edtech unicorn BYJU’S ($800 Mn); and foodtech giant Swiggy’s ($700 Mn).

Seed Stage & Bridge Funding Rise Despite Bearish Sentiment

In 2022, seed-stage startups raised $2 Bn, which was 41% of the total $5 Bn seed funding raised between 2014-2022. Despite a decline in growth and late stage funding for Indian startups, seed and bridge funding saw an increase of 27% and 11%, respectively, in 2022. Also, the seed stage deal count touched an all-time high in 2022.

The economic downturn saw public markets taking the hit first, which then moved on to late and growth-stage startups. This pulled the investors’ towards seed and bridge-stage startups, allowing them to experiment in growing sectors with small ticket sizes as well as an opportunity to exit in the follow-on funding rounds.

Ecommerce, Fintech, Enterprisetech Top The Charts

The ecommerce sector saw the maximum number of deals in 2022, with startups raising  $4 Bn across 310 deals. The sector attracted investors this year owing to increased digitisation, continuing fear of Covid-19 and new variants, the rise of micro and instant delivery models, and the D2C momentum.

In terms of funding amount, fintech topped the charts. Fintech startups raised funding of $4.5 Bn across 250 deals. While investors experimented more in ecommerce with small ticket size deals, fintech garnered more high ticket size deals in 2022.

Interestingly, enterprisetech was the only sector to see an uptick in funding. In 2022, enterprisetech startups raised $4 Bn across 303 deals, an increase of 23% from $3.2 Bn raised across 229 deals in 2021. Several factors such as B2B focus, deeptech integration, rise in automation, and the listing of Freshworks on Nasdaq in 2021 buoyed investor sentiment.

In fact, enterprisetech was the only sector among the top three in 2022 to see an increase in average ticket size for funding at the late stage while the other two sectors performed well at seed stage.

Emerging Startup Hubs Garner More Funding Than Top Startup Hubs

The funding raised by startups based in Bengaluru, Delhi NCR, and Mumbai plunged 48%, 49%, and 42%, respectively, in 2022 compared to 2021. In contrast, the emerging startup hubs of the country saw an increase of 41% in funding. The emerging startup hubs include all parts of the country outside Bengaluru, Delhi NCR, and Mumbai.

As funding in top startup hubs is driven by mega deals, the 45% decline in such deals resulted in a fall in the funding raised by these hubs. Besides, the average mega funding deal size also fell 24.81% to $206 Mn in 2022 from $274 Mn in 2021.

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Adverse macroeconomic conditions led to investors seeing early and bridge-stage startups in emerging hubs as less risky. While early-stage startups received major funding, emerging hubs also saw 10 mega deals in 2022 – Uniphore ($400 Mn), Chargebee ($250 Mn), CredAvenue ($137 Mn), Waycool ($117 Mn) from Chennai; Elastic.run ($330 Mn), Expressbess ($300 Mn), Icertis ($150 Mn), Firstcry ($100 Mn), OneCard ($100 Mn) from Pune; and Smartron ($200 Mn) from Hyderabad

With almost all major states announcing their support for startups, investors’ focus tilted towards the startup solving grassroot problems with localised solutions in the emerging hubs.

Gender Diversity Continued To Be A Challenge

In 2022, the share of women-led startups (startups with at least one woman founder) among the startups which raised funding was at 9.6%, 140 basis points lower than 11% in 2021. Enterprisetech and healthtech startups gained considerable attention from investors in 2022.

However, the share of women-led startups increased significantly in India’s coveted unicorn club in 2022. With 7 women-led startups – 5ire, Amagi, Hasura, Lead, Livspace, Open Bank, Oxyzo – turning unicorn in 2022, the share of women-led startups in the unicorn club rose to 33% from 14% in 2021.

Market Correction Pushed For Startup Growth In 2022

The year 2022 recorded the lowest number of startup launches since 2014 amid the funding winter which was a result of multiple factors like the ongoing Russia-Ukraine war, rising inflation, hike in interest rates, and fears of a looming recession. As a result, unlike the years 2020 and 2021, investors decided to sit on the sidelines and look for startups with potential to grow their revenues.

If we consider 2021 as an outlier year, the funding raised by startups in 2022 was almost double of that in 2020. The decline in the launch of new startups can also indicate that more mature and experienced founders are now taking the centrestage, while the young founders are putting in efforts to solidify their market research to find minimum viable products.

As Artha Ventures’ Damani and Bharat Innovation Fund’s cofounder and managing partner Kunal Upadhyay highlighted, businesses running on sustainable margins can find suitors even in a harsh funding environment. Even if they cannot raise capital from investors, they can always return to their most reliable source of capital – customers.

In a nutshell, the tech startups committed to solving real-world issues and addressing a large audience ready to pay for the services are getting chased by smart capital. Despite the challenging fundraising environment, such startups are in good shape as more than $18 Bn worth dry powder is sitting on the sidelines, according to Inc42 data. Hence, quality startups that have demonstrated good growth and viable business models are getting funded.

