Moneycontrol Masterclass: Slowdown in funding frenzy to impact late-stage startups more

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After a funding frenzy that led to 44 startups achieving unicorn status in 2021, and many others to grow their valuation multi-fold in the year, the question many are asking is whether the euphoria is now slowing down.

Adding to the slowing pace are global tensions triggered by Russia’s war on Ukraine and rising oil prices, leading to caution among investors.

Speaking to Moneycontrol’s Chandra R Srikanth in an episode of Moneycontrol Masterclass, angel investor and founder of neobanking platform Jupiter, Jitendra Gupta, said that the frenzy of 2021 has been replaced with rationality in the past one month.

“That being said, the bigger India story is still at play with the internet ecosystem growing and consumer habits changing. While sentiments are more subdued, I think that will last only for 6-12 months more. Post that we will be back to the party,” he said.

Madhukar Sinha, general partner at India Quotient, said that dealmaking has not yet slowed down.

“However, what has happened in the past 45-60 days is that companies that have raised a lot of capital and were planning to raise again are being questioned on their business and rationality to raise funds again,” Sinha added.

Investors are increasingly focusing on the real health of the company and asking questions regarding metrics that were hidden behind the veil of growth, he said.

Tarana Lalwani, founding partner at Innoven Capital, said: “We need to see some discipline coming in, we need to start focusing on whether these business models make sense.”

Over the past month, there has been chatter about deals taking longer to close and some late-stage deals coming under pressure from the funding slowdown. The industry sees a rational investing approach impacting late-stage startups more than early-stage startups. New entrants also have the backing of a host of new-gen angel investors.

Sandeep Jethwani, co-founder of wealth management platform Deserv, said, “With interest rates rising, liquidity availability will reduce and deal closures may take longer. However, early-stage startups may not see much impact from investors as funding dries, but later-stage startups may be asked more questions.”

With markets seeing a slump, investors have gone back to lower returns unlike the high-liquidity scenario seen in the past year. Investors have lost 30-40 percent of their capital and hence are evaluating deals based on investments in the light of the company’s revenues, profitability, etc.

Moreover, recent incidents like the clash at BharatPe leading to the ouster of cofounder Ashneer Grover after a very public spat with the board and investors has raised concerns about corporate governance issues in new-age startups. Innoven’s Lalwani said that the incident may have an impact on the Indian startup ecosystem.

“What happened in BharatPe is unfortunate and may have some impact on the Indian (startup) ecosystem. From a model perspective, an incident like this puts more onus on investors. But this may create a little more discipline so that the right companies and founders get funded,” she said.