Daily Management Review

Worsening Funding Crunch Situation To Increase Suffering For The Once Booming Startup Ecosystem In India


Worsening Funding Crunch Situation To Increase Suffering For The Once Booming Startup Ecosystem In India
As investors adjust to stretched valuations and failing consumption growth, a funding crunch at Indian startups that has already resulted in layoffs and postponed stock listings is expected to pave the way for industry consolidation.
According to data from analytics firm CB Insights, startups in India raised just $2 billion in the first quarter of 2023, which is the lowest quarterly amount in almost three years and 75% lower than the same period last year.
Startups may only raise less than $10 billion this year if things continue this way, a far cry from the record $30 billion they raised in 2021 and $20 billion in 2022.
Startups are negatively impacted by the slowdown, as is Prime Minister Narendra Modi, who has praised their success and referred to them as the "backbone of new India." It might harm India's job market and economic expansion.
"This is a fundamental reset, not just another blip," said V.T. Bharadwaj, a former India managing director of Sequoia Capital who now leads venture capital firm A91 Partners. "I don't think I'll again see a record fund raise year like 2021 at least for a decade."
With investors like Sequoia and Tiger Global placing large bets on companies that burned capital to entice customers in the 1.4 billion-person nation, many firms were able to reach multi-billion dollar valuations in recent years thanks to the possibility of rapidly expanding consumption both offline and in India's digital environment.
The investment climate in India and elsewhere has been impacted by global variables including high rates and inflation; startup funding in the United States declined by around half to $32.5 billion in the first quarter, while it plunged by 60% to $5.6 billion in China.
India's startups, however, have experienced a more severe cash crunch than their international counterparts. According to several CEOs, this is largely because investors realized they had underestimated the rate of demand growth.
According to a research released in April by the Indian venture capital firm Blume Ventures, consumption outside of the top 30 million Indian homes has dramatically decreased and is being driven by a "tiny superuser set".
According to the paper, despite India's population of over one billion people, state-backed digital money transfer service UPI is only used by 260 million people, while meal delivery business Zomato has only 50 million annual transacting customers.
"Indian startups are not catering to a billion consumers. All of them are selling to the same 100 million. The (consumer) market seems 2-3 times inflated," said Ankit Nagori, a former top executive of Walmart's e-commerce arm Flipkart who now runs cloud kitchen startup Curefoods.
The first indications of unhappiness in the Indian market were after the loss-making digital payments company Paytm's failed IPO in 2021, which led investors and regulators to question if startup valuations were fair. Things have become worse since then.
According to six investor sources and three company founders who spoke with Reuters, the funding environment will deteriorate over the next two years, and many multibillion-dollar companies will lower their values.
According to filings from the U.S. investors, BlackRock internally cut the value of the Indian online education company Byju's it invested in by half, to $11.15 billion from $22 billion, and Invesco cut the value of food delivery company Swiggy by a quarter, to $8 billion, in recent weeks.
In addition, only 271 Indian businesses raised funding in Q1 2023, down from 561 the previous quarter.
Japan's SoftBank (9984.T), which for years led the funding boom in India, has not made a single new investment there in the past year as it waits for a further drop in valuations, according to two individuals familiar with its intentions.
Despite being contacted for comment, SoftBank did not respond. By April of that year, according to calculations by Reuters, it had invested $3 billion in Indian companies in 2021 and an additional $500 million in 2022.
In the midst of all the suffering, banker Shivakumar Ramaswami has seen an opportunity and is establishing a new M&A desk at his tech-focused investment banking firm Indigoedge. Two of his colleagues are only charged with scouting for M&A prospects.
"So many funded companies hit some scale and then stalled. Everyone needs to find a home, and many of these companies can't go for an IPO. We are preparing to work with them," he said.