Growth-Stage Startup Funding Trends That Will Dominate The Most Of 2023 

The year 2021 was undoubtedly the best year for India’s startups, which lapped up $42 Bn across 1,584 deals from investors. Unfortunately, several factors pertaining to macroeconomic uncertainties, the Russia-Ukraine conflict, interest rate hikes, volatile capital markets, and fears of a looming recession jinxed this momentum, and the startup funding came crashing down in 2022 to $25 Bn. As of now, our data shows that the year 2023 will be no consolation either.

According to Inc42’s analysis, the Indian startup ecosystem could see 370 growth-stage startup funding deals in 2023, up only 4.5% from 354 such deals in 2022. Further, the growth-stage funding could touch $7.4 Bn in 2023, approximately 3.9% less than the $7.7 Bn raised in 2022.

Speaking with Inc42, market analysts pointed out that the growth-stage startup funding in any country’s startup economy is directly linked to the nation’s regulatory environment, macroeconomic factors, and the performance of its capital markets.

They said after a prosperous 2021, the Indian capital markets witnessed a blood bath in 2022, due to the fall in the valuations of listed tech companies. As a result, many companies, including startups, deferred their IPO plans.

What further marred the growth-stage startup funding in India was a scared global investor. It is pertinent to note here is that India has a limited pool of domestic growth-stage investors, and the growth-stage funding in the country is mainly driven by global investors such as Tiger Global and Softbank.

“Growth-stage funding in India fell due to the Russia-Ukraine conflict after the developed countries of the world took stock of rising energy and food prices and resisted investing overseas,” said Anup Jain, the managing partner at Orios Venture Partners.

“However, the only silver lining here was that the FPI investments in the capital  markets remained strong in 2022. This makes us positive of the fact that the growth-stage funding may revert to its original levels post the stabilisation of macros globally,” Jain added.

Key Growth Stage Funding Trends In 2022

According to Inc42’s Annual Indian Startup Funding report, growth-stage startup funding slipped a minor 4% YoY to $7.75 Bn in 2022 from $8.1 Bn in 2021.

However, between 2020 and 2022, keeping 2021 as an exception, the growth-stage startup funding was up a whopping 273% in 2022, compared to just $2 Bn raised in 2020.

Further, even though the number of growth funding deals was less compared to 2021, the average deal size rose 9% YoY in 2022, which according to the market experts is a positive.

Key Growth Stage Funding Trends In 2023

As of now, most experts have mixed feelings about the growth-stage funding scenario in 2023, and the trends that they see emerging in 2023 are as follows:

Profitability Of Startups To Be Crucial For Growth-Stage Funding

During the pandemic peak, the massive runup in the valuations across the Indian startup ecosystem got fuelled by investors holding record amounts of capital, as too much money got pumped into a limited number of investable assets.

Artha Ventures’ managing partner and director Anirudh Damani highlights that the chase led to several ‘me too’ business models getting hyper-funded to grow-at-all costs in a bid to win the maximum market share. Once the funding tap went dry, many of these businesses were in a fix. Their revenues and valuations plummeted, and they were forced to create more sustainable business models.

Ashish Fafadia of Blume Ventures believes only the startups that have a valuation above $500 Mn and are focussed on profitability will be able to secure more funding in 2023 and beyond.

So, if in the next 2-3 years, if businesses are unable to provide their investors the value for their investments, then it will become tough for the founders to raise anymore money.

Further, experts believe that for companies with a valuation between $100 Mn and $500 Mn, it will be hard to imagine big round sizes or successive fund raises in 2023. The investors will take a cautious approach and significant time in due diligence.

“I believe that the worst may not be over for the growth and later-stage funding ecosystem, and the pain will persist a bit longer as investors write off billions of dollars in invested capital. However, this ecosystem will stage a revival with businesses that pass this stern test. The tide turning for this funding ecosystem is a matter of when not if,” said Anirudh Damani, the managing partner and director of Artha Ventures.

