MUMBAI (Reuters) – The funding crunch at Indian start-ups that has already led to layoffs and share listing delays will worsen as investors view stretched valuations and faltering consumer growth, likely to set the stage for industry consolidation.
Startups in India raised just $2 billion in the first quarter of 2023, down 75% from the same period last year, and the lowest quarterly number in almost three years, figures from the startup firm showed. CB Insights data.
At this rate, startups may end up raising less than $10 billion this year, a far cry from the record $30 billion raised in 2021 and $20 billion in 2022.
The slowdown is a setback for startups, as well as for Prime Minister Narendra Modi, who hailed their success, calling startups the “backbone of the new India.” It could hurt India’s economic growth and its job market.
“This is a fundamental reset, not just another problem,” said VT Bharadwaj, a former India managing director at Sequoia Capital who now runs venture capital firm A91 Partners. “I don’t think I’ll see a record fundraising year like 2021 again for at least a decade.”
The prospect of rapidly increasing consumption both offline and in India’s digital space has helped many startups post multi-billion dollar valuations in recent years, with Sequoia and Tiger Global betting big on businesses that burned effective in attracting consumers in the country of 1.4 billion people.
Global factors such as high rates and inflation have weighed on the investment climate in India and elsewhere: seed funding in the US halved to $32.5bn in the first quarter, while in China it fell 60% to $5.6 billion.
But India’s startups, which are much more reliant on foreign capital than their global peers, have experienced a more severe contraction, which some executives say is also partly because investors realized they misjudged growth. Of consumption.
Indian venture capital firm Blume Ventures said in an April report that consumption outside the top 30 million Indian households has fallen sharply and is driven by a “small set of super users.”
Despite India’s population of over 1 billion, food delivery company Zomato has just 50 million users transacting annually and state-backed digital money transfer service UPI is used by just 260 million, according to the report.
“Indian startups are not serving 1 billion consumers. They are all selling to the same 100 million. The (consumer) market seems 2-3 times inflated,” said Ankit Nagori, a former senior executive at Flipkart, the arm of Walmart eCommerce. who now runs Curefoods, a cloud cooking startup.
LESS OPERATIONS, CONSOLIDATION AT SIGHT
The first signs of discontent in the Indian market came after the failed listing of loss-making digital payments firm Paytm in 2021, after which investors and regulators raised questions about whether valuations of many startups were unrealistic. .
Since then, things have gotten worse.
Six investor sources and three start-up founders told Reuters they expect the funding environment to worsen and many billion-dollar companies to cut valuations within two years.
In recent weeks, BlackRock internally halved the valuation of Indian online education company Byju’s in which it has invested to $11.15bn from $22bn, while Invesco cut the valuation of the online education company Swiggy’s foods by a quarter to $8 billion, US investors reveal.
And just 271 Indian startups raised funds in the first quarter of 2023, up from 561 last year, according to CB Insights.
After leading India’s funding boom for years, Japan’s SoftBank has not made a single new investment in the country in the past year as it awaits a further correction in valuations, two people familiar with its planning said.
SoftBank did not respond to a request for comment. It invested $3 billion in Indian companies in 2021 and another $500 million in 2022, as of April of that year, Reuters calculations show.
Amid all the pain, banker Shivakumar Ramaswami has sensed an opportunity and is setting up a new M&A desk at his tech-focused investment banking firm Indigoedge as he sees a wave of consolidation: two of his colleagues just they are tasked with seeking out M&A opportunities.
“Many funded companies reached a certain scale and then stagnated. Everyone needs to find a home, and many of these companies can’t do an IPO. We’re preparing to work with them,” he said.
(Reporting by M. Sriram; Editing by Aditya Kalra and Muralikumar Anantharaman)