India Venture Capital Report 2024: Resilience Amidst Global Caution

In its recently published India Venture Capital Report 2024, Bain & Company paints a nuanced picture of the Indian VC landscape in 2023. The report highlights a year marked by both resilience and adaptation, with funding activity moderating amidst a cautious global investment climate.

Key Findings of the India Venture Capital Report 2024

• Funding Moderation: VC funding in India declined from $25.7 billion in 2022 to $9.6 billion in 2023, reflecting a global trend of risk capital consolidation. Despite this, India retained its position as the second-largest VC and growth funding hub in the Asia-Pacific region.
• Shifting Investor Sentiment: A confluence of factors, including persistent inflation, elevated interest rates, and anticipated global economic slowdown, led investors to adopt a more selective approach. Deal volume witnessed a significant decline, dropping from 1,611 deals in 2022 to 880 deals in 2023. The average deal size also shrunk from $16 million to $11 million.
• Mega-Rounds on Hold, Smaller Deals Take Over: Notably, mega-deals (funding rounds exceeding $100 million) saw a dramatic 70% decline (from 48 to 15), with many high-growth startups deferring fundraising plans. However, smaller and mid-sized deals (below $50 million) witnessed a milder 45% compression, indicating continued investor confidence in India's long-term prospects.

Sectoral Trends of the Indian Venture Capital Landscape

• Tech Still Dominates, But Traditional Sectors Gain Traction: While tech-driven sectors like consumer tech, fintech, and software-as-a-service (SaaS) remained prominent, attracting nearly 60% of the funding, their dominance softened compared to 2022. Investors displayed a growing interest in sectors with established fundamentals, such as banking, financial services and insurance (BFSI), healthcare, electric mobility, and generative AI.
• Bright Spots Emerge: Even within a cautious environment, certain sectors displayed resilience. The direct-to-consumer (D2C) segment, encompassing both online and offline businesses, witnessed an impressive 80% growth in deal volume, reflecting continued investor faith in India's robust consumption story. Generative AI, a nascent technology in 2022, emerged as a breakout theme in the software sector, attracting significant investments exceeding $250 million in 2023.

Investor and Fundraising Trends in the Indian Startup Ecosystem

• A More Democratic Landscape: The report identifies a trend towards democratization in both deployment and fundraising strategies. Private Equity (PE) and growth equity firms doubled their share in VC deployment activity, collaborating with leading VC firms in large growth-stage deals. Conversely, top VCs shifted their focus towards smaller ticket rounds. Notably, crossover fund activity witnessed a significant decline (approximately 90% reduction in deal volume), while family offices remained crucial players in early-stage funding despite a decrease in their deal activity.
• Domestic VCs Step Up: Fundraising activity also witnessed a slowdown, reaching $4 billion in 2023. Interestingly, domestic VCs emerged as a dominant force, driving over 90% of fundraising activity and launching several thematic funds targeting emerging sectors.
• Exit Strategies Gain Momentum: With a focus on providing liquidity to investors in a high-interest-rate environment, exits (when investors sell their stake in a startup) witnessed a significant surge, increasing by almost 1.7 times to reach $6.6 billion. Crossover funds were the primary drivers of this trend, contributing nearly 65% of the total exit value through non-IPO public market sales, particularly by reducing their positions in companies like Paytm and Zomato. Secondary and strategic sales also witnessed an uptick, fueled by mega-exits in consumer tech giants such as Flipkart and Lenskart.

Future of Indian Venture Capital in 2024-25

The Indian VC landscape in 2023 showcased a visible shift towards maturity. As we move into 2024, Bain & Company's report highlights a sense of cautious optimism. Investors have adapted to the "new normal" by refining investment strategies and emphasizing robust governance practices.

Startups, for their part, are focusing on profitability and developing cutting-edge deep-tech innovations. Dominant themes with long-term potential, such as B2C e-commerce, SaaS, clean energy, sustainable agriculture, and India-specific AI solutions, are poised for a rebound. India's strong fundamentals, including a massive consumer base, sound economic policies, strategic global positioning, and expanding digital infrastructure, continue to inspire investor confidence for the future of the Indian VC ecosystem.