“Some of the key factors which continued to influence startups’ ability to secure funding despite the funding winter were primarily a strong business model, a compelling product or service, a talented and experienced team, a solid financial plan, a robust marketing and sales strategy, and a large and growing market,” said Vinay Bansal, founder and CEO of Inflection Point Ventures (IPV).

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What’s Next For Startup Funding In 2023?

India is home to a large and growing population of entrepreneurs and startups, and has made significant progress in developing the infrastructure and support network necessary for startups to thrive. The ecosystem stakeholders believe that despite the slowdown in 2022, the growth should continue in 2023.

According to an Inc42 survey of Indian startup founders as part of its ‘Annual Funding Report 2022’, 78% of Indian startup founders do not anticipate a slowdown in FY23 revenues. Another survey with investors suggest that operating profits will be an ideal north star metric for Indian growth stage startups in FY24. Further, three out of every five VCs in India believe that the current conservative investor sentiment toward startups will continue in FY24.

Investors Inc42 talked to unanimously expect a more matured ecosystem to be built in 2023, with Indian startups aspiring for global markets and actually getting tested on the global benchmarks.

Here are the expected key trends in 2023 as per some of the key investors in the Indian startup ecosystem:

Investors will continue to be sceptical: There is no reason to expect any kind of macro recovery in 2023. Inflation remains high forcing the governments to keep fiscal policy tight. Even though funds have raised large amounts of capital and capital availability is there, they will continue to be careful in new investments and will largely deploy capital towards existing portfolio companies, believes Rajul Garg, founder and managing Partner at Leo Capital.

India will continue to be the third-largest startup ecosystem globally: As IPV’s Bansal indicated, while there are certainly challenges and obstacles to overcome, India has a strong foundation for entrepreneurship and innovation. The country will remain a key player in the global startup ecosystem and continue being the third-largest startup ecosystem in the world.

Investors will be bullish towards tech IPOs: The investor ecosystem is bullish on startups that have remained focused on technology innovation. Coupled with the government’s commitment to fostering the development of startups, the ecosystem is poised to see rapid growth and development. The year 2023 is likely to see more matured startups hitting the public market. These startups are learning from their predecessors on what is expected from them – unit economics, growth story and retail customer understanding, said Chinmaya Saxena, partner, community strategy, BEENEXT. We may also see a bandwagon of growth stage and small startups taking the IPO route at a decent valuation, thereby boosting both the private and retail investors confidence.

Startup funding may see an uptick in H2 2023: Investors expect startup funding to drop to around 2020 level of $13 Bn in 2023. Considering the current global macroeconomic factors, they expect funding to see an uptick in the second half of 2023. As 3one4 Capital’s Pai indicated, funding should hold to 2022 levels in 2023 for the private market. It would be imperative for founders to find a way to become market leaders. There will be no scarcity of growth capital for startups which manage to do so.

Regulatory support from the government: The government’s focus on ‘Digital India’ and startups during the country’s G20 presidency speaks volume on how important they are for India. As the government has identified the startup ecosystem as an essential driver of economic growth and a key contributor to the collective ambition of a $5 Tn economy, there will be sustained policy level and regulatory support to foster the growth of the sector, said Nandini Mansinghka, CEO & cofounder of Mumbai Angel.

Deeptech, Web3 Will Be In Play: Going beyond the consumer play, the Indian startup ecosystem has developed capabilities in areas like Web3, SaaS, and deeptech, providing solutions for the world from India. According to Bharat Innovation Fund’s Upadhyay, there will be high-quality investment opportunities in deeptech startups across areas like Al, biotech, climate tech, enterprise SaaS, 5G, enterprisetech, cybersecurity and privacy.

Ecommerce Funding To Go Downhill: Riding on the D2C momentum, Indian ecommerce startups raised $11 Bn in 2021. However, this fell over 60% to just $4 Bn in 2022. While the festive season this year saw a decline in sales, the turbulent macroeconomic conditions may lead to further cuts in consumer spending. While Snapdeal and boAt have already shelved their IPO plans, Nykaa also saw a rout on the stock exchanges. Hence, investors are expected to be cautious while making bets on ecommerce startups and may even look at exits through mergers and acquisitions.

For more interesting and analysis-based predictions for next year, check out Inc42’s upcoming article on predictions for the Indian startup ecosystem in 2023.

In conclusion, it is a known fact that the Indian startup ecosystem is closely correlated with key global startup ecosystems, especially the US. Sectors like edtech and fintech were overhyped in both India and the US, and the slowdown in them is expected to continue in 2023 as well. However, the theme of digitisation continues to play out and startups involved in it will continue to grow. While seed activity is expected to be at pre-Covid levels, late-stage funding rounds could be few and far between.

“A lot of the mess created by the hyper funding of inherently unsustainable businesses is getting cleared up in the next 3-4 months, either through consolidation or shutdowns. Once this field gets cleared, investors will find solid value in the survivors who have endured the worst blast of this funding winter and come out as strong, resilient businesses, expecting a bull run by the middle of 2023,” concluded Artha Venture’s Damani.

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