Fundraising woes remain for fintechs in the face of a revival of big bets

Experts say that investors are now cautiously optimistic, albeit more selective with their bets

The Indian financial technology (fintech) start-up ecosystem, like other sectors, was hit hard by a funding winter. Despite the resurgence of large funding rounds in the space recently, many start-ups are still finding it challenging to raise capital.

Furthermore, a dearth of regulations has not done the fintech sector any service. Experts, however, say that the sector has fared better than most during this tumultuous period and investors are cautiously optimistic, albeit more selective with their bets.

Investments among fintech start-ups in India saw a decline of 47 per cent year-on-year (YoY) in 2022 at $5.65 billion, compared with $10.7 billion the previous year, according to data from Tracxn, a market intelligence platform.

The drop in funding was primarily due to a drop in late-stage funding, which fell from $8.3 billion in 2021 to $3.7 billion in 2022 -- a dip of 56 per cent. Yet, India received the third-highest funding in the fintech sector, behind the US and the UK.

“A lot of start-ups are finding it difficult to raise funds at this point in time. Even ones that can are not doing so at attractive valuations. We are in the process of raising funds and finding it challenging,” says Sameer Aggarwal, co-founder and chief executive officer (CEO), RevFin Services. “Investor interest is low right now. We are not seeing many options or offers. The overall speed of fundraising has slowed down.”

Hope in the new year

The new year, however, brought with it new hope for the space. Fintech start-ups have raised a total of $962 million year-to-date. The sector brought in the most funding during January, with the only two $100 million-plus funding rounds coming from fintech start-ups. PhonePe led the charge with a $350 million funding round, as part of an ongoing $1-billion financing round, led by General Atlantic. The other was KreditBee, an online marketplace for personal loans, which raised $120 million in a Series D round.

The floodgates of fintech funding have since opened. Insurtech start-up InsuranceDekho led a $150-million Series A round, while PhonePe bagged another $100 million in February.

March has also fared well for Indian fintechs. Aside from PhonePe, which raised another $200 million from its parent Walmart, Premji Invest-backed Mintifi -- a supply-chain financing platform -- also raised $110 million in Series D funding until now.

“Fintech, as a sector, seems to have performed better than others amid the funding winter. We have seen many large fintech deals, be it Mintifi or KreditBee, coming from the space recently. Despite this, funding has dropped from its peak levels,” says Vikram Chachra, founding partner, 8i Ventures, a fintech-focused venture capital (VC) firm. “However, there is no want of appetite among investors. But they have become much more selective,” he adds.

Akshay Mehrotra, co-founder and CEO, Fibe (formerly EarlySalary), says the fintech space in India was going through a transition of hypergrowth recently, but many businesses are now focusing on managing revenues and targeting profitability.

“Such companies still have funding available, even though entities in the growth phase, with no signs of large revenue and profit, are facing funding challenges,” he observes.

“Fibe has been extremely fortunate. We raised $110 million in Series D funding five months ago, which was the first time a private equity (PE) took a bet on unsecured lending. Taking a cue from us, Moneyview and KreditBee (with similar business models) also managed to raise large rounds,” adds Mehrotra.

Start-ups say fundraises are taking place at two extremes -- either early-stage ventures that offer higher value growth, or late-stage companies with good business models that have scaled well.

Early-stage investments have stayed relatively consistent YoY, from $1.9 billion raised in 2021 to $1.6 billion in 2022, in spite of an overall decline in funding, indicates Tracxn data. However, growth-stage companies are finding it challenging to raise capital.

“If the business model is good, however, companies will be able to raise funds, irrespective of macro environments,” says Aggarwal.

Regulatory uncertainty

Funding woes are not the only hurdle for Indian fintechs. There remains a lot of regulatory uncertainty in the space.

The Reserve Bank of India (RBI) recently tightened the regulatory framework for fintechs, which caused many start-ups to revisit their strategies and enter into fresh dialogues with their PE backers.

“The type of investments has changed from VC to PE across the industry. This indicates that the industry will now go through transformative changes, becoming larger and more impactful,” says Mehrotra.

RBI Executive Director Ajay Kumar Choudhary recently stated that regulators “need to keep a watchful eye on the risks by fintechs and Big Tech. The risks posed by (them) is different”. He added that a “framework for the fintech lending ecosystem is being worked upon by the RBI”.

Choudhary’s portfolio includes the RBI’s fintech department, which was set up in January 2022, indicating streamlining of the sector.

Regulators have, in the past, also referred to “compliance-aversion” as a big challenge to Indian fintechs. Start-ups and industry stakeholders, however, believe this is not an impediment anymore. Businesses welcome the regulations which, they say, should be implemented transparently at the earliest.

“Regulatory compliance is not a challenge for fintechs anymore. It is clear among founders that regulations must be understood and complied with. If fintechs are not compliant, they stand to lose their licences, and even their right to function. Most founders are now regulation-savvy and make sure they get the right advice,” says Chachra.

“Many large fintechs raised large sums because they are regulated entities. With more regulations coming in, more money will flow into well-established, regulated players,” he adds.

Regardless of uncertainty, investors are still optimistic about the future of the sector. “There is cautious optimism in the sector. We expect to see more consolidation this year. Companies with high valuations need to grow into them,” says Chachra.

“Highly valued companies that are already generating cash need to acquire more revenue. We may, therefore, see companies acquiring smaller start-ups. We will likely see rapid consolidation happening later this year. The market will look more oligopolistic, with strong winners emerging in different categories,” he adds.

Industry watchers believe that growth in the space is expected to continue in the long run, propelled by a large unbanked population and rising mobile phone penetration.

“Despite fintech adoption in the Indian market being high, overall penetration is low, be it in terms of payments or lending. While start-ups have scaled up significantly, we have still not scratched the surface in terms of lending and digital payments. There is still a huge opportunity in small-town India and fintechs need to start moving away from Tier-I cities to regions beyond,” says Aggarwal.

 

Source: Tracxn
YoY Funding Trends Among Indian Fintech Start-ups
Year	Funding Amount (in $bn)	No. of Rounds
2018	2.1	322
2019	4.2	385
2020	2	368
2021	10.8	577
2022	5.9	413
2023 YTD	0.96	26
Largest Fintech Funding Rounds in YTD 2023
Month	Company	Funding Amt (in $mn)	Round
March	Mintifi	110	Series D
February	InsuranceDekho	150	Series A
	PhonePe	100	Series D
January	PhonePe	300	Series D
	KreditBee	120	Series D