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The Indian fintech start-up ecosystem, like many other sectors, was hit hard by the ongoing funding winter. Despite a 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 done fintech no favours. Experts, however, say that the sector has fared better than others 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 to $10.7 billion the previous year, according to data from Tracxn, a market intelligence platform.
The drop in funding was primarily due to a decline in late-stage funding, which fell from $8.3 billion in 2021 to $3.7 billion in 2022, a 56 per cent dip. Yet, India received the third-highest amount of funding in the fintech sector, behind only the US and the UK.
“A lot of start-ups are finding it difficult to raise funds at the moment. Even ones that can are not doing so at attractive valuations. We are also in the process of raising funds and are finding it quite challenging,” Sameer Aggarwal, co-founder and CEO, RevFin Services, told Business Standard. “Investor interest is low right now and we are not seeing many options or offers. The overall speed of fundraise has also slowed down,” he said.
The new year has, however, brought with it new hope for the space. Fintech start-ups have raised a total of $962 million in YTD 2023.
The sector brought in the most funding during January, with only two $100+ million funding rounds coming from fintech start-ups. PhonePe led the charge with a massive $350 million funding round led by General Atlantic. KreditBee, an online marketplace for personal loans, was the other who raised $120 million in a series D round.
The floodgates of fintech funding have since opened even more. Insurtech start-up InsuranceDekho led a huge $150 million Series A round, while PhonePe bagged another $100 million in February.
March has also faired well for Indian fintechs. Premji Invest-backed-Mintifi, a supply chain financing platform, is another such start-up who has 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 definitely dropped from its peak levels,” said Vikram Chachra, Founding Partner, 8i Ventures, a fintech-focused VC firm. “However, there is no dearth of appetite among investors. But they have become much more selective.”
Akshay Mehrotra, co-founder and CEO, Fibe (formerly known as EarlySalary) says that the fintech space in India was going through a transition of hyper-growth recently but many businesses are now focusing on managing revenues and targeting profitability. “Such companies still have funding available. Although entities in the growth phase, with no signs of large revenues and profit, are facing funding challenges,” he said.
“Fibe has been extremely fortunate in this regard. We raised $110 million in Series D funding five months ago, which was the first-time private equity took a bet in unsecured lending. Following us, Money View and KreditBee (who have similar business models) also managed to raise large rounds,” he added.
Start-ups say that fundraises are taking place at two extremes, either early-stage start-ups – which offer higher value growth – or late-stage companies with good business models that have scaled well.
Early-stage investments have stayed relatively consistent year-on-year, from $1.9 billion raised in 2021 to $1.6 billion raised in 2022, despite an overall decline in funding, Tracxn data suggests.
However, growth-stage companies in between 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,” said RevFin’s Aggarwal.
Funding woes are not the only hurdle for Indian fintechs. There still 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 private equity (PE) backers.
“The type of investments has changed from venture capital to private equity across the industry. This indicates that the industry will now go through transformative changes, becoming larger and more impactful,” said Mehrotra of Fibe.
RBI’s Executive Director Ajay Kumar Choudhary recently stated that regulators “need to keep a watchful eye on the risks by fintechs and bigtechs. The risk posed by (them) is different.” He added that a “framework for the fintech lending ecosystem is being worked upon by RBI.” Choudhury’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 for Indian fintechs. Start-ups and industry stakeholders, however, believe that this is not an impediment anymore. Businesses largely claim that they welcome regulations which, they say, should be implemented in a transparent manner as soon as possible.
“Regulatory compliance is not a challenge for fintechs anymore. It is clear among founders that regulations must be understood and complied with very closely. If fintechs are not compliant, they stand to lose their licenses, and even their right to function. Most founders are now savvy with regulations and making sure they get the right advice,” said Chachra of 8i Ventures.
“Many large fintechs raised large sums because they are regulated entities. With more regulations coming in, more money will flow towards well-established, regulated players,” he added.
Despite the 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 and things are expected to be better this year compared to the last. Companies with high valuations need to grow into them, which might take a while,” said Chachra.
“Highly-valued companies that are already generating cash need to acquire more revenues. 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 added.
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 usage.
“Despite fintech adoption in the Indian market being very high, overall penetration is very low, be it in terms of payments or lending. While start-ups have scaled up significantly, we have still not even 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 1 cities to regions beyond,” said Aggarwal of RevFin.
