End of funding winter? Indian startups set to raise $8-10 billion this year

In 2022, Indian startups raised a total investment of $25 billion. In 2021 the fund raised a new high of $41.4 billion, according to Tracxn

Setting an upbeat tone for the Startup Mahakumbh summit that began in New Delhi on Monday, Rajan Anandan, Managing Partner of venture capital firm Peak XV Partners (formerly Sequoia India), hinted at a reversal of the funding winter. Indian  startups are expected to raise around $8-12 billion in funding this year, according to Anandan.
 

Around $10 billion – roughly Rs 80,000 crore – is sufficient for the Indian startup ecosystem to grow, Anandan said.
 

In 2021 the fundraise by startups had touched a new high of $41.4 billion, Tracxn data showed. In 2022, it was at $25 billion. Then in 2023, it was down to $7 billion—a fraction of the previous years.
 

Anandan pointed out that funding will be relatively steady for the next few years, progressing at a natural pace. Before the record funding numbers of 2021 and 2022, India's annual run rate was around $8-10 billion, he said. The startup ecosystem, he added, is currently sitting on $20 billion – around Rs 1.6 trillion – in dry powder that is waiting to be allocated.
 

Dry powder refers to unallocated capital raised by private equity and venture capital (PE/VC) players that is ready to be invested.
 

Sanjay Nayar, former chairman and chief executive officer of KKR India and now founder and chairman of Sorin Investments, argued that the pace of funding activity and valuations are wrong benchmarks for gauging startups.
 

“Good businesses are now going to attract more competition from funders…I am already seeing cheques and valuations coming in, and things might start edging up again because we have more competition,” he said.

The global macro headwinds and increased investor scrutiny, due to corporate governance lapses among several startups, impacted deal volumes during the past year. Going into the new year, governance will also be a big focus among founders and investors alike.
 

Amitabh Kant, G20 Sherpa and former CEO of Niti Aayog, emphasised the importance of proper governance and realistic valuations.
 

“I have seen startups growing, and have seen many of them collapsing as well. So, my first point is that corporate governance is key in startups and the onus for this is on startups,” he said.
 

Kant brought up several startups that have faced corporate governance issues, such as the likes of Byju’s, Zilingo, Bharatpe, Trell, GoMechanic, and Housing.com, among others.

Startups, he said, are innovators and risk-takers. And as they grow and expand, they must ensure proper financial management and proper audits.

“Self-regulation is key. If there is no self-regulation, regulators will get in, the government will get it. If you want to create a vibrant and creative Indian startup movement, there should be no government or regulator intervention,” Kant said.

Regardless, investors say that India remains an attractive market for investments.

“The geopolitical macro is in our favour. India’s sweet spot, which many people miss, is liquidity. You can build startups that consume a lot of money, but also ones that give back a lot of money to investors,” said Prashanth Prakash, partner, Accel, a venture capital (VC) firm.

“We (investors) now spend a lot of time in West Asia and Southeast Asia. But no other country has that flywheel of great entrepreneurs, enough funding, public market exits, and a supportive government,” he added.

The other factor that is attracting investors to Indian startups is the AI buzz. Anandan claimed that the shift in focus in the US towards sectors like artificial intelligence (AI) and next-generation software operations is the reason India’s startups world is emerging as the most vibrant in the world.