Is the Indian Startup Boom Losing Its Magic?

Startups in India are facing a funding squeeze that could lead to industry consolidation as investors come to terms with stretched valuations and faltering consumption growth.

In the first quarter of 2023, startups in India raised just $2 billion, a 75% drop from the same period last year and the smallest quarterly number in nearly three years, according to data from CB Insights. If the trend continues, startups may end up raising less than $10 billion this year, compared to a record $30 billion in 2021 and $20 billion in 2022.

Economic & Political Impacts Of Slow Down

The slowdown is a setback for startups that has been growing as the "backbone of new India." It could also have a negative impact on India's economic growth and its jobs market as the startup economy has significantly contributed the overall Indian economy since the launch of Startup India Scheme. The funding squeeze is being called a fundamental reset, and V.T. Bharadwaj, a former India managing director of Sequoia Capital, predicts that "I don't think I'll again see a record fund raise year like 2021 at least for a decade."

Why Indian Startups Are Seeing Less Funding?

The prospect of fast-rising consumption, both offline and in India's digital space, led many startups to clock multi-billion-dollar valuations in recent years, with investors like Sequoia and Tiger Global betting big on businesses that burned cash to lure consumers in the country of 1.4 billion people. However, global factors such as high rates and inflation have weighed on the investment climate in India and elsewhere. Startup funding in the U.S. dropped by around half to $32.5 billion in the first quarter, while in China, it fell 60% to $5.6 billion.

But Indian startups, which are far more reliant on foreign capital than global peers, have seen a more severe squeeze. This is partly due to investors realizing they misjudged consumption growth. Indian VC firm Blume Ventures reported that consumption outside the top 30 million Indian households dropped sharply, and is driven by a "tiny superuser set." Despite India's billion-plus population, food-delivery company Zomato has just 50 million annual transacting users, and state-backed digital money transfer service UPI is used by just 260 million, the report said.

Expected Industry Changes

The first signs of discontent in the Indian market came after the flop listing of loss-making digital payments firm Paytm in 2021, following which investors and regulators raised questions on whether valuations of many startups were unrealistic. Since then, things have gotten worse. Six investor sources and three startup founders told Reuters they expect the funding environment to worsen and many multi-billion-dollar firms to cut valuations within two years. BlackRock internally halved the valuation of Indian online education firm Byju's it has invested in to $11.15 billion from $22 billion, while Invesco slashed food delivery firm Swiggy's valuation by a quarter to $8 billion, disclosures from the U.S. investors show.

Additionally, only 271 Indian startups raised funding in Q1 2023, compared to 561 last year, according to CB Insights. Japan's SoftBank, which led the funding boom in India for years, has not made a single new investment in the country in the last year as it waits for a further correction in valuations. SoftBank invested $3 billion in Indian companies in 2021 and another $500 million in 2022, by April that year, according to Reuters calculations.

Finally, amid all the pain, banker Shivakumar Ramaswami has sensed an opportunity and is setting up a new M&A desk at his tech-focused investment banking firm Indigoedge.