With central banks around the world raising interest rates to tame inflation and technology stock market capitalizations 50-60% lower than a year ago, funding for late growth and growth-stage startups is on the rise. slowed as private market investors became selective in their approach. The drop in funding this year is largely attributed to slow late-stage deals (Series D and above), which more than halved to $11.70 billion from $24.91 billion in 2021.
The number of
late-stage financing deals also fell to 122 of 177 in 2021, the data showed. Most of the high-cost deals were done early in the year, with the top five funding rounds closing in the first four months.
“This year, a lot of startups haven’t raised (capital) because they’re all hoping to grow in their future valuations and want to have a premium price,” Pankaj Naik, co-head, digital and technology investment banking. , Avendus Capital, told ET.
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In the meantime,
early-stage financing deals (seed and Series A rounds) grewalbeit at a slower rate. The amount invested by venture capitalists in seed and Series A rounds this year rose to $5.40 billion, an increase of 44% from $3.74 billion in 2021.
Last year, the funding growth rate in these two rounds was over 165%.
Growth stage funding rounds (Series B and Series C) were nearly flat at $6.84 billion through 221 deals, compared to $6.82 billion from 231 deals in 2021. “In the early stage segment, things continue to be interesting and competitive. In a downturn, you only see those people who have real conviction about their idea, quitting their day jobs and getting started. So the quality of the founders is much higher,” said Rahul Taneja, a partner at Lightspeed Venture Partners.
The data also showed that while major startup hubs like Bengaluru, Delhi-NCR and Mumbai continued to lead in terms of funding, relatively smaller hubs like Chennai, Hyderabad and Pune all recorded growth in funding.
About a dozen founders and investors told ET that fundraising activity will quiet down in the first half of 2023, with new-age companies exploring funding channels only toward the second half.
Several late-stage and growth startups also did not seek financing, having enough cash after lavish rounds in 2021 during the peak of financing activity.
As for the most active investors, Sequoia Capital India topped the charts with 73 deals during the year. Some of their big bets were on the D2C brand
mamatierrafintech company One Card, and
Darwinbox HR technology company.
However, this is significantly lower than the 110 checks he wrote last year. Accel India and Better Capital signed 57 deals each in 2022.
New York-based Tiger Global, one of the most active investors last year, signed just 50 deals this year, according to the data platform.
During 2022, VCs closed 48 funds, worth more than $7 billion, compared to the $3 billion raised by these investment firms in 2021 through 39 fund closures.
The e-commerce and fintech sectors dominated in 2022, raising $5.25 billion and $5.20 billion, respectively. However, in line with the general trend,
this was significantly lower than last year’s numberswhen these two sectors collected $10,040 million and $7,990 million, respectively.
The enterprise segment, on the other hand, saw an increase in funding to $4.88 billion in 2022 compared to $3.72 billion last year.
Going forward, investors said the focus will be on the business fundamentals of startups rather than sectors.
Due to the defeat in the global public markets, late-stage startups, once prized for their growth, were challenged on key fundamentals such as profitability and costs.
“The sectors that will weather the storm; Well, it’s going to be a function of the nature of the business. Industries that try to overtly rely on customer acquisition, with very high cost of customer acquisition, will face headwinds. Companies that have a long-term positive trend in ARPU and an established market size will be the flavor of the season,” said Ashish Fafadia, partner at Blume Ventures.
Among the five best deals this year: the
$805 million raised by content aggregation platform Dailyhunt$700 million for
Swiggy in January, $665 million collected by Byju’s in March, $450 million by Web3 Polygon platform and $400 million by
SaaS signs Uniphore in February.
As price discovery became difficult and cash-needing startups were unable to raise at a premium over their latest valuations, structured rounds through convertible notes came to the rescue.
Mature startups, including those that suspended IPO plans amid weak public market sentiment, turned to convertible notes as a fundraising tool.
These included startups like
Udaan B2B Grocery CompanyEducative technology
Byju’s decacorn and healthcare technology company Pharmeasy, which raised capital through this short-term debt-equity option, typically in conjunction with a future round of financing.
“Convertible rounds are more complex for late-stage startups than early-stage ones and come with all sorts of bells and whistles. But price discovery in this market is difficult, and therefore both founders and investors are on board with convertible rounds. Pricing risk is important, mispricing risk can be more damaging than waiting 12 months to price,” said Karan Mohla, partner at B Capital Group.
For late-stage startups that raised debt through dollar bonds and other complicated instruments, the outlook remains risky.
“The other type of convertible rounds that are dollar denominated and convertible bonds that generate adequate yield are a bit risky. A lot of security is needed. If a startup is raising bonus dollars through its offshore entity and earning in INR, and if things don’t turn out as planned, it becomes a risky proposition. And if some of these companies don’t turn around, there is a chance of propping up a debt liability,” said Avendus Capital’s Naik.
However, convertible notes took immediate precedence in a startup’s capitalization table due to their innate nature. These notes, which will convert to equity at a later date, do not require valuation to be attributed to start-up at present.
“Several early-stage companies have used convertible notes as a bridge to certain financial and business milestones, and it has worked well. It’s only when you get creative in structuring the instrument that things get complicated,” said Tejeshwi Sharma, CEO of Sequoia Capital India.
The other aspect that will be important when writing checks in the future will be a company’s public market acceptability, investors said.
In 2022, consumer internet companies saw fewer initial public offerings (IPOs) compared to 2021.
Data provided by research firm Tracxn showed that there were 11 IPOs of new economy companies in 2022 compared to 16 public listings last year. The IPO’s average market capitalization also fell to $517 million compared to $4 billion in 2021, when Zomato, Nykaa, Paytm and Policybazaar hit the public markets.
In terms of mergers and acquisitions (M&A) involving Indian startups, although the consolidation momentum continued from 2021 to 2022, companies took a more prudent approach.
According to Venture Intelligence data, there were 234 M&A deals in 2022 compared to 221 such deals in 2021. However, deal values for only 72 deals were announced this year, up from 70 deals last year. last. For those deals where values were made public, 2022 saw M&A deal values of $3.01 billion, compared with $8.43 billion last year.
Investors expect acquisitions to be the mainstream theme next year, given the uncertainty over funding for several start-ups.
“Consolidation in the core market and expansion in adjacent markets will be the theme for next year. We could see midsize M&As as the big companies consolidate their respective markets,” said Sharma of Sequoia Capital India.
(Illustrations and graphics by Rahul Awasthi)