Moneycontrol Pro Panorama | Will the funding winter prolong?

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The year 2022 turned out to be a damp squib from an overall corporate fund raising perspective compared to the previous year. The decline is glaring in equities, where funding through initial public offering (IPOs), venture capital funding and even qualified institutional placements(QIPs) fell sharply.

According to Prime Database, the IPO market shrunk drastically both in term of numbers and quantum of funds tapped from investors. Data showed that only 40 issues came up compared to 72 in the previous year. Worse, even funds raised at Rs 59,412 crore, were about half that raised in the full year of 2021.

Data from Venture Intelligence points to a 34 per cent year-on-year (yoy) drop in total venture fund inflow at $23.35 billion. Its unicorn tracker shows that the number of new unicorns halved from 41 to 20.

What went wrong? Geopolitical uncertainties, frothy valuations, inability of most newly-funded companies to match valuations with performance and volatile equity markets dampened investor enthusiasm. The start-up ecosystem is in disarray, with the latter part of 2022 having been spent in just sorting out the mess, highlights Sanjay Swamy, founder Prime Ventures in this article.

Also, this Moneycontrol article points to the secondary market also slowing down, with a 72 per cent yoy fall in funds raised through qualified institutional placements (QIPs), the steepest decline since 2018.

How long this funding winter will last is anyone’s guess. The scenario is unlikely to change soon. On the contrary, the first two quarters of 2023 may look bleak given that institutions and retail investors may take a while to weigh macros and company fundamentals, instead of succumbing to glib promoter narratives and high valuations. Besides, note that the first quarter 2022 was the best with record funds invested, and hence growth would pale in comparison on a high base. Sequentially, VC funding declined with every quarter in 2022.

Furthermore, most VC firms have raised fresh funds that need to be deployed. Therefore, the months ahead may see both companies and investors get more realistic after the recent meltdown that triggered sharp drop in valuations, employee layoffs and cutbacks in business plans. Once there is pragmatism visible on the part of issuers in terms of more reasonable valuations and focus on profitability, then the money taps will also open up in response.

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Technical Picks: Hindalco Industries, TVS Motor, Silver Mini, Bank of Baroda, and TVS Motor (These are published every trading day before markets open and can be read on the app).

Vatsala KamatMoneycontrol Pro