Venture capital funding: VC firms tighten funding channels for Indian startups

Bangalore: The flood of venture capital targeting Indian startups has been drying up in recent years, even as global investors, including Sequoia Capital, keep reminding entrepreneurs of volatile financial markets. Large funding rounds have taken a huge hit over the past two months, showing that these investors are reluctant to write big checks.

According to the data source, between April 1 and May 16, 2022, there were only nine funding rounds of more than $100 million, with a cumulative amount of just over $2 billion, compared with 27 such deals between January and March this year From New York-based analytics platform CB Insights. The total value of deals worth $100 million and above slowed to $2.6 billion between April 1 and May 25 this year, compared with $5.2 billion a year earlier, according to startup research platform Tracxn.

The unicorn financing that put 42 companies into the once-elusive club in 2021 also came to an abrupt end. Only 15 startups valued at more than $1 billion have been born so far this year, and there were only five such deals in April and May.

Additionally, total funding raised by Indian startups has also dropped notably over the past two months, with $4.15 billion raised in 218 deals between April 1 and May 25, 2022, compared to January to March 2022, according to Tracxn. During the month, it was $10.11 billion as unfavorable macroeconomic conditions, especially the Fed rate hike and a slump in publicly traded tech stocks around the world weighed on sentiment.

Transactions over $100M slow down_Graphic_ETTECHETtech

Late-stage funding slows
By comparison, between April 1 and May 25, 2021, nearly $6.53 billion was raised across 364 deals in India.

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“Big deals can get bogged down or delayed because investors aren’t rushing to put money in when there’s no competition for deals,” the people said.

M&A discussions such as “Razorpay’s potential acquisition of payments solutions platform Ezetap will take longer to close due to changing market sentiment,” and that aside from Dailyhunt’s $805, there is no other “value this year,” multiple people familiar with the matter said. more than $500 million in deals” $1 million financing and Byju’s $800 million financing,

“Late-stage funding is where we’re seeing some pause, with most of the ecosystem’s total dollar value coming from late-stage deals. If late-stage funding slows, it looks like the ecosystem is slowing down,” said Rahul Taneja, partner at Lightspeed Venture Partners, who believes The early (funding) ecosystem hasn’t changed much.

“The U.S. public markets, which have rocketed over the past two years, have now repriced, which has also led to a correction in the pricing of private transactions,” Taneja said. “Investors want to make sure that companies are now turning to a A fundamentally sound business model that will provide free cash flow over the long term.”

Back in December 2021, when U.S. tech stocks took a hit, expect late-stage funding to slow. Typically, private valuations are reordered after a four-month lag of public markets.

SoftBank Vision Fund CEO Rajeev Misra told ET in March,
The power of capital has been transferred back to the capital provider After the excitement of the past two years.

“…If a company is trying to raise $25 billion or $500 million, they’re trying to find a lead investor who can get $10-150 million,” Misra said at the time. According to him, the fund has seen certain investors in the private market exit after verbally promising deals.

Since then, the environment has only gotten worse.

Longer time to close deals, M&A

An entrepreneur at one of the country’s most valuable startups said India’s liquidity situation will get tougher going forward, adding that the current situation in the US is relatively more worrying.

“For example, this (Ezetap deal) has been in the works for months and will eventually be completed, but they (Razorpay) are now doing more in-depth due diligence (DD) as there is no rush to complete these acquisitions in the current market conditions” said a person familiar with the matter. Unlike last year, the company doesn’t have multiple investment or M&A term sheets, he added.

E-commerce company Meesho is one of the companies looking to raise at least $500 million at a valuation of nearly $8 billion, 60% higher than its valuation last September. People familiar with its fundraising said it was unlikely to close a new round anytime soon.

Early-stage funding maintains momentumETtech

What’s next?

The founders have switched gears and focused on saving cash, even though they recently closed a funding round.

“We know the crash is coming, but we don’t know exactly when… The rainy day we’re talking about is here right now. Even for people raising money now, we’re telling them to take this as your last round and consider a plan B,” said Sanjeev Bikhchandani, founder

and an early investor in Policybazaar, which went public last year, adding: “Companies with the right unit economics and well-capitalized and well-growing companies will survive this (slowing cycle), but those that need capital but haven’t been able to raise it. Startups will have difficulty.”

He also noted that “as long as U.S. inflation remains high, the Fed will raise interest rates, which will affect overall funding.”

Inflation and interest rates in the U.S. are key factors in India’s start-up capital, as large investment deals are dominated by foreign investors with deep pockets. Last year, India also saw crossover investors betting on Indian late-stage startups. These funds are being withdrawn to write aggressive checks. Tiger Global lost $17 billion, according to the Financial Times, while SoftBank CEO Masayoshi Son announced earlier this month that he would slash investments this year. The two companies are also among the largest unicorn creators in India and globally.

“Right now, all companies planning to go public within 18-36 months face the greatest pressure to cut costs and correct course. For many, the answer is to reduce staff costs. Even existing investors are pushing their Portfolio. Profitability and control costs,” said Amarjeet Singh, Partner and Head of Emerging Giants and Startups, KPMG India.