Indian startups are struggling to find funding due to a number of factors, including tightening monetary policies worldwide, increasing inflation and an economic slowdown in the global economy.
According to Venture Intelligence in Chennai, the research firm, data from the first quarter 2023 shows that startups in India raised $5.5 billion. This is down 66% compared to $16 billion during the same period last year. The largest investment deal ($700m) in this period was made by the Hyderabad-based Greenko Group with Singapore's GIC and Abu Dhabi Investment Authority.
Startups in the banking and IT sectors were most affected by this funding crunch.
Venture capital firms will invest $46 billion in India by 2022. This is down 29% compared to the record-breaking amount of $201 million. Foreign funding became increasingly difficult to obtain as the global economy plunged into chaos. Venture capitalists said that this was due to high overhead costs and stretched valuations.
Lack of funding has forced startups to reduce their operations and layoff staff. It also delayed their plans to list.
Mayank Shiromani is the director of MUFG Innovation Partner. He told Quartz that "public markets are the ultimate judge of valuation and private investors understand that the multiples earlier won't work unless a company has the ability to earn extraordinary margins, or maintain extraordinary organic expansion." MUFG Innovation Partners, the corporate venture-capital arm of the Mitsubishi UFJ Group, is the company.
The US is the biggest funder of India's startup industry. The US Fed's monetary policy over the past year has sent tremors through the Indian startup scene.
Fed interest rates were near zero from April 2022 until now, which meant that startups had a lot of cheap money. Global investors wanted to invest in avenues that would yield high returns during the pandemic. Rates on government securities and debt instruments were very low.
Venture capital funding decreased as rates increased, leading to lower cash flow and valuations. Priorities of investors tightened. Investors are now focusing their attention on startups with strong cash flow and profitability.
In 2022, India was also affected by inflation due to the disruptions in supply chains, which were exacerbated by war in Ukraine.
The rising cost of energy and commodities increases operational costs. Marginal costs rise as input prices increase. It is difficult for new businesses to generate positive cash flows. Venture capital firms are concerned that lower profits mean less money for investment.
The National reported in March that "business owners have reduced their financial expenditures, closed down loss-making ventures and begun to consider unit economics", according to Neha Singh, co-founder of startup data platform Tracxn.
Indian startups are revisiting the rich valuations they had in 2020 and 2021. These were driven by a proliferation of tech-enabled products such as Paytm Zomato Nykaa and Zerodha. These high valuations, however, did not result in major profits.
Paytm's 2021 listing, a fintech firm, was the first sign of a deterioration in the Indian market. Investors have since then focused on metrics like fair valuation, profitability and consumer reach.
Suri said that "all of the current events require a complete change in thinking from startups. They will need to prepare and expect greater and more unpredictable risk and be prepared to pivot when necessary."
Venture capitalists are convinced that Indian startups can achieve great success in the long term. However, they recognize the need to recalibrate their business metrics and fundamentals.
Abhimanyu Bihst, General Partner of CapFort Ventures said: "The country’s abundance of talent pool and its ability to create cutting-edge solutions for the local market as well as a global audience further enhances its appeal to investors."