Funding Freefall: Marking the End of an Era of Easy Money for Indian Startups As the Indian startup ecosystem saw a 72 percent (USD 19.7 billion) fall in investment during the first half of 2023 as compared to 2022 in the same period, entrepreneurs are finding it increasingly difficult to get the funding they need for growth and development.

The first half of 2023 has already passed, and the Indian startup ecosystem's fundraising environment is currently difficult. The startups are up against a tremendous obstacle as a result of the combination of global uncertainty, economic volatility, and a freeze on venture capital investments. Entrepreneurs are finding it more and more difficult to secure the funding they need for growth and development, according to a Tracxn report, as the total funding in the January to June period of 2023 (H1) amounted to USD 5.5 billion, a 24 percent decrease from the second half (H2) of 2022 (USD 7.3 billion), and a startling 72 percent drop from H1 2022.

Shortage of Funding and the Tech Depression

The funding well for Indian entrepreneurs has been drying up since mid-2022, signalling the end of an age of easy money. As Q2 of 2023 marks the weakest quarter in the previous three years, demonstrating a considerable fall in funding, with USD 2.7B being raised in Q2 2023, a 65% decline from the same period in 2022 and USD 2.8B raised in Q1 2023, a 76% decline from same period in 2022.

"Investment trends in startups are often driven by the broader economic sentiment, which has been generally negative in recent quarters, resulting in a noticeable funding slowdown," said Anirudh A Damani, Managing Partner of Artha Venture Fund.

As per Tracxn, the severity of the financing crisis was evident in June 2023 when funding reached just USD 0.15 billion, the lowest level in the preceding three years. Early-stage and growth-stage companies are also impacted, but growth-stage firms that are battling to become profitable experience the most difficulties in attracting funding.

There were no new unicorns in the first half of 2023, a significant drop from the six and 19 new unicorns that appeared in the second half of 2022.

"However, with the economic situation showing signs of recovery, especially in emerging markets, and the adverse impact being less severe than expected, the investment community has a sense of optimism. Now is the ideal time for investing, given that we might be on the cusp of a significant upswing in funding activity within the next two quarters," Damani further added.

Investor Probe and a Changing Climate

Since 2022, India Inc has brought to light a number of instances of corporate governance failures in startups, including BharatPe, Broker Network, Trell, and Zilingo, where the businesses were charged with inaccuracy in financial reporting. Beginning in 2023, another instance of financial fraud was made evident when the GoMechanic founders admitted to defrauding investors by misrepresenting their financial accounts.

As a result, venture capitalists now scrutinise businesses from the very beginning and are stricter and more cautious than ever. Concerns concerning unit economics, product-market fit, and corporate governance have been raised by this rigorous approach.

Series B and later capital rounds are getting harder to obtain, whereas seed and Series A investments are still very easy to come by. Because of this, growth-stage and late-stage businesses are now in a perilous situation and are significantly dependent on a sizable capital runway to maintain their operations.

Focus Sectors

Startups in all areas have been hurt by the capital scarcity, although some have fared better than others. While enterprise tech and software-as-a-service (SaaS) firms have drawn a lot of attention, ecommerce continues to dominate fundraising. Startups in the fields of artificial intelligence and machine learning are in third place, which reflects the impact of the Chat GPT revolution. A strong business plan and defensibility are now necessary for long-term success with VCs; being an AI startup alone is no longer adequate.

"At Artha, solving real-world problems, having scalable positive unit economics, having strong moats, and using technology as an enabler have always been the cornerstones of our investment approach. The 'expansion at all costs' mentality, which has led many businesses down unsustainable paths, appears to have given rise to a greater emphasis on unit economics and profitability," stated Damani.

Notably, the electric vehicle (EV) market has seen over $1 billion invested in climate tech companies, with companies like Ola Electric leading the trend. But as it has become more difficult to find these offers, the number of new unicorns has decreased.

International Comparison and Recovery Hope

India ranks third globally in terms of investment for geography, behind the United States and the United Kingdom, despite the funding issues the Indian startup ecosystem faces. India's position demonstrates investor confidence in its potential, which is a silver lining despite the negative effects of the worldwide fall in finance.

"In times like these, when the focus of entrepreneurs shifts towards sustainable growth and valuations are grounded in reality, the best investment opportunities arise. I enjoy investing during these times because these periods yield the highest ROI," Damani emphasised.