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Indian Startup Funding Declines 75% YoY In Q1 2023

According to Inc42’s analysis, Indian startups raised a total of $3 Bn in Q1 2023, down 75% from $12 Bn raised in Q1 2022, indicating their cash-starved state

With maximum correction at Series C rounds, mega deals declined 77% YoY to seven in Q1 2023, owing to the declining revenues of Indian startups, their mounting losses, and founders groping in the dark to find strategies to scale

Wary of valuation corrections amid the funding winter, late-stage founders resorted to debt funding instruments in Q1 2023, leading to a higher number of such deals in Series C and above rounds

It seems that the ongoing funding winter just refuses to loosen its grip on the cash-starved Indian startup ecosystem that saw a 75% year-on-year decline in funding in the first quarter (Q1) of 2023.

According to Inc42’s ‘Indian Tech Startup Funding Report Q1 2023’, Indian startups raised a total of $3 Bn in Q1 2023 as against $12 Bn in Q1 2022.

Further, the number of deals, too, nosedived 58% YoY to 213 during the quarter under review from 506 in the year-ago quarter.

Indian Startup Funding Declines 75% YoY In Q1 2023

Inc42 notes that despite sitting on dry powder of more than $18 Bn, investors are apprehensive due to the ongoing Russia-Ukraine war, the falling rupee, the Silicon Valley Bank collapse, and macroeconomic uncertainties, among other things.

Not only this, but what has visibly hurt the investment sentiment are the declining revenues of Indian startups, their mounting losses, and founders groping in the dark to find strategies to scale.

Download Q1 2023 Funding Report!

Meanwhile, the Inc42 report also finds that the funding patterns are returning to the pre-pandemic levels after the bull run of 2021. Some of the other observations made in the report are as follows:

Mega Deals Have Dropped To 2019 Levels: In Q1 2023, the ecosystem saw only seven mega deals, a drop of 77% against 30 mega deals in Q1 2022. The drop in mega deal count impacted the total funding raised by Indian startups in Q1 2023.

The top three mega deals in Q1 2023 comprised PhonePe’s funding round of $650 Mn, Lenskart’s fundraising of $500 Mn, and InsuranceDekho raising $150 Mn.

Late-stage Funding Continues To Decline: Late-stage funding recorded a YoY decline of 77%, with startups raising only $1.8 Bn against $7.8 Bn in Q1 2022. The maximum correction was observed at Series C rounds, as the number of deals fell 75% from 30 in Q1 2022 to 5 in Q1 2023.

Growth Stage Remains The Toughest To Crack: The growth stage funding amount dropped 76% in Q1 2023, with startups raising $700 Mn against $2.9 Bn in Q1 2022. Both Series A and Series B funding rounds saw a massive correction in the number of deals.

While Series A deals dropped to 30 against 58 in Q1 2022, down 48% YoY, Series B deals tanked 86% YoY to 4 from 28 in the year-ago quarter.

An Inc42 survey suggests that 84% of investors believe it will be challenging to raise capital at the growth stage this year.

Seed Funding Gets The Chills: Despite the slowdown, 2022 emerged as the year that lapped up the highest seed funding in the last eight years. Almost 41% ($2 Bn) of the total seed funding ($5 Bn) raised by Indian startups between 2014 and 2022 was secured in the year 2022.

However, the seed funding amount declined 81% to $180 Mn in Q1 2023 from $961 Mn in Q1 2022, signalling a massive funding correction in the ecosystem.

Stage wise startup Funding

Debt Takes Over Equity At Late Stage

From the founders’ perspective, those who were able to raise larger funding rounds at a good valuation during the peak of 2021 are sceptical about a down round or lesser valuation. While those who didn’t raise between Q1 2021 and Q1 20222 are now feeling the chills of the current market sentiments.

Thus, founders aim to reduce cash burn and wait out the funding winter period to raise at a good valuation once markets revive. This has pushed entrepreneurs towards debt funding instruments to support their working capital needs, particularly at the late stage.

Download Q1 2023 Funding Report!

As shown in the graph below, although by a minor difference, debt funding deals surpassed late-stage deals across Series C & above rounds in Q1 2023. Increased debt funding also indicates a strong inflow of revenues, indicating an increased push for an improved FY24 by these companies.

