Indian startups faced a significant funding contraction in the first half of 2023 as prominent late-stage investors curtailed new investments.
This was due to a slowdown in the broader public market. According to data from market intelligence agency Tracxn, Indian startups raised only $5.46 billion uring this period.
YOU MAY ALSO LIKE: Apple’s Market Cap Exceeds $3 Trillion
It marked a substantial 68% decline from the $17.1 billion raised in the same timeframe in 2022 and a drop from $13.4 billion in the first half of 2021.
This year has seen no new unicorns emerge in the Indian startup ecosystem, in stark contrast to the 18 new entrants in 2022’s first half and 16 in the corresponding period the previous year.
The funding crunch has affected startups at different stages.
Tracxn’s data reveals that only 325 seed funding deals were struck in H1 2023, a significant fall from 936 in the same period in 2022 and 921 in H1 2021.
Other early-stage funding rounds, particularly Series A and Series B, also declined to 108 deals compared to 296 and 211 in the equivalent periods in 2022 and 2021, respectively.
Late-stage funding also suffered, with only 36 deals compared to 137 and 114 during similar periods in the previous years.
The slowdown can be attributed to the withdrawal of many late-stage investors who were previously active in backing Indian startups.
Tiger Global, for example, only completed one deal in India this year, while SoftBank and Insight Partners wrote minimal checks despite their significant investments in late-stage startups in previous years.
Instead, SoftBank has been focusing on increasing liquidity and selling portions of its Paytm stake.
Tiger Global, which has deployed over $6.5 billion into Indian startups, is unlikely to invest in new startups in India for the next few months, as stated by a partner at the firm.
Scott Shleifer, who oversees startup investments at Tiger Global, expressed his view on returns on capital in India during an investor call.
He noted that historically, they have been unsatisfactory compared to market-leading internet companies like Google, Facebook, Alibaba, and Tencent.
While some prominent late-stage investors remain on the sidelines, sovereign funds, particularly from the Middle East region, have been financing the most deals in India recently.
Rahul Chandra, a seasoned investor and co-founder of Arkam Ventures, anticipates that some prolific late-stage investors will not return to their usual investment activity in India for at least another two years.
The lack of participation from late-stage backers and the scarcity of IPOs have also affected mid-stage investors.
Particularly those who are struggling to adapt their underwriting models to reflect the current public market sentiment.
Several high-profile Indian startups, including Byju’s, Swiggy, and PharmEasy, have experienced significant downward adjustments in their valuations, sometimes by 50% or more.
Despite these challenges, Indian startups have the potential to rebound with the considerable “dry powder” of untapped capital reserves held by venture capitalists.
Many active VC firms in India, including Peak XV Partners, Lightspeed, Accel, Elevation Capital, Matrix Partners India, 3one4 Capital, and Blume Ventures, have secured new and larger funds over the past 18 months.
Rahul Chandra believes that the pace of investments will likely pick up in the coming months.
YOU MAY ALSO LIKE: CMA Set To Probe Proposed Adobe/Figma Merger
However, the availability of capital will remain largely confined to local sources, with rational behavior prevailing due to the absence of excessive exuberance that drives valuations.
Nevertheless, competition for termsheets among investors will continue as more capital is deployed over the next two years.
