startup funding slowdown: Funding for Indian startups continues to dip in second quarter

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Bengaluru: Venture capital funding into Indian startups dipped 37% in the second quarter of this year to $6.9 billion, data sourced from research firm Venture Intelligence showed.

In the first quarter, overall investments into startups were $11 billion.

For the first half of the year, the overall investments stood at $17.9 billion, a 36% increase from the same period last year.

ET
reported on May 30 that VC firms had started tightening the funding tap of Indian startups, as adverse macroeconomic situations, especially interest rate increases by the US Federal Reserve and a rout in publicly traded technology stocks worldwide, continued to depress sentiment.

“There are so many external factors that are driving this (funding) freeze…it is reasonable to expect this is going to last for another 12 months,” said Sanjay Swami, managing partner, Prime Venture Partners.

Over the last few months, several top-tier global venture capital firms including Sequoia Capital, Y Combinator and Beenext have issued cautionary notes to portfolio companies to survive the ‘funding winter’.

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Unicorn rounds, which valued startups at roughly $1 billion or more, have also halted in the second quarter, with only four new unicorns being minted in the second quarter compared to 12 for the same period last year, as per industry tracker Tracxn.

Unicorn rounds get rarerETtech

Illustration: Rahul Awasthi

Early-stage momentum

Early-stage funding, however, was the silver lining in the current market downturn.

Funding for early-stage startups dipped marginally to $839 million in the April-June period, from $856 million in the previous quarter, but it continues to be 30% higher than the total funding for the segment in the last quarter of 2021, according to Venture Intelligence.

Early-stage investments continueETtech

Illustration: Rahul Awasthi

Total investments in early-stage startups in the April-June period have doubled from the same period last year, largely driven by growth and late-stage investors including Tiger Global, Sequoia, among others, being bullish about early-stage opportunities.

Deals over $100 million take a beatingETtech

Illustration: Rahul Awasthi

“The reason for the increase in early-stage activity is clear by the tier-1 funds wanting to get in early. Most of them today have accelerated their fund allocation towards seed to early-stage opportunities. However, how the deployment progresses (for tier 1 funds) will largely depend on how many of their portfolio companies move from seed to Series A and growth stages,” said Ganapathy Venugopal, cofounder and chief executive of Axilor Ventures.

Over the past six months, several top venture capital funds including

, Elevation Capital, Athera Venture Partners (formerly Inventus Capital), have all closed their latest funds and increased their corpus on the back of a record-breaking funding year for Indian startups.

“Venture capital firms that have raised funds cannot keep waiting, since startup investments have the longest gestation period to exit. The clock is also ticking (for them) on deployment,” said Amit Nawka, partner, deals and startups leader, PwC India.

VC investments in H1 2022 up from last yearETtech

Illustration: Rahul Awasthi

“For larger funds (above $300 million corpus), the strategy cannot be restricted to cutting $2-$3 million cheques only, as the portfolio size then becomes unsustainable,” added Swati Murarka, vice president, Athera Venture Partners.

Late-stage impacted

Late-stage rounds are stifled, as investors reassess valuations amid bleak exit outcomes through public market listings.

In the second quarter, there were 19 funding rounds of $100 million or more, cumulatively amounting to $3.6 billion, compared to 29 such deals worth $6.7 billion in the January-March period this year, according to Venture Intelligence data.

VC funding drops in Q2 2022ETtech

Illustration: Rahul Awasthi

This is also a decline compared to the second quarter of 2021, when Indian startups raised $5.3 billion across 24 deals worth $100 million or more.

“Late-stage investors continue to be concerned, as they look at faster exits and at present the performance of public markets continues to be poor,” added Nawka.

The slowdown in late-stage funding was anticipated as early as December 2021 when US technology stocks were being pummelled. Typically, private valuations reorder after a lag of four-six months after the public markets.

“Most late-stage investors are now taking their own time to decide on the bets that they are making, considering there is no fear of missing out in the current market environment. They are taking time to renegotiate valuations, and it has now turned to an investor market,” said Venugopal of Axilor Ventures.



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