Venture Capital activity to pickup in later part of 2024: Report

Startup winter going on: Indian startup funding has dropped 62 per cent on a year-on-year (YoY) basis , raising Rs 66,908 crore in equity funding, according to a report by market research platform PrivateCircle.

In contrast, startups raised about Rs 2.42 lakh crore during the funding peak in 2021.

Under the analysis, PrivateCircle tracked 252 secondary deals for 117 Indian startups since 2021, which have a valuation of $500 million in the last three years.

“There is no denying that 2023 has been a tough year for startups. Both funding volumes and value figures have hit a six year low,” Murali Loganathan, Director of Research, PrivateCircle noted.

Notably, the funding has dropped even below the 2018 numbers, registering a six-year low for the Indian startup ecosystem. The funding deal volume also dropped 72 per cent to 1,444 deals, compared to 5,000 deals in 2022 - marking a six-year low for the ecosystem, as per the findings.

Funding to pick-up pace

But the cautious approach of VCs for the past two years is now expected to convert into investment activity later this year, Loganathan noted.

“Even though funding rounds have slowed down, venture capital funds are sitting on ample dry powder. Funds usually have a 10-year cycle for investments and they can only raise capital in the first three. Given the cautious approach of investors has now continued for almost two years, we expect to see VC activity pick up pace later this year,” he said.

The repercussions of the prolonged funding winter for startups has made startups increase their focus on revenue growth and profits, but has also caused anxiety among founders who have over 12 months of runway, as per the assessment.

Based on deal volume between January 2023 to December 2023, 100X.VC has topped the list by closing over 50 investment deals in 2023.

Notably, the pre-seed and seed stage VC fund has an average deal size of Rs 1.25 crore.

The Dark Horses

Even as the total funding raised by the ecosystem dropped significantly, startups who have managed to win the interest and faith of investors amid this tough environment include Lenskart, PhonePe, DMI Finance and Udaan. The B2B e-commerce start-up had laid off a hundred employees last month and is also seeing a leadership step-down.

Late-stage eyewear brand Lenskart raised the highest funding amount of $500 million in 2023, securing funds from Abu Dhabi Investment Authority in 2023.

PhonePe secured the top spot in terms of revenue, followed by by Lenskart, DMI Finance and others. Flipkart had raised $600 million from its parent entity Walmart, and hence excluded from the list.

Notably, the top 10 companies that have raised mega rounds have revenues of over Rs 500 crore, underlining the importance of robust cash management and generation.

As noted by VCs, fintech is rising as the dark horse for investments with the category seeing the highest number of secondary transactions in both 2023 and 2022. This was followed by Software-as-a-Service (SaaS) in the same time period.

In contrast, e-commerce saw the highest number of secondary deals followed by media and entertainment during the 2021 funding peak. Fintech was a common sector for investments in terms of secondary deals.

A secondary round takes place when an existing shareholder sells their shares to a third-party.