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The funding bubble bursts: India's start-ups brace for a tough 2023

Macroeconomic Challenges and Valuation Worries Dampen Investor Sentiment

13 March 2023

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Jayashri Ghorpade

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  • According to experts, India's start-up sector is currently experiencing a funding winter and may not recover until later this year due to a challenging global environment.

  • The downturn is due to macroeconomic challenges, recession fears, and concerns around start-up valuations

  • As central banks raise interest rates after more than a decade of near-zero funding, funding is on the decline globally. However, some of the largest investors in India's start-ups, including Sequoia Capital, Accel, and Tiger Global, remain active in the market.

According to experts, India's start-up sector is currently experiencing a funding winter and may not recover until later this year due to a challenging global environment. Karteek Pulapaka, co-founder and partner at Bengaluru-based fund Java Capital, cites a "marked slowdown" in deal-making and attributes it to global macroeconomic and geopolitical headwinds, including inflation and the war in Ukraine. He remains optimistic about a possible recovery in the last quarter of the year.


According to GlobalData, 87 venture capital deals worth $696.2 million were announced in India in January, marking a decline of 13.9% and 23.1% by volume and value, respectively, compared to the previous month when India saw 101 venture capital deals worth $905 million. The downturn is due to macroeconomic challenges, recession fears, and concerns around start-up valuations, says Aurojyoti Bose, lead analyst at GlobalData. However, India's start-up sector has boomed over the past decade, becoming an increasingly critical part of the country's economy, with more than 80,000 start-ups registered in the country, valued at over 3 trillion rupees ($36 billion), according to Indian government data.


India's largest startups include Paytm, a digital payments firm that went public in 2021, Zomato, a food delivery app that also listed in 2021, and Ola, a ride-hailing app. With a population of around 1.4 billion, increasing incomes, and rising internet use, Indian startups have attracted local and global investors who have provided funding in the form of angel investments, private equity, and venture capital. According to Tracxn, over 80 percent of the top ten investors in seed-stage rounds are from India, while foreign investors, mainly from the US, dominate the top ten investors in early and late-stage rounds.


As central banks raise interest rates after more than a decade of near-zero funding, funding is on the decline globally. However, some of the largest investors in India's start-ups, including Sequoia Capital, Accel, and Tiger Global, remain active in the market. While the funding environment in India experienced a sharp downward trend last year, following a bumper year for fundraising by start-ups in 2021, the acceleration of digitalisation trends due to the coronavirus pandemic helped to boost investor interest then. Additionally, a record 44 start-ups in India in 2021 became "unicorns", which refers to new ventures with a value of more than $1 billion.

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The global economic slowdown and Russia's war in Ukraine made the backdrop cloudy in 2022, accompanied by the US Federal Reserve raising interest rates and capital flowing away from emerging markets. Analysts say that this funding winter is not showing signs of thawing yet, as the volume of funding deals for India registered a year-on-year decline of 62.5 per cent in January 2023, and the value of deals fell by 80.3 per cent, according to GlobalData's figures. “The current declining trends in funding are expected to continue in 2023 in view of concerns about a global recession and other geopolitical factors,” says Neha Singh, co-founder of Tracxn.


Last month, PhonePe, an Indian digital payments company, raised $100 million from TVS Capital Funds, Ribbit Capital, and Tiger Global, with this funding round valuing it at $12 billion. This brought the total investment raised by the company this year to $450 million, including the $350 million investment by General Atlantic in January. PhonePe has also stated that it anticipates further investments from leading global and prominent Indian high net worth investors in the future.


Analysts suggest that the financial technology segment in India is outperforming other sectors, given the large, young population to tap, rising smartphone ownership, and a relatively stable economy. While inflation has made capital more expensive for both investors and companies, Sagar Agarvwal, the co-founder and managing director of Beams Fintech Fund, is optimistic about fundraising in the FinTech sector.

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