Why Did Funding In Indian Startups Plunge 70% In The 1st Half Of 2023?

So, finally, we are halfway to 2024, which means we have successfully completed half of 2023. Wait, Successfully?? Well, I guess ‘that term, success,’ doesn’t goes well with startups and unicorns because there were no new unicorns in India in the first half of 2023. Also, startup financing surged more than 70% from January to June last year, indicating that the funding winter is here to stay because some top unicorns remain entangled in the economic slump!

Following are some stats to support the downfall of Indian startups.

• According to statistics from market intelligence firm Tracxn, Indian entrepreneurs raised just $5.48 billion in the first six months, compared to $19.5 billion in the same period last year.
• In the first quarter of this year, Indian entrepreneurs raised a total of $2.8 billion, a staggering 75% decrease from the same time last year ($11.9 billion), as rising prices and interest rates continue to substantially impact investments.
• The startup ecosystem witnessed 546 deal rounds in the first half of this year, a considerable decline from the 1,570 overall deals in the same period last year.
• Seed rounds saw $349 million in investments (383 deals), early-stage deals noticed $1.36 billion (123), and late-stage deals noticed $3.77 billion (40 deals). In comparison, the first half of 2022 saw 19 unicorns, with seed-round investments totaling $1.08 billion, early-stage rounds totaling $5.08 billion, and late-stage funds totaling $13.1 billion.

Why the Indian startups are witnessing downward momentum?

Foreign money became increasingly difficult to get as the global economy deteriorated. According to VCs, this was mostly due to inflated valuations and hefty overhead expenditures. The leading financiers in India’s startup industry are US investors. As a result, the US Fed’s monetary policy over the last year or two has indirectly sent shocks across the Indian startup environment. The Fed’s interest rates had stayed around zero until April 2022, so startups were flush with cheap money. During the pandemic, global investors searched for high-yielding investments due to low-interest rates on government securities and other debt instruments.

However, VC investment dried up when interest rates climbed, decreasing cash flows and values. Investors’ priorities have become more focused. Given the current risk parameters, investors focus on startups with strong cash flows and profitability. Due to a lack of cash, founders have been forced to scale back their operations and lay off employees. This also pushed back their intentions to list. Because public markets are the last judge of value, private investors have recognised that the previous multiples would not work unless the firm can produce great margins or maintain tremendous organic growth.

In most countries, including India, inflation increased in 2022 due to supply chain problems exacerbated by the Ukraine war. Rising commodity and energy prices drive up input costs, which raise operational expenses. As input prices grow, so do marginal costs. This makes generating a net positive cash flow for startups challenging. Lower profitability, from the perspective of a venture capital firm, leaves little room for investment for startups.

However, there were few good funds in the following few locations.

• Regarding geography, Bengaluru is still the favourite startup destination for investors in June. Startups in Karnataka’s capital received $172 million in investment in June 2023. 
• The startup growth is followed by Delhi NCR, which received $109 million in investment.
• One of India’s rising startup centres, Kozhikode reached its first-ever monthly podium in April when edtech firm Xylem Learning received $61 million in financing from PhysicsWallah. 
• Raipur ranked fourth, is a surprising entry to the top startup centres in June, when Drools raised $60 million in fundraising at a valuation of $600 million. The two massive and exceptional trades pushed Kozhikode and Raipur to the top. Between 2014 and May 2023, the two cities saw only 7 financing agreements, raising slightly over $4 million.
• In terms of finance, Mumbai was ranked fifth. However, it was the second-most active startup hub in June 2023, with 17 investment agreements.

The startup economy in India is in a reset mode.

Indian entrepreneurs are reviewing their lofty valuations from 2020 and 2021, spurred by the growth of tech-enabled businesses like Paytm, Zomato, Nykaa, and Zerodha. However, their extreme values did not result in significant profits.

The first signs of a deterioration in the Indian startup industry occurred with the failure of Paytm, a fintech startup, to list in 2021. Since then, investors have placed a premium on measures including fair value, profitability, customer reach, and the ability to expand sustainably.

All of the current developments entail a total shift in mindset for startups; they must expect and plan for higher and more unforeseen risks and be prepared to pivot when necessary. While venture investors feel that Indian businesses have enormous long-term potential, they also believe their fundamentals and business KPIs must be recalibrated. The country’s large talent pool and ability to develop cutting-edge solutions that serve the local market and a worldwide audience add to its allure as a leading investment location.