India’s start-up sector is within the depth of a funding winter.

Investment continues to be subdued and the nation might not emerge from the coolness till a lot later this yr amid a difficult international setting, specialists say.

Karteek Pulapaka, co-founder and companion at Java Capital, a Bengaluru-based fund targeted on seed-stage entities, says there was a “marked slowdown in the pace of deal making in the market”.

“The global macroeconomic and geopolitical headwinds, inflation and war in Ukraine, are truly to blame for the slowdown in funding,” he says.

Mr Pulapaka anticipates “a possible recovery in the last quarter of this calendar year, if we are to take an optimistic view”.

Figures from GlobalData show that a total of 87 venture capital deals worth $696.2 million were announced in India during January this year. This marked a decline of 13.9 per cent and 23.1 per cent by volume and value, respectively, on the previous month, when India saw 101 venture capital deals worth $905 million, the data shows.

“India has always been a hotbed for venture capital funding activity,” according to analysts at GlobalData. “However, the new year has brought with it a funding winter that has been continuing to take a toll on investor sentiments.”

Aurojyoti Bose, lead analyst at GlobalData says the downturn is due to “macroeconomic challenges, recession fears and concerns around start-up valuations”.

Over the previous decade, India’s start-up sector has boomed with the rise of technology to become an increasingly critical part of the nation’s economic system.

Indian government data shows that there are more than 80,000 start-ups registered in the country, and it values this start-up ecosystem at more than 3 trillion rupees ($36 billion).

Some of India’s biggest startups include digital payments firm Paytm, which went for a public listing in 2021, food delivery app Zomato, which also listed in 2021, and ride hailing app Ola.

With a population of about 1.4 billion, rising incomes and increasing web use have through the years made Indian start-ups engaging for native and worldwide buyers.

Funding has flowed in from angel investors, private equity companies and venture capital funds.

Global start-up data platform Tracxn’s research shows that more than 80 per cent of the top ten investors in seed-stage rounds are from India, while the top ten investors in early and late-stage rounds are dominated by foreign investors, primarily from the US.

Some of the largest investors from the US in India’s start-ups include Sequoia Capital, Accel, and Tiger Global.

As central banks raise interest rates global after more than decade at near zero funding is on the decline.

The funding environment in India experienced a sharp downward trend last year, following a bumper year for fundraising by start-ups in the country in 2021.

The acceleration of digitalisation trends due to the coronavirus pandemic helped to boost investor interest then. In addition, a record 44 start-ups in India in 2021 became “unicorns”, which refers to new ventures with a value of more than $1 billion.

But the backdrop turned cloudy in 2022 because of Russia’s war in Ukraine and the spillover effects of the conflict on the global economy. This was accompanied by the US Federal Reserve raising interest rates, leading to capital flowing away from emerging markets.

This funding winter is not showing signs of thawing yet, analysts say.

The volume of funding deals for India registered a year-on-year decline of 62.5 per cent in January 2023, while the value of deals fell by 80.3 per cent, GlobalData’s figures reveal.

“The current declining trends in funding are expected to continue in 2023 in view of concerns about a global recession and other geopolitical factors,” says Neha Singh, co-founder of Tracxn.

“Despite minor upticks in October and November 2022, the overall trend has been downward with the first three months of this year being no exception.”

This is taking a toll on India’s start-ups.

“Business owners have cut back on their financial outlays, shut down losses-making ventures, and started to carefully consider unit economics,” says Ms Singh. “Also, as a result, we witnessed extensive, widespread layoffs in 2022 and the first two months of this year.”

Local media reports in India say that several high-profile start-ups in the country, ranging from food delivery apps to educational technology companies have been laying off hundreds of employees each.

“Although venture capital funds are sitting on a lot of uninvested capital, investments are still expected to be slow as investors exercise more caution while taking investment decisions,” says Ms Singh.

“Their investment strategies have changed dramatically and it is expected that funding will be directed toward start-ups with a clear roadmap to profitability and strong fundamentals.”

“Investors will look for qualities like scalability, growth potential, and the ability to reduce cash burns among start-ups, and such businesses are expected to attract ample investments going forward,” she says.

There are still some bright spots in India.

Ms Singh points out that despite the overall downward trend in funding since the start of 2023, there have been six $100 million funding rounds.

This “indicates that funding will be consolidated to more established start-ups with strong fundamentals”, she says.

Indian digital payments company PhonePe, which is backed by US retail giant Walmart, last month raised $100 million from Tiger Global, California-based Ribbit Capital, and Chennai-based TVS Capital Funds, with the funding round valuing it at $12 billion. That brought the total investment it has raised this year to $450 million, after it secured $350 million from General Atlantic in January.

PhonePe said it expects “further investments from leading global, as well as prominent high net worth Indian investors in due course”.

“We are privileged to have a great set of leading global investors, both existing and new, who believe in our mission of building massive technology platforms to bring at-scale financial and digital inclusion in India,” said Sameer Nigam, chief executive and founder of PhonePe, as the fund raising was announced.

Also, last month, Indian insurance technology start-up InsuranceDekho raised $150 million in a round made up of equity and debt, with Goldman Sachs Asset Management, TVS Capital Funds, Investcorp, and Leapfrog Investments participating.

With a big, younger inhabitants to faucet, rising smartphone possession, and an economy that is faring relatively well in comparison with many economies globally, analysts say that the monetary expertise section is outperforming different sectors.

Sagar Agarvwal, the co-founder and managing director of Beams Fintech Fund, believes things are looking promising for fundraising in the FinTech sector in India after a few challenging quarters during which inflation has made capital more expensive for both investors and companies.

“We have seen some improvement since the last quarter in our own deal pipeline, and we are glad that companies took their time to focus on unit economics before raising their next round of growth capital,” says Mr Agarvwal.

“India is the third largest start-up ecosystem in the world, and we continue to stay bullish on high quality companies that are solving large complex problems and have a clear path to profitability.”

However, Java Capital’s Mr Pulapaka warns that, for the broader start-up ecosystem in India, “a prolonged slowdown in funding may discourage first time founders from starting up, and founders will have to settle for lower mark-ups to continue raising this year”.

But he says India’s economic growth story is still intact and he sees “this slowdown as a speed bump rather than a point of no return”.

Anil Joshi, the managing partner at Unicorn India Ventures, which is focused on the tech sector, remains upbeat, given the country’s large consumer base and other fundamentals. He says his venture capital fund is still seeing strong investor interest despite the funding winter.

“We haven’t seen any drop in interest from investors for Indian companies,” says Mr Joshi.

“Overall, India will keep attracting investors’ interest for the whole of the decade considering the way India is progressing.”

Updated: March 13, 2023, 4:00 AM