Indian Companies in for more Suffering as Funding Shortage Worsens

According to data from analytics firm CB Insights, startups in India raised just $2 billion in the first quarter of 2023, the lowest quarterly amount in almost three years and 75% lower than last year. As investors adjust to stretched valuations and failing consumption growth, a funding crunch at Indian startups that have already resulted in layoffs and postponed stock listings is expected to pave the way for industry consolidation.

Are Startups Facing a Crisis in India?

Startups may only raise less than $10 billion this year if things continue this way, a far cry from the record $30 billion they grew in 2021 and $20 billion in 2022. The slowdown negatively impacts startups, as Prime Minister Narendra Modi has praised their success and referred to them as the "backbone of new India." It might harm India's job market and economic expansion.

With investors like Sequoia and Tiger Global placing large bets on companies that burned capital to entice customers in the 1.4 billion-person nation, many firms were able to reach multi-billion dollar valuations in recent years thanks to the possibility of rapidly expanding consumption both offline and in India's digital environment.

Have Global Issues Impacted the Investment Process in India?

Global issues have affected the investment climate in India and elsewhere, including high rates and inflation; startup funding in the US declined by almost 50% to $32.5 billion in the first quarter, while it fell by 60% to $5.6 billion in China. India's startups, however, have experienced a more severe cash crunch than their international counterparts. According to several CEOs, this is partly because investors realised they had underestimated the demand growth rate.

According to research released in April by the Indian venture capital firm Blume Ventures, consumption outside the top 30 million Indian homes has dramatically decreased and is driven by a "tiny superuser set."

According to the paper, despite India's population of over one billion people, the state-backed digital money transfer service UPI is only used by 260 million people. At the same time, the meal delivery business Zomato has only 50 million annual transacting customers.

Startups in India need to serve a billion customers. The same 100 million people are buying from all of them.

Fewer Transactions, Consolidation In The Air

The first indications of unhappiness in the Indian market were after the loss-making digital payments company Paytm's failed IPO in 2021, which led investors and regulators to question if startup valuations were fair. Things have become worse since then. According to six investor sources and three company founders who spoke with Reuters, the funding environment will deteriorate over the next two years, and many multibillion-dollar companies will lower their values.

According to reports from the US investors, BlackRock internally cut the value of the Indian online education company Byju's it invested in by half, to $11.15 billion from $22 billion, and Invesco cut the importance of food delivery startup Swiggy by 25%, to $8 billion, in recent weeks. In addition, only 271 Indian businesses raised funding in Q1 2023, down from 561 the previous quarter.

As it waits for additional valuation corrections, Japan's SoftBank, which led the funding boom in India for years, has yet to make a single new investment there in the past 12 months, according to two individuals familiar with its intentions. By April of that year, according to calculations by Reuters, it had invested $3 billion in Indian companies in 2021 and an additional $500 million in 2022.