$18 Bn VC Dry Powder To Prove Redundant For Growth-Stage Startups

At this point in time, VC dry powder is at an all-time high globally. In India, we saw 126 new funds in 2022, with approximately $18 Bn of uninvested money at the disposal of VCs. However, at least for the top growth-stage startups, there is a limited pool of investors who have the size and ability to issue large cheques to the company that cross the threshold of $500 Mn to $1 Bn valuation.

Analysts suggest that in the US, the valuation multiple is that high growth companies are trading at 40% or more, with an enterprise value to revenue multiple of 2.4-2.5. During the pandemic peak, this was closer to 6. So, companies aren’t very keen to accept a down round, as this affects investors too and they have to write down the valuation of their portfolio companies, which, in turn, impacts their AUM.

Meanwhile, many other analysts that we spoke with indicated that at the growth stage, India could see more investments in the startups with a structured approach and a focus on maximising the investors’ returns.

Consider this: If a company today is valued at $100 Mn, and an investor pumps in $10 Mn with a condition of a 2x liquidation preference, the investor will want to end up making $20 Mn, even if the company is divested at 50% less valuation.

“At the growth stage, startups with superior metrics will continue to attract funding. However, investors might be more stringent and will focus on various parameters, importantly Governance” while evaluating them. Also, startups at growth stage might look at alternative sources of funding,” said Prachi Malpani, an investment analyst at Mela Ventures.

Fintech & Logistics Tech To Be The Showstoppers

Analysts are quite bullish on the fintech and logistics tech sectors in terms of attracting growth-stage funding. The fintech space witnessed a lot of regulatory challenges in 2022, which has now placed investors and startups on a clear path.

Also, the fall in the valuation of Paytm has alerted the founders of growth-stage startups to keep their valuations in check, thereby paving the way for a more confident investor.

Further, the rise of omnichannel retailing as well as cross border supply chain focus is expected to give a boost to the logistics tech sector in 2023.

Strong Tailwinds Visible For BharatTech And Sustainability Startups 

Similar to deeptech, sustainability startups are solving world-changing challenges. With growing awareness and increasing support from the governments and large enterprises the world over, there are strong tailwinds visible for the continued growth of the startups in this space.

Next, BharatTech, or startups serving the needs of domestic customers who have traditionally been underserved, is another segment that Rocketship.vc’s Partner Madhu Shalini Iyer believes will thrive.

 “With increasing digital penetration, growing awareness among consumers across towns and villages, and improving socioeconomic conditions, there is a strong market of customers that can continue to drive growth for the startups that understand and solve their needs,” she added.

Some of the other key trends that the investor ecosystem expects for the growth-stage startup ecosystem in India in 2023 are as follows:

A Slowdown In Funding Until The First Half Of 2023: Soumitra Sharma, an active angel investor, says that at the growth stage, we will continue to see a funding slowdown at least in the first two quarters of 2023. Most high-ticket size rounds will be seen towards the end of the year, and these are likely to be at a flat valuation, with both startups and investors looking to safeguard their interests alike.

No Free Lunches For Entrepreneurs: Headwinds arising from global politics, China, and the dearth of opportunities in some geographies of the world will enhance the investment climate in India. However, the money will not be available easily, and the founders will have to prove themselves worthy before attracting any kind of investment, says Fafadia of Blume.

Startup Focussed On Resolving Grassroots Challenges To Rise: Bharat Innovation Fund’s Kunal Upadhyay believes that the startups that would grow in 2023 will be the ones whose products are rooted in building emerging hubs and solving the challenges at the grassroots. Here, the growth-stage investors will likely be bullish around deeptech startups operating in areas like Al, biotech, climate-tech, 5G, enterprisetech, cybersecurity and privacy.

The next report in our series will depict some interesting late-stage funding trends in the Indian startup ecosystem. Stay tuned for more.

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