Fintech, consumer cos lead funding activity

Consumer, enterprise applications and fintechs emerged as the top-funded sectors in 2022, according to data from startup intelligence platform Tracxn. However, funds raised by startups in these sectors shrunk in line with the overall slowdown in private markets, where the capital raised by Indian startups plunged by 39% to $25.4 billion in 2022 from $41.8 billion the year before.

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There was a slight change in the top sectors from 2021, with enterprise applications startups pipping retail to the second position.

Consumer startups, including marketplaces, business-to-consumer and e-commerce, raised $20.4 billion across 746 deals in 2022, less than half the $21.9 billion in 2021 across over 1,099 deals.

The enterprise applications sector, which includes startups in enterprise Software, software-as-a-service (SaaS), and HR tech platforms, raised $7.2 billion across 644 deals in 2022. Last year, it was at $10 billion across over 886 deals.

Fintechs raised $5.7 billion across 348 deals in 2022, compared to $10.3 billion across over 548 deals in 2021. The retail sector, which received funding worth $12.9 billion across 614 deals in 2021, fell out of the top three, bagging less than half the investment worth $5.7 billion across 384 deals.

In 2023, they will continue to be the dominant themes for venture capitalists.

For early-stage VC firm Blume Ventures, one of the top-10 active VCs in India, key verticals through the last 12 months include SaaS, cleantech, fintech, and consumertech. “These will continue to be areas of focus all through the next year as well,” said Ashish Fafadia, a partner at Blume Ventures.

Ashish Sharma, managing partner of InnoVen Capital, echoed similar views. “We expect enterprise-SaaS, fintech and consumer internet to see the most investor interest,” he said.

However, the funding pace is yet to pick up. Amid rising interest rates, high inflation and a possible recession, investors are taking a cautious approach. “The pace will be more calibrated. There is plenty of capital, but it is going to be more cautious, especially for later stages,” said Ganesh Rengaswamy, co-founder and managing partner at Quona Capital.

“The environment will be a bit tough for firms where business models have not been set, but that is where the selection parameters and filtering come into the picture, and we are committed to continue with the same approach,” said Fafadia.

Startups working on digital enhancement and transformation, like artificial intelligence, the Internet of Things, cloud computing, and immersive customer experience, will continue to garner investor interest. “Startups in the hi-tech arena are predicted to emerge, harnessing the application of augmented reality and virtual reality to improve quality and add a fresh dimension for consumers,” Gaurav VK Singhvi, co-founder of We Founder Circle, an early-stage investment platform, said.

Besides these, the focus on sustainability is going to increase as investors grow bullish about agritech and climate tech, among others.

In 2022, there was a lot more focus on unit economics, profitability and building a sustainable business. Startups aimed to lower their cash-burn rate and improve their runways.

Edtech, fintech and cryptocurrency faced the major brunt of the above demands, which was exacerbated by regulatory upheavals. Edtech funding in India reduced to $2.4 billion in 2022 from $4.1 billion in 2021.

Sharma of InnoVen expects edtech, Web3.0, social to remain soft from a funding standpoint in the next year too.

“Sectors which are trying to overtly be reliant on customer acquisition, with very high customer acquisition costs, will definitely be having headwinds,” said Fafadia. “Businesses which have a long-term positive trend in average revenue per user and market size is established will be the flavour of the season.”

Most investors, in general, though, are bullish about India, despite the slowdown in markets. “On a global scale, India is better positioned to weather this winter, as most top-tier funds have raised record sums this year, indicating that we may be in for intense investment cycles in the future,” said Shashank Randev, co-founder, 100X.VC.

“Furthermore, recent global developments have increased the relative attractiveness of India as an investment destination for many investors,” he added.