Are We Past the Bottom Of Funding Winter? Early-stage funding has been on the path to resurgence, as we see that a lot of deals have happened in the past 6–8 weeks, says Kavit Sutariya, general partner, Capfort Ventures
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After a temporary slowdown, investors seem to have reassessed their funding strategies. The number of funding deals in the past few weeks showcases a seeming revival of capital investment, even though market sentiments are still not positive globally. That's why we asked a few investors and founders if funding winter is close to over.
Funding scenario today
"Investors know that we are past the bottom of startup funding. Hence, it's a good time to enter into startups, especially in the early stages, which will form the bedrock for the next wave of unicorns in the coming decade. Early-stage funding has been on the path to resurgence, as we see that a lot of deals have happened in the past 6–8 weeks. Meanwhile, late-stage rounds have also started to pick up recently," said Kavit Sutariya, general partner, Capfort Ventures.
Many also say that there wasn't a slowdown at all in the early stage. And, in growth companies too, it was more of a recalibration of valuations and business models. "That having taken place, now it is slowly coming back to investments for good companies with a path to profitability," said Bhaskar Majumdar, managing partner, Unicorn India Ventures.
According to Preqin data, private investors, including venture capital and private equity, are sitting on "an enormous pile of cash" but are apprehensive about making big pocket investments. Both PE and VC firms had accumulated $1.96tr in dry powder, or capital waiting to be deployed, by the end of last year, says the report.
In India too, funding winter is being seen more as a behavioral shift in how investors are approaching their investment decisions. "What happened back in 2021-22 was a combination of dry powder and the rush to back startups that seemed to have 'outraced' the pandemic. With terms like resilience, new business models and changing consumer habits, many businesses seemed super attractive and that boiled over into a FOMO of sorts. I know fund managers who felt the pressure to invest even though they did not have conviction in the valuations. Rounds closed in a matter of days," said Nupur Garg, founder, Winpe.
Funding winter has also played out differently in different sectors in the Indian context. For instance, let's take the case of agritech startups. "Easy money is drying out, but there is still a healthy flow of capital in this space. For now, startups need to build a low/no burn culture, find product-market fit frugally, and prioritize cash runway to keep the business running smoothly between funding rounds," said Jinesh Shah, managing partner, Omnivore. According to Economic Survey 2023, agritech startups raised INR 6,600 crore in funding over the last four years.
Iesh Dixit, founder and CEO, Powerplay feels that the funding winter has massively hit the startups that were looking for IOPs, and the situation is still very much the same now. "Rarely has anyone raised funds for B and onwards series. While the funding landscape is showing signs of improvement, it's not yet time to declare an end to the funding winter," he said.
Today, startups perceived as having a stronger team and business model continue to attract investors and this competition will support good valuations for them. "The other thing that is happening is the vintage effect – with valuations correcting, investors are viewing this as a good vintage to invest in. So investors with dry powder are looking at deploying capital and getting good deals done," she added.
When will we see a complete revival?
While it's hard to predict for anyone as to when funding for growth-stage startups will return to normal, given the macroeconomic conditions, they feel that until startups prioritize scalability and demonstrate value to investors, the funding winter may persist.
"Until the VCs get exit from big startups they will not be able to fund B+ series for other growing startups," said Dixit. "2023 will be another year of tight money, and startups that can cockroach (streamline processes, reach profitability and generate positive cash flow) will become the new unicorns when the macro environment improves," added Shah.
2022 also saw 229 startup mergers and acquisitions (M&As). Thus, 2023 is expected to be a year of growth and late-stage consolidation to unlock more value creation for late-stage investors and move faster toward profitability. "Early stage will continue to see a positive trend as valuations have turned more realistic and funds can take more bets at lower risk than in 2021. In the growth stage, I am of the opinion that we will see more M&As or consolidation before we see the new entities getting funded again," said Anup Jain, managing partner, Orios.
Experts continue to be optimistic. "The investing business is opportunistic in nature and the India startup opportunity is too attractive to ignore for any investor looking to build a good global portfolio," said Garg.