Funding spring for startups may return in next 12 months, say analysts

The India tech startup ecosystem witnessed its highest funding of $43.5 bn in 2021 and after this, the funding started to witness a downfall and there is no sign of improvement in the funding to date,

The Indian tech startup ecosystem saw its highest funding peak at $43.5 billion in 2021. Since then, funding has witnessed a downturn with no evident signs of recovery, and according to analysts, the funding in this space dropped by 38 per cent in 2022, falling to $27 billion.

“Indian tech startups have raised a total of $6.2 billion in 2023 to date. In comparison, funding in the same period in 2022 and 2021 was $21.6 billion and $27.2 billion, respectively,” stated Neha Singh, co-founder of research firm Tracxn. “This constitutes a drop of 71 per cent and 77 per cent compared with the funds raised in the corresponding period in 2022 and 2021, respectively.”

A similar trend has been observed globally, as countries grapple with growing inflation, rising interest rates, and uncertain macroeconomic conditions. The ongoing Russia-Ukraine conflict has further accelerated the slowdown.

“In response to these factors, investors have become more cautious in making significant investments unless they identify businesses with a clear path towards profitability,” said Singh.

Considering the current volatile economic climate, industry experts anticipate that such trends, including a funding winter, will continue throughout 2023.

This is leading to major cost-cutting measures by tech startups, resulting in the loss of thousands of jobs. In the first half of 2023 alone, approximately 70 startups have collectively laid off more than 17,000 employees, according to data from CIEL HR, a recruitment and staffing firm.

Prominent edtech company Byju’s has been involved in multiple rounds of layoffs, while US-based software-as-a-service startup Tekion, quick commerce firm Dunzo, homegrown video-sharing platforms ShareChat and Moj, edtech unicorn Unacademy, and Kirana tech startup 1K Kirana Bazaar have all taken similar actions.

In a survey conducted in June 2023, consulting firm Redseer found that 50 per cent of investors expect the funding spring to return over the next 6-12 months. About 17 per cent of respondents believe it will happen sooner, while the rest think it will be 12-18 months or more before the funding winter ends.

Despite the current gloom, Kanishka Mohan, a partner at Redseer Strategy Consultants, expressed optimism that the ongoing funding winter would contribute to a more robust long-term narrative for India's public and private funding environment.

VCs today have more available capital, or "dry powder," than ever, signalling a positive outlook for the total number of deals this year. Approximately 90 per cent of these are expected to be seed or early-stage deals, in line with trends observed since calendar year 2017 (CY17).

“We are essentially course correcting from liquidity-driven investing in 2021,” commented Dipanjan Basu, co-founder and partner at Fireside Ventures, in the Redseer report.

Expectations suggest that 2023 will align with long-term trends similar to CY17 to CY20, with funding potentially hovering between $12 billion and $15 billion. Redseer anticipates a bullish rise into CY24, touching $15-20 billion.

“I think it will probably be 9 to 12 months before the environment stabilises,” observed Hemant Taneja, MD and CEO of General Catalyst, in the Redseer report.

Reflecting the 2023 funding trend among the top 10 VCs in the Indian startup ecosystem, fintech leads in terms of funding, with $1.2 billion raised, according to Tracxn. Retail, edtech, transportation and logistics tech, and environment tech are also key sectors receiving substantial investment. In 2023, major players like Tiger Global, Softbank Vision Fund, and Accel have made significant investments in companies such as PhonePe, Byju’s, Lenskart, and Ola Electric.

Finally, the conditions are expected to improve once macroeconomic uncertainties wane. The International Monetary Fund (IMF) recently revised its 2023 gross domestic product (GDP) growth prospects for India to 6.1 per cent, a 0.2 increase from April predictions. “This is a positive sign for the Indian economy and provides a favourable outlook for the startup ecosystem in this region,” concluded Singh of Tracxn.