VC investments fall 25% sequentially in Q1CY22: KPMG's Venture Pulse report

Rising commodity prices, geopolitical uncertainty weigh on sentiment: KPMG report

There are signs of a slowdown in fundraising activity in the Indian start-up ecosystem this calendar year. According to KPMG’s Venture Pulse report, VC investments in the country declined sharply to $7.9 billion across 300 deals in Q1CY22, from $10.65 billion across around 400 deals in Q4CY21.

Still, the March 2022 quarter number VC investment figure was much higher than the $3.35 billion (across nearly 100 deals) in Q1CY21.

Rising commodity prices, tightening interest rate environment, and geopolitical uncertainty emanating from the Russia-Ukraine war are likely to continue to weigh on investors’ decision while investing in Indian start-ups but liquidity in the market may help moderate the impact in the second quarter of 2022, the report said.

India attracted three of the biggest fundraising rounds during Q1CY22, with an $800-million raise by BYJU'S, a $700-million raise by Swiggy, and a $478-million mop-up by DailyHunt.

According to the KPMG, the slowdown in VC investments is not just in India; they have gone down for the US and the Asian markets, too. VC investments in the Americas fell from $103.3 billion across 4,628 deals in Q4CY21 to $77.6 billion across 4,138 deals in Q1CY22. The US accounted for $70.7 billion of Q1CY22 investment (against $95.4 billion of investment in Q4CY21).

Global VC investment dropped from a high of $191.9 billion across 10,775 deals in Q4CY21 to $144.8 billion across 9,349 deals in Q1CY22.

“Heading into Q2CY22, VC investment is expected to remain relatively stable globally, given the amount of funding available in the market, although VC investors will likely become more cautious in their investment decision-making — particularly alternative investors like family offices. Seed and early-stage companies will likely take the biggest hit as investors focus on later-stage deals in order to de-risk their portfolios,” said the KPMG report.

Squeeze in funding shall impact the valuations and also the rate of evolution into unicorns. Many VC players are of the view that during the entire 2022, the pace of funding could remain a bit slow.

If one looks at fundraising by soonicorns in the March 2022 quarter, the number appears to be dismal. According to Venture Intelligence, only three soonicorns raised funds — Perfios Software, Rupeek, and InfMoney.

Niren Shah, managing director and head of Norwest Ventures Partner India, believes the pace of unicorn creation shall be similar to last year, although the underlying segments from where the unicorns will come out remain dynamic. “The year has shown a strong start in the number of unicorns but global market conditions may play spoilsport in the second half of the year,” he said.

According to an InnoVen Capital report, for 2022, a large section of investors (47 per cent) expects funding activity to go through a slowdown. For the year, investors indicated SaaS, Web 3.0, FinTech, health-tech & creator economy as areas of interest.

The KPMG report noted that despite a softer Q1 in terms of fundraising, VC investors continued to show interest in a wide range of sectors, including e-commerce, fintech, edtech, social platforms, and gaming.

Nitish Poddar, partner and national leader-private equity, KPMG in India, said: “One of the sectors poised to attract big VC investments in India in is agritech. Right now, mostly smaller players are involved in the space but it has the potential to become one of the biggest VC plays in the country. Almost half the population is engaged in farming and agriculture-related activities, so any technology that can help improve yields, make farming processes more efficient, and increase profits for farmers have enormous potential.”

Despite uncertainty plaguing the VC market globally, VC investment is expected to remain relatively stable in Q2CY22 because of a significant amount of dry powder. Investors will likely continue to be cautious, focusing on late-stage companies and proven bets.