Indian startup funding shrinks by 73% in 2023. What model companies can adopt?

In India, startup funding has declined to a five-year low figure in 2023 — $7 billion as compared to $25 billion received in the previous year, a nearly 73% decline from funding recorded in 2022 amid a worsening global macroeconomic environment tossed by geopolitical tensions.

According to research platform Tracxn data, as of December 5, the fourth quarter of 2023 saw the lowest equity investment received by new-age ventures since the terrible performance in the third quarter of 2016.

Indian startups raised $1.5 billion between July and September this year, Tracxn Geo’s report said, adding that the number was about $957 million in October and November 2023.

It also revealed that late-stage funding has seen the biggest fall this year, dropping by over 73% to $4.2 billion in 2023 till date from $15.6 billion in the same period in 2022, while drop-in late-stage funding is closely followed by early-stage funding with a drop of 70% in 2023.

Additionally, seed-stage funding has also seen a sizable drop of 60% this year, dropping to $678 million in 2023 to date from $1.7 billion in the same period in 2022. In total, the India Tech ecosystem saw only 17 $100M+ rounds in 2023 to date as compared to 55 in the same period last year, a 69% drop.

Entrackr reported that a total of 20 Indian startups have raised $130 million in funding from December 4 to December 9, including four growth-stage deals and 14 early-stage funding deals.

India, which was ranked 4th in 2022 and 2021 among the highest-funded geographies globally, is now down to 5th place in 2023, the Tracxn report added.

Startup Funding Report 2023: Top funded sectors this year
1) In 2023, Fintech has received $2.1 billion in funding as compared to $5.8B received in the same period last year. As per the report, PhonePe is the top-funded company in the Fintech sector in 2023 which has received a total of $750 million in four Series D rounds. Some other top-funded companies in this sector include Perfios, Insurancedekho, and Kreditbee.

2) The retail sector received a total of $1.9 billion in funding this year to date, a 67% drop as compared to 2022. In this sector, Lenskart is the top-funded company, receiving g $600M in two Series J rounds. Zetwerk, Atomberg, and Xpressbees are some of the other top-funded companies in the sector.

3) Enterprise Applications is the third highest funded sector in 2023 receiving $1.56 billion in funding in 2023, down by 78% as compared to $7 billion received in the same period last year 2022, the report said.

4) Environment Tech received funding of $1.2 billion in 2023 to date, a 50% drop from as compared to $2.4 billion funding received in the same period last year. Tracxn reported that it is the only sector that saw a significant increase in funding in the middle of funding winter with a 225% increase in funding as compared to 2021.

5) SpaceTech is another sector receiving good investor interest since the introduction of privatization by the Indian government. It has received funding of $122 million in 2023 to date, a 6% increase from $115 million received in 2022.

Leading investors in Indian Tech Space
The report stated that LetsVenture, Accel, and Blume Ventures have been the top active investors in 2023 to date. This includes 100X.VC, Venture Catalysts, and Y Combinator as the lead investors in the seed stage, while Accel, Peak XV Partners, and Elevation are the most active investors in the early stage. And, Singularity Ventures, Avataar Ventures, and Filter Capital are the leading investors actively involved in the late stage.

Top-funded companies and new unicorns in India
Lenskart, PhonePe, Perfios, and Zepto are some of the top-funded companies in India Tech in 2023, the report said, adding that two new Unicorns were created in India Tech in 2023 till as compared to 23 in 2022, a 91% drop. The two companies that entered the Indian Unicorn Club in 2023 are Incred and Zepto. Bangalore, Mumbai, and Delhi-NCR are the top-funded cities in India in 2023 to date.

Startup Funding Report 2023: What model companies can adopt now?
Tushar Dhawan, Partner, Plus91Labs stated that the reminiscent dip in investment activity from 2016 is particularly harsh for companies navigating their growth stage and the closures of ZestMoney and Frontrow epitomize the hurdles faced by models heavily reliant on capital injections.

“Companies must adapt to leaner models, optimizing cloud resources for cost-effectiveness. The move from unchecked growth to operational cash flows aligns with a cloud-centric strategy, emphasizing scalable solutions that mitigate financial strains,” Dhawan told LiveMint.

The closures of ZestMoney and Frontrow serve as examples of the struggles faced by models that heavily rely on capital injections, said Ashish Rane, Director of Valuation and Financial Advisory at Aranca.

“Venture capitalists now prioritize operational cash flows overgrowth according to their playbook. The significant drop from 23 unicorns in 2022 to two, in 2023 highlights the necessity for startups to pivot strategically and emphasize resilience, sustainability, and operational efficiency amidst the challenges and uncertainties that impact investor confidence,” Rane said.

Amit Saneja, CEO of Educate Online India believes that the closures of notable ventures, exemplified by Frontrow, underscore the critical need for robust business models and operational effectiveness in this demanding environment.

“Amidst these challenges, education startups must display resilience, placing a premium on flexibility and strategic efficiency to not merely survive but thrive in this evolving landscape. Broader industry challenges, such as market saturation and regulatory uncertainties, accentuate the call for innovation and adaptation, ushering in a transformative phase for sustained success in the post-Covid era.”

To navigate financial limitations, Rohit Gajbhiye, the founder and MD of LEO1 said it is essential for startups to adapt their business models to cater to market demands and generate multiple sources of income that requires an in-depth evaluation of expenses and safeguarding core functions while striving towards profitability and sustainability.

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