VC funding for startups down 30% this year to $24 billion
Venture capital funding for startups fell 30% this year compared to the record highs of 2021 as the turbulence in the technology sector made investors skittish, severely hitting late-stage fundraising. Indian new-age companies picked up $23.95 billion across all stages as of December 28 this year compared with $35.46 billion, according to data from Venture Intelligence.
With the central banks across the world hiking interest rates to rein in inflation and tech stocks’ market capitalisations 50-60% lower from a year ago, funding for late and growth-stage startups slowed as private market investors became selective in their approach.
The fall in funding this year is largely attributed to sluggish 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 funding deals also fell to 122 from 177 in 2021, the data showed. Most high-ticket deals took place in the early part of 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 are all hoping that they will grow into their future valuations and want to be priced at a premium,” Pankaj Naik, co-head, digital and technology investment banking, Avendus Capital. Meanwhile, early-stage funding deals (seed and Series A rounds) grew, albeit at a slower pace. The amount invested by VCs in seed and Series A rounds this year moved up to $5.40 billion, a 44% increase from $3.74 billion in 2021. Last year, the rate of growth in funding in these two rounds was more than 165%.
Growth-stage funding rounds (Series B and Series C) remained almost flat at $6.84 billion through 221 deals, compared with $6.82 billion from 231 deals in 2021. “In the early-stage segment, things continue to be hot and competitive. In a downturn, you only see those individuals who have real conviction on their idea, quitting their day jobs and starting up. So, founder quality is much higher,” said Rahul Taneja, partner at Lightspeed Venture Partners.
The data also showed that though top startup hubs like Bengaluru, Delhi-NCR and Mumbai continued to lead in terms of funding, the relatively smaller centres such as Chennai, Hyderabad and Pune recorded a growth in funding. About a dozen founders and investors told ET that fundraising activity will be muted in the first half of 2023, with new-age companies exploring funding channels only toward the second half.
Several growth and late-stage startups also did not seek funding, as they had enough cash following plush rounds in 2021 during the peak of funding activity. In terms of the most active investors, Sequoia Capital India topped the charts with 73 deals during the year. Some of its major bets were on D2C brand Mamaearth, fintech company One Card, and HR-tech firm Darwinbox.
However, this is significantly lower than the 110 cheques it 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 only 50 deals this year, according to the data platform. During 2022, venture capitalists closed 48 funds, amounting to more than $7 billion, compared to $3 billion raised by these investment firms in 2021 through the closure of 39 funds.
Focus sectors- The ecommerce and fintech sectors ruled the roost in 2022, raising $5.25 billion and $5.20 billion, respectively. However, in line with the broader trend, this was significantly lower than last year’s numbers, when these two sectors raised $10.04 billion and $7.99 billion, respectively. The enterprise segment, on the other hand, recorded 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 more than sectors. Due to the rout in global public markets, late-stage startups once prized for their growth were questioned on key fundamentals such as profitability and costs.
“The sectors that will weather the storm; well, it is going to be a function of the nature of business. Sectors which are trying to overtly be reliant on customer acquisition, very high customer acquisition cost, will face headwinds. Businesses which have a long-term positive trend in ARPU and established market size, will be the flavour of the season,” said Ashish Fafadia, partner, Blume Ventures.
Among the top five deals this year: the $805 million raised by content aggregator platform Dailyhunt, $700 million by Swiggy in January, $665 million picked up by Byju’s in March, $450 million by Web3 platform Polygon and $400 million by SaaS firm Uniphore in February.
Convertible Notes- As price discovery turned tough and startups in need of cash couldn’t raise at a premium to their last valuations, rounds structured through convertible notes came to the rescue. Mature startups, including those who put their IPO plans on hold amid weak public market sentiment, turned to convertible notes as a fundraising tool.
These included startups such as B2B grocery firm Udaan, edtech decacorn Byju’s and healthtech company Pharmeasy which raised capital through this short-term debt option that converts into equity, typically in conjunction with a future financing round.
