India adds 23 unicorns in 2022, overtakes China for 2nd consecutive year

India overtook China by adding 23 unicorns in 2022 while the neighbouring country created 11 such startups with valuation of USD 1 billion or more, according to a report released on Wednesday.

For the second time in a row, India topped China creating 23 unicorns in 2022, taking the total number of such high-value companies to 96, as against China's 11 in the year, said a reporty by IVCA-Bain & Co.

However, this year's number is just half of the unicorns created in 2021 when it stood at a record 44, which took the overall number to 73 in that year.

According to the report, nine of the 23 unicorns added in the year have emerged from cities outside of the top 3 metros, indicating a shift to more democratic funding geographically. This means that funding to startups in non-metros grew to 18 per cent of the total inflows share.

The year also many investors raising their largest ever India-focused funds, the report said, adding the SaaS (Software as a Service)-based and fintech players maintained the deal value while consumer tech declined.

The year 2022 saw a recaliberation in venture capital investments in the country as increasing macroeconomic uncertainty and recessionary fears affected investment momentum, said the Bain & Company's annual report in collaboration with the Indian Venture and Alternate Capital Association (IVCA).

The report said the country added 23 unicorns notwithstanding the 33 per cent compression in the deal value faced by the domestic startup ecosystem, from USD 38.5 billion in 2021 to USD 25.7 billion in 2022.

Decline in funding was largely over the second half of the year as macro headwinds intensified. Despite such a deep compression, early-stage companies continued to see sustained momentum buoying deal volume to over 1,600 venture capital investments in 2022.

According to Arpan Sheth, partner at Bain & Co, overall funding saw a drop in 2022, led by a decline in late-stage large deals. The ecosystem has faced foundational shifts as VCs pivoted their focus to unit economics and startups faced a challenging year with multiple regulatory challenges, layoffs and corporate governance issues surfacing.

Despite the overall softening, a few areas continued to offer hope -- SaaS funding remained in line with 2021 highs and early-stage deal making saw sustained momentum.

Going forward, while macro headwinds will continue to impact the funding, 2023 may lead to the emergence of a more resilient ecosystem in the country, he added.

According to the IVCA president Rajat Tandon, over the years, the alternative investment asset class has demonstrated remarkable resilience. While 2022 marked a year that heralded PEs/VCs to adapt in the face of unprecedented challenges, it also went on to see record fund-raising and all-time high available dry powder. This only reinforces global investor confidence in the country as one of the few growth bright spots.

"We remain optimistic about the long-term growth prospects of the industry and its ability to navigate uncertainties, identify opportunities," he added.

The report further noted that while the share of leading funds came down to 20 per cent from 25 per cent in 2021 following a slowdown in activity from global crossovers and hedge funds, traditional PEs continued to show interest in select growth equity deals and participated in several USD 100 million-plus deals, deepening the pool of growth capital available. Micro VCs also grew in salience.

On their outlook for 2023, partner at Bain & Co Sriwatsan Krishnan expects 2023 likely seeing the emergence of a more resilient ecosystem as stakeholders remain cautiously optimistic. Investors are expected to double down on early-stage deal making in emergent spaces such as gaming (hyper casual games, e-sports), health-tech, EV and AI-led use-cases likely to see interest.