Fewer startups getting bigger cheques when investors chase returns

The quantum of funding has remained flat at $3.9 billion in the first five months of this year. However, the good news is that it has not dropped as much as it did in the past few quarters.

There were 465 deals this year, compared to 758 reported in the same period last year, according to data from Tracxn, a market intelligence platform. “The current investment landscape is undergoing a strategic shift. Investors are now prioritising startups capable of delivering a return on capital employed that surpasses their expected return on investment, creating substantial value for shareholders and founders alike,” says Anirudh Damani, managing partner at Artha Venture Fund, a micro venture capital (VC) fund.

This shift, says Damani, is steering capital away from perpetually cash-burning startups towards those demonstrating strong customer acquisition, retention, and upsell capabilities — a major contributing factor to the decline in deal activity.

Nevertheless, while the market is seeing fewer deals, the ones happening are considerably larger. The average deal value has increased 40 per cent to $10.1 million so far this year, compared to $6.1 million during the same period last year, Tracxn data notes.

“Investors are gravitating towards winners with larger cheques. Within our portfolio, we see category winners that have scaled and are profitable, attracting multiple term sheets when they step out to raise between $35 million to $50 million,” says Vikram Chachra, founding partner of financial technology (fintech)-focused VC fund 8i Ventures.

Investors say that these “winners” primarily include companies that have demonstrated the ability to scale, achieve profitability, and create shareholder value through disciplined and capital-efficient operations.

“Investors are more comfortable deploying substantial capital into these businesses because they’ve seen them grow and succeed. They want to secure their stakes before others do, ensuring that the top-performing companies get the necessary funding to maintain their momentum,” Damani adds.

According to Tracxn, the Indian startup world witnessed its lowest-funded year in the past five years in 2023 at just $7 billion, a 72 per cent drop from $25 billion in 2022, amid a funding winter.

This drop was most pronounced in the late-stage segment, where investments fell 73 per cent during the year.

The bigger cheque sizes in 2024 so far have, however, led to a slight resurgence in late-stage funding. Investments have increased from $2 billion across 53 deals to $2.1 billion across just 39 deals.

The startup world has, until May, seen several big-ticket funding rounds, including Flipkart’s $350 million round last week led by Google.

Other notable deals include Meesho’s $275 million round last month, Pocket FM’s $103 million round led by Lightspeed in March, and Shadowfax’s $100 million fundraise from TPG NewQuest in February.

The year has already seen the creation of more unicorns than the full year of 2023. Three startups, including Ola’s AI startup Krutrim, fintech software-as-a-service platform Perfios, and logistics platform Porter, crossed the $1 billion valuation threshold this year, compared to just two — Zepto and InCred  — last year.

Investors say that the funding winter is now beginning to thaw.

The second half of 2024 is expected to witness a revival in funding across stages as cheque sizes continue to increase.

Sukhmani Bedi, partner at Orios Venture Partners, an early-stage investment firm, says: “I expect deal activity to improve pointedly this year. We are seeing an increase in the number of high-quality startups across sectors. There’s ample dry powder ready to be invested in these promising ventures.”

The funding environment is expected to improve after the 2024 Lok Sabha elections conclude.

“With the election results on June 4, investors will have the clarity needed to make long-term strategic bets. I expect a robust second half of the year, with the small and medium-sized enterprise and initial public offering markets reviving investor confidence,” adds Damani.