Venture Capital funding to India drops 73% in July-September 2022: Elevation Capital report

Venture capital (VC) funding to India in July-September dropped the most among the world’s top three startup ecosystems, over October-December 2021, a report by Elevation Capital revealed. The report highlighted the predicaments of the country’s startups that are currently navigating through a funding winter amid slowing growth.

As per the EC report titled 'India Pulse 2022', the country saw a drop of about 73 percent in VC funding in the third quarter of 2022 compared to October-December 2021. The United States, on the other hand, saw a 61 percent decline in funding, while a 52 percent fall was witnessed by China. The average investment cheque size has also witnessed a drop across all funding stages, the report said.

The report further revealed that Indian startups raised about $3 billion in July-September this year, against $11 billion in October-December 2021. In the US, startups raised $31 billion in the third quarter of 2022, versus $80 billion in October-December 2021. In China, the July-September quarter saw a small uptick on a quarter-on-quarter basis in terms of VC funding, as it rose to $6 billion from $5 billion in April-June; in October-December 2021, startups in China raised $13 billion in VC funding.

Globally, VC funding fell 54 percent in the July-September quarter, on a year-on-year basis, the Elevation Capital report showed. Companies across the globe raised $68 billion in the third quarter of this year against $148 billion in the same period last year. Rising inflation across all major economies that led to tighter monetary policies, slowed down VC funding, the report said.

The macroeconomic headwinds have hit late-stage funding the most, the report showed. In India, late-stage funding dropped more than 50 percent to $3 billion in April-June 2022 from the same period a year earlier, while in the US it dropped 44 percent during the same period, and 82 percent in China.

As for early-stage investments, the US has seen a  near 44 percent decline from Q2 2021 to Q2 2022, while India and China have remained relatively stable. Early-stage sentiment in India has been bullish, according to the report.

Notably, this data attains significance as it comes at a time when startups in the country are in the midst of a prolonged funding winter. India is currently the third-largest startup ecosystem in the world with over 61,000 registered startups and 107 unicorns. However, with funding drying up, many startups, including the biggest in the country, have exercised thousands of layoffs, and have shut down non-core verticals, while also having to undergo valuation markdowns. Despite this, early-stage investments have remained upbeat in the country.

The India Pulse 2022 report also stated that India is better positioned than its G-20 (Group of 20) peers to navigate the funding downturn next year as the country’s demographics are ‘stronger.’ India’s inflation is among the lowest compared to its G-20 peers, and its currency has also depreciated less than other emerging economies. India is also expected to be the world’s fastest-growing large economy, expected to grow at about 6.5 percent in the 2022-2026 period, the report said, citing IMF (International Monetary Fund) forecasts.

Moreover, many large VC firms such as Sequoia Capital, Lightspeed, Elevation Capital, Accel and Matrix, have raised India-dedicated funds, highlighting global investors’ optimism about the country’s startup ecosystem.

“We expect a relatively cautious approach from investors in 2023 as they wait for macroeconomic uncertainty to subside and company valuations to adjust to lower growth expectations,” said Ravi Adusumalli, Co-Managing Partner, Elevation Capital.

“However, we believe that the fundamentals of the Indian economy are very strong. Low leverage and favourable demographics in India create a long runway for growth. Indian start-ups will continue to remain an attractive asset class for investors globally and the recent fundraising announcements of the India-dedicated funds bear witness to the significant capital waiting to be productively deployed,” he added.

The Elevation Capital report showed that $120 billion was invested in India by VC firms in the last 10 years, 50 percent of which came in the last 2.5 years. While the average two-year funding was in the range of $1.6 billion at the beginning of the decade, it has reached an average of $26 billion in the last two years. VC investments reached an all-time high in 2021, topping $41 billion, a 17x rise over the last eight years, the report revealed.

India’s market share in global funding has also increased to 7 percent in 2021 from 3 percent in 2011, while that of the US has declined to 51 percent in 2021 from 67 percent in 2011. China’s market share in global funding, too, declined to 10 percent in 2021 from 13 percent in 2011.

Acquisition of tech companies has seen a 200 percent growth from 2011-2015 to 2016-2021 and 2021 alone has been a year of record mergers and acquisitions (M&A) for the Indian startup ecosystem, the report showed. The number of M&A transactions grew 2.5 times from 82 transactions in 2020 to 206 in 2021.