“Convertible rounds are more complex for late-stage startups than early stage and come with all kinds of bells and whistles. But price discovery in this market is tough and, therefore, both founders and investors are agreeing on convertible rounds. Pricing the risk is important, pricing it wrong can be more harmful than waiting out 12 months to price it,” Karan Mohla, partner, B Capital Group, said.
For late-stage startups that raised debt through dollar bonds and other complicated instruments, the prospects remain risky. “The other type of convertible rounds which are dollar-denominated and proper yield-earning convertible bonds are a bit risky. There is a lot of security needed. If a startup is raising a dollar bond through its overseas 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 do not turn around then there is a chance of shoring up a debt liability,” Avendus Capital’s Naik said.
However, convertible notes took immediate precedence on a startup’s capitalisation table due to its innate nature. These notes, which will convert into equity at a later date, require no valuation to be ascribed to the startup currently. “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 with structuring the instrument that things get complicated,” said Tejeshwi Sharma, managing director, Sequoia Capital India.
Exit strategy- The other aspect that will be important while writing cheques moving forward will be the public market acceptability of a company, 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 with 16 public listings last year. The average IPO market capitalisation also fell to $517 million compared to $4 billion in 2021, when the likes of Zomato, Nykaa, Paytm, and Policybazaar hit the public markets. In terms of mergers and acquisitions (M&A) involving Indian startups, though the momentum of consolidation continued from 2021 into 2022, companies took a more prudent approach.
As per Venture Intelligence data, 234 M&A deals happened in 2022 compared to 221 such deals in 2021. However, deal values for only 72 deals were announced this year, against 70 deals last year. For those deals where values were made public, 2022 recorded M&A deal values of $3.01 billion, compared to $8.43 billion last year.
Investors expect acquisitions to be the broad theme next year, given the uncertainty in funding for several startups. “Consolidation in the core market and expansion in adjacent markets is going to be the theme next year. We might see medium size M&As as large companies consolidate their respective markets,” said Sharma of Sequoia Capital India.
With the central banks across the world hiking interest rates to rein in inflation and tech stocks’ market capitalisations 50-60% lower from a year ago, funding for late and growth-stage startups slowed as private market investors became selective in their approach.
The fall in funding this year is largely attributed to sluggish 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 funding deals also fell to 122 from 177 in 2021, the data showed. Most high-ticket deals took place in the early part of 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 are all hoping that they will grow into their future valuations and want to be priced at a premium,” Pankaj Naik, co-head, digital and technology investment banking, Avendus Capital. Meanwhile, early-stage funding deals (seed and Series A rounds) grew, albeit at a slower pace. The amount invested by VCs in seed and Series A rounds this year moved up to $5.40 billion, a 44% increase from $3.74 billion in 2021. Last year, the rate of growth in funding in these two rounds was more than 165%.
Growth-stage funding rounds (Series B and Series C) remained almost flat at $6.84 billion through 221 deals, compared with $6.82 billion from 231 deals in 2021. “In the early-stage segment, things continue to be hot and competitive. In a downturn, you only see those individuals who have real conviction on their idea, quitting their day jobs and starting up. So, founder quality is much higher,” said Rahul Taneja, partner at Lightspeed Venture Partners.
The data also showed that though top startup hubs like Bengaluru, Delhi-NCR and Mumbai continued to lead in terms of funding, the relatively smaller centres such as Chennai, Hyderabad and Pune recorded a growth in funding. About a dozen founders and investors told ET that fundraising activity will be muted in the first half of 2023, with new-age companies exploring funding channels only toward the second half.
Several growth and late-stage startups also did not seek funding, as they had enough cash following plush rounds in 2021 during the peak of funding activity. In terms of the most active investors, Sequoia Capital India topped the charts with 73 deals during the year. Some of its major bets were on D2C brand Mamaearth, fintech company One Card, and HR-tech firm Darwinbox.
