MUMBAI: A funding crunch at Indian startups that has already led to delayed stock listings and layoffs is set to worsen as investors reckon with faltering consumption growth and stretched valuations, likely laying the ground for industry consolidation.
According to data from analytics firm C.B. Insights, startups in India raised just $2 billion in the first quarter of this year, which is 75% less than the same period last year and the lowest quarterly amount in over three years, Reuters said.
At this run rate, startups may raise less than $10 billion in 2023, a far cry from the $30 billion raised in 2021 and $20 billion in 2022.
The slowdown is a setback for startups and Prime Minister Narendra Modi, who has praised their success by referring to such companies as the “backbone of new India”. It could hurt the economic growth of India and its jobs market.
Former Sequoia Capital managing director for India V.T. Bharadwaj, who currently heads venture capital firm A91 Partners, declared, “This is a fundamental reset, not just another blip. I don’t think I’ll see a record fundraising year like 2021 again for at least ten years.”
With investors like Sequoia and Tiger Global placing large bets on companies that burned capital to entice customers in the nation of 1.4 billion people, the potential of rapidly expanding consumption offline and in India’s digital realm helped numerous firms reach multi-billion-dollar valuations in recent years.
The investment climate in India and elsewhere has been impacted by global variables, including high rates and inflation; start-up funding in the United States decreased by almost 50% to $32.5 billion in the first quarter, while it decreased by 60% to $5.6 billion in China.
However, India’s start-ups have seen a more severe cash crunch than their international counterparts. Some executives claim this is also partially because investors realised they had underestimated the consumption growth rate. According to research released in April by the Indian venture capital firm Blume Ventures, consumption outside of the top 30 million Indian homes has dramatically decreased and is driven by a “tiny super user set”.
Despite having a population of over one billion people, Zomato (ZOMT.NS), a food delivery business, and UPI, a state-backed digital money transfer service, only have 260 million and 50 million active users, respectively, according to the report.
Startups in India aren’t serving a billion customers. The same 100 million people are buying from all of them. The current CEO of cloud kitchen company Curefoods and Ankit Nagori, a former top executive of Walmart’s e-commerce subsidiary Flipkart claimed that the (consumer) market appears to be 2-3 times exaggerated.
FEWER DEALS, CONSOLIDATION IN SIGHT
The first indications of discontent in the Indian market were after the loss-making digital payments company Paytm (PAYT.NS)’s disastrous offering in 2021, which led investors and authorities to question if the valuations of many firms were fair. The situation has worsened since then.
According to three start-up founders and six investor sources quoted by Reuters, the funding environment will deteriorate over the next two years, and many multi-billion dollar companies may lower their valuations.
In recent weeks, BlackRock (BLK.N) internally cut Byju’s valuation in half, investing $11.15 billion instead of $22 billion, and Invesco (IVZ.N) cut Swiggy’s valuation in half, to $8 billion, according to disclosures from the U.S. investors. According to C.B. Insights, only 271 Indian businesses raised funding in Q1 2023, down from 561 the previous quarter.
Japan’s SoftBank (9984.T), which led the funding boom in India for years, hasn’t made a single new investment there in the past year as it awaits a further correction in valuations, according to two individuals familiar with its intentions. Despite being contacted for comment, SoftBank did not respond. According to projections by Reuters, it invested $3 billion in Indian companies in 2021 and another $500 million by April of the following year.
In the midst of the suffering, banker Shivakumar Ramaswami sees a chance and is establishing a new M&A desk at his tech-focused investment banking firm Indigoedge as he anticipates a wave of consolidation. Two of his colleagues are solely responsible for looking for M&A prospects.
“So many sponsored businesses reached a certain level of growth before stalling. Everyone must find housing, and many businesses cannot pursue an IPO. We are getting ready to work with them,” he declared.
