The funding bubble bursts: India's start-ups brace for a tough 2023

According to experts, India's start-up sector is currently experiencing a funding winter and may not recover until later this year due to a challenging global environment. Karteek Pulapaka, co-founder and partner at Bengaluru-based fund Java Capital, cites a "marked slowdown" in deal-making and attributes it to global macroeconomic and geopolitical headwinds, including inflation and the war in Ukraine. He remains optimistic about a possible recovery in the last quarter of the year.

According to GlobalData, 87 venture capital deals worth $696.2 million were announced in India in January, marking a decline of 13.9% and 23.1% by volume and value, respectively, compared to the previous month when India saw 101 venture capital deals worth $905 million. The downturn is due to macroeconomic challenges, recession fears, and concerns around start-up valuations, says Aurojyoti Bose, lead analyst at GlobalData. However, India's start-up sector has boomed over the past decade, becoming an increasingly critical part of the country's economy, with more than 80,000 start-ups registered in the country, valued at over 3 trillion rupees ($36 billion), according to Indian government data.

India's largest startups include Paytm, a digital payments firm that went public in 2021, Zomato, a food delivery app that also listed in 2021, and Ola, a ride-hailing app. With a population of around 1.4 billion, increasing incomes, and rising internet use, Indian startups have attracted local and global investors who have provided funding in the form of angel investments, private equity, and venture capital. According to Tracxn, over 80 percent of the top ten investors in seed-stage rounds are from India, while foreign investors, mainly from the US, dominate the top ten investors in early and late-stage rounds.

As central banks raise interest rates after more than a decade of near-zero funding, funding is on the decline globally. However, some of the largest investors in India's start-ups, including Sequoia Capital, Accel, and Tiger Global, remain active in the market. While the funding environment in India experienced a sharp downward trend last year, following a bumper year for fundraising by start-ups in 2021, the acceleration of digitalisation trends due to the coronavirus pandemic helped to boost investor interest then. Additionally, a record 44 start-ups in India in 2021 became "unicorns", which refers to new ventures with a value of more than $1 billion.