Why Venture Capitals fundings are declining in Indian startups, explains market analyst – lists key reasons

By - Amit Pamnani, Chief Investment Officer for Investment Banking, Swastika Investmart Ltd.

Looking at the global scenario we see rising inflation in many countries including developed countries like the US, Japan, and Europe, rising interest rates, the Russia-Ukraine war, fluctuating Oil prices, rising India’s trade deficit, depreciating Rupee, etc. all these factors coming together is causing global turmoil in business and economies.

Startup funding is directly related to all such macro-economic factors, hence we see a 33% downside in Q2 2022 funding as compared to Q1. Further, if we compare the trend with last year, it was seen that in Q2 2021 deal volume and the aggregate amount increased over Q1 2021.

However, in Q2 2022 volume and amount have decreased as compared to Q1 2022. Valuation multiples have also been corrected by 25%.

Venture capital (VC) funding into Indian startups dipped 37% in the second quarter of this year to $6.9 billion. In the first quarter, overall investments into startups were $11 billion.

Venture capital funds investing in India arrange capital from global markets which are shaken at large and hence new funds are on halt. The US and Europe were affected since Q1 but in India impact is seen from Q2 and will be observed in Q3 at least. 

VC investors like Sequoia and Y combinator have asked their portfolio startups to keep a runway of 24 months and curtail expenses and new hires.

In the last few years, the startup industry and the cash pump have both been on a bullish ride and therefore the supply of funds was at its peak. Where there was ample supply on one side, there had to be demand on another side.

Fortunately, fundamentally, India is strong enough and has outperformed the global market on various parameters. But since every shining sun sets, this Bull Run also had to come to an end and now India is noticing a crunch in supply both at stock and VC markets.

The valuations are getting affected and layoffs are breaking new numbers daily but the blessing in disguise is that we are heading towards fair valuations. The reason the Indian start-up industry is getting naturally hit is that only 15-20% of the players are profitable and can churn the money.

Whereas the rest of them are still dependent on funding and are still in the cash-burn stage. Would there be PAT or not is still a question and therefore most start-ups are finding their future not so bright?

In India, by the winter season, we will experience the funding winter in startups at its peak but it will be short-lived as Indian fundamentals are strong and returns on investment are higher than in other countries both in Stock markets and startups. 

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)