The so-called funding winter that has sent a chill down the Indian startup ecosystem could be a tad exaggerated. According to a research report by Credit Suisse, the pessimism in the startup ecosystem is "overdone", just as the optimism was at one point of time.
The current funding environment signals a pause for breath after the sprint rather than a complete halt of funding, the report says.
"As a period of euphoria ends, investment flows dry up and valuation benchmarks drop. In this phase, many start questioning the business case. That has started, with investors, entrepreneurs and journalists waking up to a market that is smaller than earlier envisaged, with a stagnant Indian middle-class. In our view, just like the earlier optimism was overdone, so is this pessimism," it says.
After two landmark years in which 70 new unicorns emerged, changing India’s corporate landscape, there is a much-needed pause.
This was expected, given rising interest rates globally, new valuation anchors provided by the first large listings and a slowdown in unicorn formation globally.
“With only 11 new entrants, our list this year expands to 103, collectively valued at US$357bn, vs 93 last year, valued at US$330bn." the report states.
The new unicorns added to the list of Credit Suisse's list are: Amagi Media Labs, Fractal Analytics, Leadsquared, Molbio Diagnostics, OneCard, Open Financial Technologies, Oxyzo Financial Services, PhysicsWallah, Purplle and ShipRocket.
The value of India unicorns is much larger compared to the size of the listed space in other countries—11 percent in India against 7 percent in China and 5 percent in the US.
"This also reflects greater economic salience of Indian unicorns: not just in terms of wealth creation, but also in economic growth,” it says.
In a country with low per-capita wealth, where there were enough entrepreneurs but not enough risk capital, private funding is filling an important gap.
The local also rises
To date, the funding scene has been dominated by global funds. The report says flows from domestic funds are picking up and stepping in to fill the deficit.
"The demand from local savers for participation in private market wealth creation has created new investment channels,” it says.
While Alternative Investment Funds (AIF) include a broad range of investor types, the categories under which VC/PE investors are classified are showing strong growth too.
AIF assets have grown at 40 percent CAGR to Rs 3.1 trillion ($38 billion), with funding commitments of Rs 6.9 trillion ($84 billion), implying dry powder of Rs 3.8 trillion ($ 46 billion).
“Not all of this would be VC/PE, but as per data from Venture Intelligence, domestic VC investors were 22% of private fundraise in India vs. 15% in 2019, " the report says.
The report emphasises that the geographical reach of the ecosystem is expanding, too, with angel-investing clubs emerging in several large cities, funding startups in non-metro cities.
Unicorns rising stronger in India
While in 2022, 59 percent of the unicorns across the globe were from the US, the number has now gone down to 53 percent.
India accounts for 8 percent of the world's unicorns and 9 percent if seen from the lens of the value of these unicorns and 7 percent in terms of news unicorns added for FY22.
The hunt for profitability
Private firms, especially those in late-stage growth, are now under pressure to improve profitability. This is not just to extend the duration for which their existing cash reserves can last but also to make them more attractive to market investors.
"When interest rates are close to zero, it does not make a difference whether a company makes profits this year or the next...When interest rates rise as sharply as they have done, profit expectations need to be brought forward. As firms shift focus to profitability, their growth slows down, which further pressures their valuation. Slower growth also results from startups trying to preserve their capital, as incremental funding has become more difficult," the report states.