In 2021, Indian startups had their best year ever, raising over $35 billion. But the tide turned in 2022, as a series of macroeconomic headwinds hit all at once. The Russia-Ukraine War, followed by U.S. Fed rate hikes to curb rising inflation, resulted in a tech rout that inflicted deep cuts on venture capital investors.

Startup investments fell by a third to $24 billion, with growth-to-late-stage startups finding it hardest to raise funds. As a result, India saw fewer unicorns last year, with 21 startups achieving billion-dollar valuations compared to 44 in the record-setting year of 2021. India, the world's third-largest startup ecosystem globally, hasn't seen the flight of a unicorn since last September when 22-year-old Molbio Diagnostics was valued at $1.53 billion, becoming the 102nd entrant to the billion-dollar club.

The funding winter, which also led to more than 18,000 cost-saving layoffs throughout 2022, turned colder as 2023 began. Funding fell to a five-year low in January at $630 million. February was worse, with $536 million raised versus $4 billion raised in the same month last year, according to data from Venture Intelligence.

While funding continues, early-stage startups are currently the safe favourites. More than $20 billion of dry powder are ready to be deployed on the condition that founders show a clear path to profitability. According to an InnoVen Capital report, six out of ten founders are now striving to achieve EBITDA profitability in the next two years.

According to the Bain & Company & IVCA’s annual India Venture Capital Report 2023, deal value in India decreased by 33 percent from $38.5 billion to $25.7 billion over 2021-22, with the decline in funding largely over the second half of 2022 as macro headwinds intensified in the latter part of the year.

However, early-stage funding continued to see sustained momentum, leading to an expansion in deal volume.

Despite the compression in deal value, India continued to outpace China for the second year in a row in terms of new unicorns created, with 9 out of 23 unicorns added in 2022 emerging from cities outside of the top 3 metros, indicating a shift to more democratic funding geographically.

SaaS and fintech continued to see momentum relative to 2021, growing in salience from ~25 percent to ~35 percent of total funding in 2022. Funding grew 1.0x in SaaS and 0.9x in fintech. Funding grew 1.0x in SaaS, led by increasing depth in assets, and 0.9x in fintech, led by innovation in emergent segment.

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Arpan Sheth, Partner at Bain & Company, added, “Overall funding saw a drop in 2022—led by a drop in late-stage large deals. The ecosystem faced foundational shifts as VCs pivoted focus to unit economics and start-ups faced a challenging year with multiple regulatory challenges, lay-offs and corporate governance issues surfacing.”

The report also noted that the investor landscape has broadened—while the share of leading funds reduced to <20 percent from 25 percent as activity from global crossovers and hedge funds slowed down, traditional PE funds continued to demonstrate interest in select growth equity deals and participated in several $100 million+ megadeals, deepening the pool of growth capital available. Micro VCs grew in salience over 2022, increasingly playing a critical role in the ecosystem by bridging funding gaps at pre-seed and seed rounds.

The year also saw a few sectors clocking increased activity in the second half of the year. The EV space saw 2.4x growth in overall investment value due to policy-led cost competitiveness, growth in adoption led by innovative business models, and broader interest across the value chain.

Agritech saw one of the highest funding years in 2022 as total investments crossed $500 million led by a few large players demonstrating innovation & scalability. Further, emergent deep tech segments, such as generative AI, space tech and climate tech gained momentum led by global megatrends.

“2023 will likely see emergence of a more resilient ecosystem as stakeholders remain cautiously optimistic. Investors are expected to double down on early-stage deal making – innovation in emergent spaces such as gaming (hyper casual games, e-sports), health-tech, EV and AI-led use-cases likely to see interest. SaaS and Fintech will remain significant – while regulatory oversight may have some impact on Fintech, focus on globalization of the India Stack (cross-border UPI, identity, cross border commerce) is likely to open up new avenues. Participation from a wider investor base (micro-VCs, family offices, global funds foraying in India) is likely to sustain” said, Sriwatsan Krishnan, Partner at Bain & Company.

While global headwinds will impact India, a more resilient ecosystem is set to emerge, with solid macro-fundamentals, a large consumption opportunity, sizeable workforce entering the formal economy, digitally enabled population, and a deepening innovation ecosystem remaining key foundational drivers.

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(Edited by : Vivek Dubey)