The flood of venture capital directed at Indian startups in recent years is drying up even as a stream of global investors including the likes of Sequoia Capital caution entrepreneurs about turbulent financial markets. Big-ticket funding rounds have suffered a huge blow in the past two months signalling a reluctance among these investors to write large cheques.

In the period April 1-May 16, 2022, there were only nine funding rounds of more than $100 million, cumulatively amounting to a little over $2 billion, compared to 27 such deals in the January-March period this year, according to data sourced from New York-based analytics platform CB Insights.

Unicorn rounds that catapulted 42 companies to the once-elusive club, in 2021, have also come to a screeching halt. Till date, just 15 startups valued at over $1 billion have been birthed this year, with April and May seeing only five such deals.

In addition, overall capital raised by Indian companies has also come down perceptibly in the last two months with $3.82 billion during April 1-May 16, 2022 across 268 deals compared with $9.93 billion in the period January-March, per CB Insights, as adverse macroeconomic situations, especially the interest rate hikes by the US Federal Reserve and the rout of technology stocks on public markets worldwide depressed sentiment.

Slowdown in late-stage funding

In contrast, during April 1-May 2021, close to $4 billion was raised across 227 deals in India. People in the know said "large deals are getting stuck or delayed as investors are in no hurry to commit capital when there is no competition for deals".

Multiple sources aware of the matter said M&A discussions such as "Razorpay’s potential acquisition of payments solution platform Ezetap have taken much longer to close due to changing sentiment," while there have been no other "deals worth over $500 million this year" barring Dailyhunt’s $805 million funding round and Byju’s $800 million funding,

"Late-stage financing is where we have seen a bit of pause, and most of the aggregate dollar value for the ecosystem comes from late-stage deals. And if the late-stage funds slow down, it looks like the ecosystem is slowing down," said Rahul Taneja, partner at Lightspeed Venture Partners, who is of the view that the early stage (funding) ecosystem hasn't changed that much.

Pointing out that "public markets in the US were a rocketship over the last two years and have re-priced now and the same has led to correction in pricing in private deals too", Taneja said, "Investors want to be sure that companies are now moving into a business model which is fundamentally sound and will deliver free cash-flows over the long term."

The slowdown in late-stage funding was anticipated as early as December 2021 when US technology stocks were being pummelled. Typically, private valuations reorder after a lag of four-six months after the public markets.

Rajeev Misra, CEO of SoftBank Vision Fund, said the power of capital has shifted back to the capital provider after the euphoria of the last two years.

"…if a company is trying to raise $250 or $500 million, they're struggling to find the lead investor who will come in with $100-150 million," Misra said at the time. According to him, the fund had seen in the private markets certain investors back out after verbal commitments on deals.

Since then, the environment has only worsened. Longer to close deals, M&As

According to an entrepreneur at one of the country’s most valued startups, the liquidity situation in India will become tougher going forward and added that relatively the situation is more worrying in the US currently.

"This (Ezetap deal), for instance, has been in the works for months and will close eventually but they (Razorpay) are now doing a deeper due diligence (DD) as there is no rush to close these acquisitions in the current market scenario," a person briefed on the matter said. He added that unlike last year, companies do not have multiple term-sheets for investments or M&As.

Ecommerce player Meesho was among the companies looking to raise at least $500 million at a nearly $8 billion valuation–60% higher than its previous valuation last September. People briefed on its fundraising said it is unlikely to close a new round anytime soon. So, what’s next?

Founders have already shifted gears and are focusing on conserving cash even if they have recently closed a funding round.

"We knew a meltdown would come but we didn’t know exactly when…The rainy day we spoke about is here now. Even to people raising rounds now, we tell them to treat this as your last round and think of a plan B," said Sanjeev Bikhchandani, founder of Info Edge and early investor in Zomato and Policybazaar, which went public last year, adding that "companies with the right unit economics and those that are well-capitalised and growing well, will survive this (slowdown cycle) but startups that need capital and fail to raise it will have difficulty."

He also pointed out that "as long as the US inflation remains high, the Fed will increase interest rates and that will impact funding overall."

The US inflation and interest rates are critical factors for Indian startup funding because large investment deals are led by foreign investors with a deep pool of capital. Last year, India also saw crossover investors taking bets on late-stage Indian startups. These funds are pulling back on writing aggressive cheques. Tiger Global has registered a $17 billion in losses as per the Financial Times newspaper while SoftBank chief Masayoshi Son announced earlier this month he will cut down investments drastically this year. These two are among the biggest unicorn creators in India and globally, too.

"At present all companies which were aiming for an IPO in 18-36 months’ timeline have maximum pressures to cut down on costs and do course corrections. For many the answer is reducing employee cost. Even existing investors are pushing their portfolio on the road to profitability and are controlling costs," said Amarjeet Singh, partner and national lead, emerging giants and startups, KPMG in India.