India trumps China in unicorn creation for second consecutive year in 2022

Companies grow despite shrinking funding, regulatory challenges and lay-offs

India in 2022 created more new unicorns than China for the second year in a row despite macroeconomic uncertainty and recessionary fear affecting investments, said a report on Wednesday.

As many as 23 Indian firms crossed the $1-billion valuation mark for unicorn status, compared to China’s 11. Deal value in India shrunk 33 per cent from $38.5 billion in 2021 to $25.7 billion in 2022, said the report by IVCA-Bain & Company.

“Overall funding saw a drop in 2022—led by a drop in late-stage large deals. The ecosystem faced foundational shifts as VCs pivoted focus to unit economics and start-ups faced a challenging year with multiple regulatory challenges, lay-offs and corporate governance issues surfacing,” said Arpan Sheth, partner at Bain & Company, referring to venture capitalists.

The decline in funding was largely over the second half (H2) of 2022 when macro headwinds intensified. Early-stage investments continued despite the decline, pushing total VC deals in the year to more than 1600.

“Going forward, while macro headwinds will continue to impact India, we believe 2023 may lead to the emergence of a more resilient ecosystem in India,” Sheth said.

Start-ups in non-metro cities grew to 18 per cent in terms of funding share, while 9 out of 23 unicorns added in the year were in cities outside India’s top three cities. The report said this indicates a shift to more democratic funding geographically.

“Over the years, the alternative investment asset class has demonstrated remarkable resilience. While 2022 marked a year which heralded PE/VCs to adapt in the face of unprecedented challenges, it also went on to witness record fund-raising and all-time high available dry powder. This only reinforces global investors’ confidence in India to be one of the few bright spots of growth,” said Rajat Tandon, president of IVCA.

“We remain optimistic about the long-term growth prospects of the industry and its ability to navigate uncertainty, identify opportunities, and support India's dynamic entrepreneurial ecosystem,” he said.

The report said that while global headwinds will impact India, 2023 will likely see a stronger startup ecosystem emerging.

“2023 will likely see the emergence of a more resilient ecosystem as stakeholders remain cautiously optimistic. Investors are expected to double down on early-stage deal making, taking bets in emergent spaces such as gaming (hyper casual games, e-sports), health-tech, EV and AI-led use-cases likely to see interest,” said Sriwatsan Krishnan, Partner at Bain & Company.

Software-as-a-service (SaaS) and fintech continued to see momentum relative to 2021, growing from 25 per cent to 35 per cent in terms of total funding share in 2022.

“SaaS and Fintech will remain significant. While regulatory oversight may have some impact on Fintech, focus on globalization of the India Stack (cross-border UPI, identity, cross border commerce) is likely to open up new avenues. Participation from a wider investor base (micro-VCs, family offices, global funds foraying in India) is likely to sustain,” Krishnan added.

The electric vehicles sector witnessed 2.4-fold growth in overall investment value due to policy-led cost competitiveness, growth in adoption led by innovative business models, and broader interest across the value chain, the report said.

Agriculture technology start-ups were among sectors getting the highest funding in 2022, with total investments crossing $500 million.