The scenario has been grim in India with big-ticket funding drying up over the past six months as investors remain cautious about betting on startups.
According to the report, VC funding in India hit a 21-month low in the July-September quarter with 387 deals bringing is a paltry $2.8 billion, compared with the $9.8 billion raised in 525 deals in the same period last year.
The funding figures plummeted about 58% from the $6.6 billion raised by startups in the April-June quarter. Amid the ongoing tech winter and predictions of a recession towards the end of the year, funding for startups seems likely to remain depressed in the short-to-medium term.
Late-stage equity funding in India has taken the biggest knock. ET reported on Wednesday that
late-stage startups such as Udaan and PharmEasy are resorting to debt instruments such as convertible notes to tide over the economic whiplash. Convertible notes convert into equity at a later date and require no valuation to be ascribed to the startup.
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Several late-stage startup founders told ET they did not expect big-ticket funding to revive before the next financial year at least, pushing them to seek alternative routes during the funding winter.
“Convertible notes (are) a good option for entrepreneurs (with) confidence to pull off an (equity) round in the next one year or so and discount the notes in that funding round,” Ashwin Damera, cofounder at edtech startup Eruditus, whose company has signed a $350 million debt financing round from Canada Pension Plan Investment Board (CPPIB), told ET.
Flush with funds, but no deployment
Startup funding in India peaked in 2021 as investors rushed to grab a piece of the growing ecosystem, but sentiment has changed considerably in 2022.
ET reported in July that over a dozen VC firms, including Lightspeed Venture Partners, Sequoia Capital, Elevation Capital, and a number of smaller funds
closed fewer deals in the first half of this year than in the same period in 2021.
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One major difference from last year is the lack of FOMO (fear of missing out) among VCs. “Just because VCs have the dry powder, it doesn’t mean they have to deploy the capital quickly because there’s uncertainty and nobody knows what the rock bottom for the markets is,” an investor told ET.
Is the worst yet to come?
As many developed nations stare at an imminent recession, the question is: how long will the funding drought continue for Indian startups?
In a recent interaction with ET, Arjun Sethi, founder of US-based Tribe Capital, predicted a tough times ahead.
Sethi said around 50% of companies would have to sell or wind down globally and in India amid the tight funding environment.
“I think consolidation is good for the ecosystem… it will be harder to raise the next rounds unless the companies are in the top 5-10% of logos and performance; (these companies) will not have issues…”
Talking about the rout faced by the tech sector in public and private markets, Sethi said India was similar to the growth market in the United States (tech growth stocks), where late-stage companies have seen 50-70% shaved off their enterprise value. Fintech firms have been hit the hardest, along with software-as-a-service (SaaS) companies.
Sethi’s views echo ET’s deep-dive in September, which suggested that
wary investors are walking away from large-funding deals at unicorns such as Good Glamm Group, Acko, and Meesho, citing tech turbulence.
“The market has changed so much that late-stage deals that started around six months ago will have only two outcomes – fall through or settle at much lower valuations than initial conversations,” Abhay Pandey, managing partner at A91 Partners, a Mumbai-based investment firm which has backed the likes of Digit Insurance, Sugar Cosmetics, and Paper Boat, among others, told ET.