Late Stage Startups Funding

Startups that raised debt funding in Q1 2023 are fintech startups Varthana ($7 Mn), Jupiter ($12.2 Mn), Neogrowth ($10 Mn), and Stashfin ($100 Mn); edtech startup Lead School ($19.5 Mn); and ecommerce startups Zetwerk ($12 Mn) and Jumbotail ($9 Mn).

Interestingly, except Varthana, all the other companies raised their late-stage equity rounds between 2021 and 2022. This also poses questions about these companies’ high cash burn rates and profitability metrics. But that’s the story for next time!

Fintech, Ecommerce Top The Charts

Amid the funding slowdown, investors remain bullish on the fintech and ecommerce sectors. In Q1 2023, fintech topped the charts in terms of the amount of funding, raising a total of $1.2 Bn, followed by ecommerce at $633 Mn and enterprisetech at 194 Mn.

In terms of the number of deals, enterprisetech led with 41 deals, followed by ecommerce at 40 and fintech at 25 deals.

Fintech Funding

M&As Fail To Pick Up Pace

Over the past three consecutive quarters, the frequency of M&A deal count in India has been flat. However, compared to an all-time high of 100 M&A deals in Q1 2022, the M&A deal count declined 65% in the first three months of the calendar year 2023.

The ecosystem also saw distressed deals such as the acquisition of GoMechanic by Lifelong Group Consortium as well as pushed-back deals such as PhonePe’s acquisition of ZestMone.

In the first quarter of 2023, the fintech, ecommerce, and enterprisetech sectors recorded the highest number of M&As. Further, as many as 63% of M&As in India were centred in the top three hubs — Bengaluru, Mumbai, and Delhi NCR.

Although the market sentiment is low, going forward, we can expect an uptick in the number of M&As.

Download Q1 2023 Funding Report!

Increased financial resources, market share, and talent acquisition will be some of the key factors that will drive consolidation amid the ongoing funding winter in the Indian markets.

M&A Activities

Troubled State Of Indian Unicorns

The unicorn spree has slowed down as no new company has made its entry into the club in the last six months. Tata 1 MG was the last company to enter the highly coveted unicorn club in September 2022.

Not to mention, the Indian startup ecosystem was baffled by investors tightening their purse strings and founders resorting to layoffs to cut costs.

According to the Inc42 layoff tracker, 23K+ employees have been laid off between January 2022 and March 2023 by 82 startups, including unicorns BYJU’S, Chargebee, Cars24, LEAD, Ola, OYO, Meesho, MPL, LivSpace Innovaccer, Udaan, Unacademy, and Vedantu. Also, 19 edtech startups, including four of the seven edtech unicorns, laid off 8,460+ employees.

Most recently, Unacademy’s leadership team announced to take a 25% pay cut in FY24. Also, controversies such as Ashneer Grover’s rift with BharatPe executives and GoMechanic’s public admission of financial misreporting, among others, have played marred investor sentiment in late-stage companies.

Can Indian Startups Regain Investors’ Trust?

The inability of startups to attain profitability, particularly at the late stage, is a big concern for the investor community.

According to Inc42’s latest report – ‘India’s Top 200 Startups Financial Index Report 2023’ – of the 74 unicorns included in the analysis, 55 have reported a cumulative operating loss of $5.9 Bn in FY22. This is almost double the cumulative loss of $3 Bn generated by 53 unicorns in FY21.

Further, according to Inc42’s Top Indian Startup Investor Ranking Survey, 51% of the VCs participated in fewer funding deals in Q1 2023 compared to Q1 2022.

While 77% of the Indian investors are aiming to sell their portfolio companies in FY24, half of the VCs are open to selling their startup stake below a 10X multiple.

Earlier, speaking with Inc42, Anirudh Damani Of Artha Venture had said that VCs were uncomfortable with unsustainable burns. “The cost of raising money from an LP has gone up and has created a domino effect on the entire cycle of investing, deployment of capital by investors and expected returns,” he had said.

As of now, with funding levels back to 2019 and 2020 levels, industry experts stated that startups with strong fundamentals will be able to regain investor confidence.

Download Q1 2023 Funding Report!

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