However, this is significantly lower than the 110 cheques it 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 only 50 deals this year, according to the data platform. During 2022, venture capitalists closed 48 funds, amounting to more than $7 billion, compared to $3 billion raised by these investment firms in 2021 through the closure of 39 funds.
Focus sectors- The ecommerce and fintech sectors ruled the roost in 2022, raising $5.25 billion and $5.20 billion, respectively. However, in line with the broader trend, this was significantly lower than last year’s numbers, when these two sectors raised $10.04 billion and $7.99 billion, respectively. The enterprise segment, on the other hand, recorded 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 more than sectors. Due to the rout in global public markets, late-stage startups once prized for their growth were questioned on key fundamentals such as profitability and costs.
“The sectors that will weather the storm; well, it is going to be a function of the nature of business. Sectors which are trying to overtly be reliant on customer acquisition, very high customer acquisition cost, will face headwinds. Businesses which have a long-term positive trend in ARPU and established market size, will be the flavour of the season,” said Ashish Fafadia, partner, Blume Ventures.
Among the top five deals this year: the $805 million raised by content aggregator platform Dailyhunt, $700 million by Swiggy in January, $665 million picked up by Byju’s in March, $450 million by Web3 platform Polygon and $400 million by SaaS firm Uniphore in February.
Convertible Notes- As price discovery turned tough and startups in need of cash couldn’t raise at a premium to their last valuations, rounds structured through convertible notes came to the rescue. Mature startups, including those who put their IPO plans on hold amid weak public market sentiment, turned to convertible notes as a fundraising tool.
These included startups such as B2B grocery firm Udaan, edtech decacorn Byju’s and healthtech company Pharmeasy which raised capital through this short-term debt option that converts into equity, typically in conjunction with a future financing round.
“Convertible rounds are more complex for late-stage startups than early stage and come with all kinds of bells and whistles. But price discovery in this market is tough and, therefore, both founders and investors are agreeing on convertible rounds. Pricing the risk is important, pricing it wrong can be more harmful than waiting out 12 months to price it,” Karan Mohla, partner, B Capital Group, said.
For late-stage startups that raised debt through dollar bonds and other complicated instruments, the prospects remain risky. “The other type of convertible rounds which are dollar-denominated and proper yield-earning convertible bonds are a bit risky. There is a lot of security needed. If a startup is raising a dollar bond through its overseas 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 do not turn around then there is a chance of shoring up a debt liability,” Avendus Capital’s Naik said.
However, convertible notes took immediate precedence on a startup’s capitalisation table due to its innate nature. These notes, which will convert into equity at a later date, require no valuation to be ascribed to the startup currently. “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 with structuring the instrument that things get complicated,” said Tejeshwi Sharma, managing director, Sequoia Capital India.
Exit strategy- The other aspect that will be important while writing cheques moving forward will be the public market acceptability of a company, 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 with 16 public listings last year. The average IPO market capitalisation also fell to $517 million compared to $4 billion in 2021, when the likes of Zomato, Nykaa, Paytm, and Policybazaar hit the public markets. In terms of mergers and acquisitions (M&A) involving Indian startups, though the momentum of consolidation continued from 2021 into 2022, companies took a more prudent approach.
As per Venture Intelligence data, 234 M&A deals happened in 2022 compared to 221 such deals in 2021. However, deal values for only 72 deals were announced this year, against 70 deals last year. For those deals where values were made public, 2022 recorded M&A deal values of $3.01 billion, compared to $8.43 billion last year.
Investors expect acquisitions to be the broad theme next year, given the uncertainty in funding for several startups. “Consolidation in the core market and expansion in adjacent markets is going to be the theme next year. We might see medium size M&As as large companies consolidate their respective markets,” said Sharma of Sequoia Capital India.
.jpg "Aquapulse : Pioneering Global Leadership in Seafood Exports Through Market Intelligence & Post Harvest Innovation")
.jpg "10 Dimensions Design : Pioneering Technology Integration in the Construction Industry")
