India's startup economy stares at deepening funding winter in 2023

Indian startups, which saw a massive 35 per cent drop in funding in 2022 -- from $37.2 billion in 2021 to $24.7 billion (till November) -- are bracing themselves for a deepening funding winter in 2023 as recession fears loom.

Although some startups, like fintech platform KreditBee ($200 million), Foodtech platform HealthKart ($135 million) and HRtech software-as-a-service (SaaS) platform BetterPlace ($40 million), raised decent funds in December last year and in the beginning of January, the scene overall is grim as VC money has squeezed.

Thousands lost their jobs amid a deepening funding winter in 2022 amid massive layoffs by the tech companies, which still continues.

According to a PwC India report, startup funding in India hit a two-year low at $2.7 billion in the third quarter of 2022.

In 2022, the significant drop in funding was attributed to a decline in late-stage investments, which fell by 45 per cent from $29.3 billion in January-November 2021 to $16.1 billion for the same period this year, according to data provided by Tracxn, a leading global market intelligence platform.

Seed stage rounds also experienced a contraction and dropped by 38 per cent as compared to the previous year.

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The report said that 22 startups entered the unicorn club in 2022, as compared to 46 in the previous year.The number of big ticket ($100 million and above) funding rounds dropped by 35 per cent to 55 as compared to 85 in the reported period.

The number of funding rounds saw a drop of 30 per cent, from 2,647 last year to 1,841 this year, the report said.

"The funding winter, which began in Q4 of 2021, will persist in 2023 as well. In order to survive the drought, startups are taking unit economics more seriously, which has been illustrated through the series of mass layoffs that have occurred this year," said Neha Singh, Co-Founder, Tracxn.

"Although we are currently experiencing a slump, the situation is prompting startups to establish clearer and more sustainable paths to growth, as investors` evaluation metrics begin to emphasise good profitability over growth at all costs," Singh had said in a statement.

The startup ecosystem`s funding winter could last another 12 to 18 months and the industry may face "a lot of turmoil and volatility", Flipkart CEO Kalyan Krishnamurthy warned recently.

According to Shrijay Sheth, Founder, Legalwiz.in, 2023 will continue to be the year of sustenance for most, and funders will continue to remain more cautious.

"Both valuation multipliers and funding opportunities will go more conservative. Startups must build better units economics as opposed to expensive acquisitions driven growth channels. Geo-political issues, Global supply chain crisis and other macro issues are expected to prevail," he said.

However, this also needs to be seen as a year where resilient, innovative and problem-solving entrepreneurs shall get an opportunity to stand out from the crowd.

"As the macro environment gets tougher, we can expect some excellent business models to outshine the rest with high levels of innovation and frugality. Also, mostly the serious funding houses will prevail while we will see visitors in the VC world take a break," Sheth noted.