According to a report by Moneycontrol, India’s startup ecosystem received $1.32 billion worth of funding in 91 deals in February 2023. Last year, in comparison, it had received $4.77 billion in funding across 308 deals.
The flow of funding to India’s growing startup sector is freezing up. Why?
Let’s find out!
Funding for Startups in India — Why is it Slowing Down?
There is a two-fold reason for this. The first is on a larger economy scale, and the second is on a more specific level.
Firstly, there is the changing global economic landscape. According to Aurojyoti Bose from GlobalData, “macroeconomic challenges, recession fears and concerns around start-up valuations” are making investors more cautious. We all know the impact that the Covid-19 pandemic left on us. Recovery is certainly underway, but we are far from regaining equilibrium.
In the face of impending global recession, investors are increasingly looking to diversify their portfolios and reduce their exposure to high-risk investments. Fixed income investments and other secure assets that remain unaffected by market fluctuations are becoming more popular. The demand is for investments that you can liquidate when the need arises.
This means that startups, which are inherently risky ventures, may find it harder to attract funding. Not only is there is a high rate of failure, there is also the illiquid aspect. If your investment goes bust, you won’t be able to liquidate your stake unless you find another buyer. Apart from this, there is also the fact that industries that have been hit hard by the pandemic are still struggling to find their footing.
It comes as no surprise that people are not feeling particularly adventurous at the moment. We want to spend a few more months recuperating in the safety and comfort of our warm homes before venturing out in search of high-growth investments again.
Secondly, we have the oversupply of capital in the Indian startup ecosystem. The excessive availability of funds has led to a saturation of the market, with too many startups chasing too few investors.
“One of the reasons why big deals are missing and even at the earlier stage there is lower deal flow because the investors are looking after their existing portfolio. So if you are not sure whether your best-performing startups will be able to get a large Series C or Series D in this market and it may take longer than expected, you will save some dry powder to help them.” — Ankur Mittal, Inflection Point Ventures
Investors wants to cut their losses, basically. If they feel that investing some more in the same company will increase its chances of success, they will likely choose that option over a new startup.
This means, newer startups will find it harder and harder to secure funding. They are the unknown entity, and in this market, it is always to go with the devil you know.
What is the future of startups in India?
Firstly, it’s important to note that the funding crunch is not affecting all startups equally. In spite of the unfriendly waters and the dangers lurking around every corner, some startups are still surviving.
That’s when you know you have a winner, right? When nothing can keep it down.
Successful startups with a proven track record of revenue and growth will continue attracting funding. But, newer and riskier ventures will have their work cut out for them. They may find it harder to secure funding, and this can slow down the growth of the Indian startup ecosystem.
The change in attitude can have long-term impacts on a broader market level. With investors becoming more risk-averse, founders will focus on building more sustainable and profitable businesses that are less reliant on external funding. They will make sure their business ideas are backed up by the numbers.
Don’t worry, guys. This is not the end of startups in India. It just means the rules of the game have changed. Startups will need to adapt if they want to remain standing.