More pain ahead for Indian startups

The funds flowing into Indian startups dried further in July and dropped below $1 billion for the first time this year, making it the worst month of 2022.

The dismal numbers made many industry veterans and investors warn that the situation could get worse amid global recession fears.

The funds raised in July by ventures across stages (seed, early and late) stood at $603 million, a 78 per cent drop from $2.76 billion in the year-ago period.

"There was a spike in valuations last year, what we are seeing now is the correction of this trend," said Shivam Prasad, founding partner at early-stage venture firm Upsparks.

Unlike the glory days of the startup world, investors are also increasingly checking on the profitability of startups before investing in them.

The correction is also the result of an expectation mismatch between the funds raised and value generated in sectors such as edtech and ecommerce, said RK Rangan, Chairman and Director of venture capital firm BLinC Invest.

Global factors are also worsening the funding winter.

"Some of the reasons for this could be attributed to the uncertainty seen in global markets," said Amarjeet Singh, Partner and National Lead – Emerging Giants and Start-ups, KPMG India.

Some expect the funding crunch to persist until global recession fears are quelled.

"Global tech stocks have still not recovered," said Amit Nawka, Partner - Deals and India startups Leader at PwC.

Winners and losers

Some sectors in the startup space will outperform others in such uncertain times, investors and analysts told DH.

New start-ups that specialise in solving challenges of large unorganised markets, along with fintech, B2B, Software as a service (SaaS), and enterprise tech segments have been showing promise, said Ankur Mittal, co-founder of early-stage investment platform Inflection Point Ventures.

"Sectors like real estate and technology will continue to see growth. Likewise, EV and drone production and purchases will benefit from government incentives, and will see growth," Mittal said.

While Prasad has been seeing a lot of interest in agritech and health tech startups over the last six months, some others are betting big on SaaS startups due to their continued digitisation.

"SaaS remains a place to watch out for," Nawka said, highlighting how B2B businesses in the space have lower customer acquisition costs, making them less vulnerable than their B2C peers when funding dries up during a global slowdown.

While fintech continued to outperform other segments, SaaS-based companies accounted for 15 per cent of all the funds raised in July 2022.