Indian startup funding winter shows signs of thaw as large deals resurface

After a prolonged period of muted investments, brought about by weak financing, a recent resurgence in large and mid-sized funding rounds has come as a welcome breather for Indian startups.

Notably, in October, Ola Electric raised a massive $385 million funding, through equity and debt, amid a challenging macroeconomic environment, in the leadup to its initial public offering (IPO). Before Ola, several others like Zetwork, Zolve, and InsuranceDekho, raised relatively large rounds. 

Indian startups raised $542.8 million across 72 private-equity deals in October, according to the data from Tracxn, a market-intelligence platform. These ranged from mid- to large-sized deals from companies like Zetwork ($120 million), Bluebirch ($60 million), and Husk Power Systems ($50 million). The $542.8 million funding figure for October 2023 does not include venture debt deals like Ola Electric and Zolve.

Neobank Zolve raised $100 million in debt funding.

When considering these debt rounds, the funding amount is on a par with the $1.1 billion that startups raised in October last year. The amount of investment also crossed the $874 million raised by fledgling companies in September this year.

“The so-called funding winter is showing signs of thawing. Recalibration within the startup ecosystem, characterised by the phasing out or restructuring of previously over-hyped ventures, has paved the way for a more grounded and realistic funding environment,” said Anirudh A Damani, managing partner, Artha Venture Fund, a micro-venture capital fund.

After an influx of investment during 2021, when startups raised a record $44.3 billion at inflated valuations, investors tightened their purse strings. As a result, startup funding fell almost 39 per cent year-on-year to $27.1 billion in 2022. The decline continued into 2023, when investments fell 72 per cent year-on-year in the first half (H1) of the calendar year (CY) 2023 to $5.5 billion.

Things improved thereafter

In Q3CY2023, startups raised $1.7 billion across 208 deals, a 43 per cent drop from the $3 billion these companies raised in the corresponding period in 2022.

The quarter saw several rounds of more than $100 million from Perfios, Zepto, Ola Electric, Ather Energy, and Zyber 365. This has given way to many more funding announcements so far this quarter.

“Deals are closing much faster now, which is a precursor to volumes increasing. When we talk to founders, the time taken from when they start speaking to us to when they have a term sheet has come down from three to four months to a month now,” said Rahul Chandra, managing director, Arkam Ventures, an early-stage technology-focused VC firm.

The current funding momentum is expected to stay the pace as investors look to incrementally allocate the vast amounts of dry powder they have been sitting on over the next few quarters.

“There are more deals closing now. Some of them would probably be closing in the next quarter, where we should see a flurry of announcements,” Chandra said.

According to industry insiders, this revival has been fuelled by several factors, including the country’s economic resilience compared to global counterparts, India’s foray into becoming a global hub for manufacturing and services, and the large-scale rectification of startup valuations.

“As the economy grows and matures, the focus has naturally shifted towards startups with solid business fundamentals rather than mere hype. This shift is a positive sign, indicative of a more discerning and matured investment ecosystem ready to propel deserving startups to the next level of growth,” Damani says.

Investor expectations have also adapted to the changing market conditions.

“There are some growth investors keen to put capital to work in the right companies but the bar is higher and there is a high sensitivity to get in at the right entry valuation, or else they are happy to wait,” said Ashish Sharma, managing partner, InnoVen Capital.

As the Indian startup ecosystem makes its way into the new year, the amalgamation of realistic valuations, promising startups with solid business fundamentals, the re-entry of global funds, and the keen interest from global family offices are setting the stage for a pleasant summer.