The Indian startup ecosystem continues to face a challenging funding landscape as we reach the halfway point of 2023. The prevailing global uncertainty, combined with geopolitical and economic fragility, has resulted in a freeze on venture capital investments.

Between January and June this year, the total value of VC investments barely reached $4 billion, which is nearly five times lower than the $18.4 billion secured during the same period in 2022. Since mid-2022, funding has been drying up due to a tech drought that marked the end of the era of easy money.

To grasp the severity of the funding shortage, it's important to note that Q3 2021 witnessed the peak of funding for Indian startups, with a staggering $12 billion raised in a single quarter. Since then, Q2 2023 has become the worst quarter in the last three years, highlighting the significant decline in funding.

In fact, June 2023 recorded the lowest funding levels since August 2020, marking a 34-month low. This funding slump has affected all stages of startups, although early-stage companies have fared relatively better compared to cash-consuming growth stage firms struggling to achieve profitability.

Concerns regarding corporate governance, product-market fit, and unit economics have prompted venture capitalists to scrutinise startups more rigorously right from the entry stage. While seed and Series A investments are still relatively accessible, Series B and subsequent funding rounds have become increasingly challenging to secure. As a result, growth-stage and late-stage companies find themselves on precarious ground unless they have a substantial capital runway.

Among the most active investors in this sluggish year, Peak XV Partners (formerly known as Sequoia Capital India) has emerged at the top, closing 21 deals in the first half of 2023. Accel India and Bloom Ventures follow as the only other venture capital firms to have signed at least 10 deals.

In terms of sectors, e-commerce ranks highest in terms of funding, but enterprise tech and software-as-a-service (SaaS) startups have garnered the most term sheets. Artificial intelligence and machine learning startups come in third place, reflecting the impact of the Chat GPT revolution.

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Merely being an AI startup is no longer sufficient; venture capital investors now demand a strong business model and defensibility. This cautious approach has resulted in a 70 percent decrease in funding compared to the previous year.

Turning to the sunrise sector, electric vehicles (EVs) continue to thrive, with climate tech startups attracting over $1 billion in investments thus far in 2023. Ola Electric secured the largest deal, raising $300 million, although such deals have become increasingly scarce. The first half of 2023 witnessed only 14 rounds of $100-million investments, fewer than in 2021 but better than the second half of 2022. Consequently, no new unicorns have emerged recently.

The current funding trend in India aligns with the global decline, mirroring the challenges faced worldwide. However, there is a silver lining as India ranked among the top three funded geographies in H1 2023, trailing only the United States and the United Kingdom.

(Edited by : Shoma Bhattacharjee)

First Published:Jul 7, 2023 8:46 PM IST