Industry insiders said the latest data would be for deals that closed a few months ago, as that’s typically the time it takes to officially announce the fundraiser. Despite a slight increase in deal activity, technology investors said it does not point to a sustained recovery. Late-stage financing also continues to be under pressure.
The data showed that after June, when Indian startups raised $2.36bn, funding activity slowed to around $877m in July, $981m in August and $787m in September. However, the last two months have seen a gradual recovery, with a total fundraiser of $1 billion in October.
Separately, data provided by market intelligence platform Tracxn showed that out of the top 10 transactions in 2022, nine closed in the first half of the year.
Anand Lunia, founding partner of India Quotient, a seed-to-early stage venture capital firm focused on India, said: way happening.”
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On why there is a pickup in funding activity now, Lunia said: “The reason is that the hangover from 2021 was over in the minds of VCs in January-February. But the founders were mentally in 2021 until June or July of this year. Their valuation expectations remained in the same place.”
A venture capital investor who spoke to ET on condition of anonymity said the founders initially hoped for better valuations but eventually signed deals as they began to near the end of their cash run.
“In the first quarter of 2022, there were founders who wanted the typical $5 million for 20% seed funding, but by then investors had gotten real. A founder who wasn’t ready to do a $3 million deal with us in Feb-March came back and signed a $1 million raise in August,” this person said.
Bengaluru-based Arpit Agarwal, an investor in early-stage fund Blume Ventures, said: “The market remains sluggish… There may have been deals that the founders were looking to close that ended at lower-than-expected valuations. Many founders managed to raise a large amount of capital last year and would not have required funding in the first half of this year… I still don’t see this as a sign that the market is coming back,” added Agarwal.
Entrepreneurs are still waiting to get through the funding winter by not opting to raise a new round. “I would like to avoid a fundraiser as much as possible in the next six months. Valuations will be emphasized even for relatively better companies with strong economics. I took on a small amount of debt for working capital and that’s better now than taking money through an expensive stock sale,” said the founder of an online-focused food brand.
“The focus is to further strengthen the economics of the unit and show profitability, which is the new benchmark between private equity investors and public market investors,” he added.
Thinking in the future
While the upward momentum in funding activity is expected to continue over the coming months, not many investors are writing checks for post-Series B rounds, IndiaQuotient’s Lunia said.
“People will wait and watch to see who really performs and who survives before entering into more Series-B deals. The second half of next year, Series B, C, D deals will start to happen, but the first half is unlikely to happen much. In general, venture capitalists now focus only on seeds,” Lunia said.
During a panel discussion at the ET Startup Awards in November about rebooting in the tech industry, Flipkart Group CEO Kalyan Krishnamurthy
said the next 12-18 months would see Indian startups go through turmoil and volatilityand the funding crisis will start to hit these new-age tech companies early next year.
Things would improve after that and companies should focus on surviving this period, he said. “It’s going to be tough next year… I think a lot of people will hit the market (to raise funds) between April and June of next year. That is probably the moment of truth for all of us in the ecosystem,” she said during the discussion.
The VC investor quoted above also said there would be more pain for the startup community before things start to pick up. “At this point, there has been no ecosystem cleanup or fix in India like there has been in the US. All the unicorns that were made in 2021 are still there. So far, the only correction seen has been in the form of layoffs of 10% or 20%,” he said, adding: “There will be more before things start to pick up.”