Startup Funding Breaking Bad: Analyzing the Plunge Since Jan 2023

Indian startups are facing a severe funding winters as investments have dwindled to just a fifth of last year's levels during the first five months of 2023. The funding winter shows no signs of abating, with private equity and venture capital (PE/VC) funding plummeting by a staggering 79% to $3.3 billion, compared to $15.7 billion in the same period in 2022. These alarming statistics have been revealed by Venture Intelligence, a leading data provider in the startup ecosystem.

Indian Startup Ecosystem : Dismal Funding Landscape

Startups in India managed to secure a mere 247 funding rounds between January and May this year, compared to 613 during the corresponding period last year. The distressing trend is even more evident in May, where investors participated in just 53 funding rounds, injecting a total of $948 million into the ecosystem. In stark contrast, the same month in 2022 witnessed 108 funding rounds and investments totaling $1.68 billion.

A Steep Decline In Startup Funding

Although the funding amount saw a slight month-on-month increase, rising from a meager $342 million in April to $948 million in May, it remains well below the levels seen in 2022. The year-on-year decline in funding amount stands at approximately 44%. Moreover, the number of deals has experienced a significant downturn, more than halving in May 2023 compared to the previous year.

Challenges in Growth and Late-stage Funding

The funding crunch has hit growth and late-stage startups particularly hard. Between January and May 2023, startups in this phase managed to secure a total of $2.75 billion across 105 deals. In comparison, the same period last year recorded an average of $8.9 billion in funding, spread across 189 late and growth-stage deals. Prashanth Prakash, a founding partner at Accel, a prominent venture capital firm, predicts a surge in mergers and acquisitions in the coming months. However, he warns that funding sources for late-stage startups will likely dry up for the next nine to ten months, posing a significant challenge for these companies.

The Need for Startup Consolidation

Prakash further emphasizes that many late-stage companies will be compelled to revamp their business models, with some requiring a complete reset. Consequently, the next six months are expected to witness a wave of consolidation within the startup ecosystem. This consolidation may entail mergers and acquisitions as struggling startups seek survival strategies in the face of the funding winter. Prakash shared his insights during an industry event in Bengaluru on June 1.

Early-stage Funding Takes a Hit

During the January-May 2023 period, startups in the early stage received 142 deals worth $549 million. This represents a decline of approximately 54% in the number of deals compared to the five-month average in 2022, which stood at 310 deals. In terms of funding, startups received over 56% less than the average funding of $1,255 million received during the same period in 2022.

The funding winter has unleashed a severe blow to the Indian startup ecosystem, with funding plunging to a fraction of last year's levels. Startups across all stages are grappling with reduced investments, threatening their growth and survival prospects. The decline in both the funding amount and the number of deals highlights the urgency for startups to seek alternative strategies, such as consolidation and business model transformations. As the funding crisis persists, the future remains uncertain for many startups in India, and the broader impact on innovation and economic growth remains a pressing concern.

But Why There's a Funding Winters Going on in India?

The Indian startup ecosystem is currently experiencing a severe funding winter, characterized by a significant decline in investments compared to previous years. Several factors contribute to this funding crisis, impacting startups across all stages and threatening their growth and survival prospects. Here are some key reasons behind the funding winter in India:

• Economic Uncertainty: The Indian economy has been facing challenges, including slower GDP growth, rising inflation, and disruptions caused by the COVID-19 pandemic. Investors are cautious about deploying capital in such an uncertain environment, leading to a decline in funding for startups.
• Regulatory Changes: Recent regulatory changes and policy uncertainty have added to the challenges faced by startups. Factors like increased scrutiny, changes in foreign direct investment rules, and stricter regulations have made investors more hesitant to commit capital to Indian startups.
• Investor Sentiment: The funding winter in India can be attributed to a change in investor sentiment. After witnessing a surge in investments in previous years, investors have become more selective and risk-averse. They are now prioritizing profitability and sustainable business models over rapid growth, making it difficult for startups to secure funding.
• Liquidity Crunch: The global liquidity crunch has also affected the funding landscape in India. Many investors, including venture capital firms and private equity funds, are facing constraints in raising new funds. This limited availability of capital has reduced the overall funding available for startups.
• Valuation Realignment: Startups in India experienced significant valuation growth in previous years, but many were operating at high valuations that were not always supported by their underlying fundamentals. The funding winter can be seen as a necessary correction in the market, as investors are now more focused on realistic valuations and sustainable growth.
• Consolidation and Mergers: With the funding winter persisting, startups are increasingly exploring consolidation and merger opportunities to survive. This wave of consolidation is expected to reshape the startup ecosystem, leading to mergers and acquisitions as struggling startups seek synergies and cost efficiencies.
• Business Model Transformation: Startups that relied heavily on external funding are now compelled to revamp their business models to become more self-sustainable. They need to focus on revenue generation and profitability to weather the funding crisis.

Moreover, experts believe that a global funding winter is currently affecting startup funding worldwide, including in India. Once stability is restored in the global startup space, it is expected that Indian startups will regain momentum and get back on track.