Indian Startup Ecosystem Faces Funding Slump: Lowest 6-Month Funding in 4 Years

Funding woes are still plaguing the Indian startup ecosystem. According to a PwC India survey titled, Startup Perspectives – H1 CY23  capturing the current investment outlook for Indian startups, the Indian startup ecosystem reported the lowest six-month funding in the last four years in H1CY23 at US$3.8 billion across 298 deals – a decline of nearly 36% as compared to H2 CY22 (US$ 5.9 billion).

During the last few quarters, despite challenging funding market conditions, investors have shown strong support for their portfolio companies by doubling down on their investments in companies that demonstrated positive growth, the report stated.

Amit Nawka, Partner – Deals & India Startups Leader, PwC India, said, “A funding winter is just a season in a startup’s journey. There is a slowdown in startup funding despite significant untapped capital reserves held by venture capitalists (VCs). Active VC firms in India have secured new funds in the past year and we can expect the pace of investments to pick up in the next few months.

There is a slowdown in startup funding despite significant untapped capital reserves held by venture capitalists (VCs)

Amit Nawka, Partner – Deals & India Startups Leader, PwC India

In the interim, there has been an increase in the due diligence being carried out by investors before making investments, both in terms of detailing as well as coverage – from typical finance and legal to areas like technology, HR, and business processes – to ensure that the startups have a robust corporate governance framework.”

Other statistics reveal that growth and late-stage funding deals accounted for 84% of the funding activity in H1 CY23 (in value terms). These represented 43% of the total count of deals in this period. The average ticket size in growth-stage deals was US$ 19 million and in late-stage deals were US$ 52 million during H1 CY23. Also, 80 M&A deals involving startups were executed in H1 CY23.

While this news is saddening for startups, Vinod Khosla, Venture Capitalist at Khosla Ventures, Investor in OpenAI, has some words of advice.

“The funding environment is down but all it means is your competition is also not getting funding; capital efficiency will go up. With all the layoffs, it’s a perfect time to hire entrepreneurs. When things are great and there’s euphoria, it’s a bad time to invest for entrepreneurs, and also for investors.

The funding environment is down but all it means is your competition is also not getting funding; capital efficiency will go up. With all the layoffs, it’s a perfect time to hire for entrepreneurs

Vinod Khosla, Venture Capitalist at Khosla Ventures

Investors have been very cautious in India as they focus on revenue too much and not building assets. There is not a single example where I’ve used an IRR calculation to decide whether to invest or not at Khosla Ventures. Too much founder friendliness or focus on revenue is not right.

The founder should be treated like a child. Saying yes to everything will spoil them and you’ll do them a disservice. Completely controlling them means they won’t be innovative and creative. A good investor is an assistance to its entrepreneurs.”

Amongst those who have been able to secure funding, Fintech, SAAS, and D2C continued to be the most funded sectors in H1 CY23. SaaS, D2C, FinTech, e-commerce B2B and Logi and AutoTech continue to be the top five invested sectors based on the funding received in the first half of the year. These contribute to approximately 89% of the total funding received in H1 CY23 in value terms.

The D2C and online gaming sectors each saw investments increase by almost 3x that of H2 CY22. In the FoodTech sector, investments increased by four times in H1 CY23 compared to H2 CY22 in value terms. Bengaluru, NCR, and Mumbai continue to be the key startup cities in India, representing around 83% of the total startup funding activity in H1 CY23.

The Indian startup ecosystem is currently facing funding challenges. Despite this, there is optimism for the future The slowdown in funding presents an opportunity for startups to focus on capital efficiency and make strategic hires. Despite the current funding environment, it is crucial for investors to strike a balance between caution and providing necessary assistance to entrepreneurs.