Private equity and venture capital (PE/VC) funding to India’s startup ecosystem fell 77 percent in February from a year earlier, as investors continued treading cautiously amid macroeconomic uncertainties.
In February 2023, the country’s startup ecosystem, currently the third-largest in the world, saw only 91 deals worth $1.32 billion, against 308 deals worth $4.77 billion in the same month of 2022, according to data collated by Moneycontrol through Tracxn Technologies.
From January to February 2023, startups managed to raise just $2.91 billion across 258 deals against $11.1 billion in 682 deals a year earlier, the data showed. Moneycontrol reported how PE/VC funding had fallen to a five-year low in January.
“January saw most of the brunt of it (funding winter), and that was happening through the end of the year as well. Deal pipelines really started slowing down around October and November. Investors began telling portfolio companies to fix their unit economics before going out to raise funds around that timeframe. So the pipeline really started drying up around that time,” said Piyush Kharbanda, General Partner, Vertex Ventures, an early-stage investor in companies like Licious, FirstCry, Xpressbees, and BinanceAsia, among others.
According to Venture Intelligence data, December also saw low funding to startups, with $799 million raised in 54 deals, a drop of more than 30% month on month from $1,149 million raised in 69 deals in November, as the deal pipeline began to dry up.
Active investors
In February 2023, Inflection Point Ventures, a former investor in BharatPe, was the most active VC investor, the data showed. The VC participated in four deals, followed by TVS Capital Funds, and Sequoia Capital with two deals each.
Elevation Capital and Matrix Partners, which raised large India-dedicated funds in 2022, did not participate in a single deal, while Accel, which also raised a $650 million India-dedicated fund, closed just one deal in February 2023.
“Most funds are sitting on a considerable amount of dry powder. The only reason why these funds are taking a cautious approach is - what if they will have to support some of their existing portfolio startups? Investors definitely don't want them to go bust right because of a lack of funding. That will not be good for their LPs (limited partners) also,” said Ankur Mittal, co-founder at Inflection Point Ventures.
Interestingly, traditional private banks participated in funding rounds in February, with HDFC Bank, ICICI Bank, and Kotak Mahindra Bank all closing one deal. Last February, pure VC investors such as Y Combinator, Accel, Kalaari Capital, and A91 Partners, among others, dominated the funding landscape.
Meanwhile, Tiger Global Management, one of India's most aggressive technology investors, which has been extremely bullish on India's startup ecosystem, did not close a single deal for the second consecutive month. SoftBank, another prolific investor in India's technology sector, which has sounded rather cautious since last year, is yet to close a deal this year.
Stage-wise funding
Moreover, unlike in 2022, early-stage deals have lacked momentum in 2023, with early-stage funding halving in the first two months of this year. Early-stage startups (up to Series A) raised $631 million in 200 deals from January to February 2023, compared to $1.32 billion in 510 deals.
Late-stage deals, on the other hand, dropped 80 percent in terms of volume and 88 percent in terms of value in February 2023. Series B onwards, startups raised only $459 million across 11 deals in February 2023 against $3.84 billion across 56 deals in the same period of 2022.
“One of the reasons why big deals are missing and even at the earlier stage there is lower deal flow because the investors are looking after their existing portfolio. So if you are not sure whether your best-performing startups will be able to get a large Series C or Series D in this market and it may take longer than expected, you will save some dry powder to help them,” said Mittal of Inflection Point Ventures.
Mittal believes the current funding environment is suitable for investors. “With the good quality deals that come to us, we can choose to be more cautious. We have the option, the luxury, to be more choosy, and take more time to do due diligence. We are giving some startups, some targets to achieve before we can fund them because we have that luxury now,” he added.
