Firms with strong fundamentals chill out amid ‘funding winter’


While investments in startups was a little over $37 billion in 2018, around $46.5 billion in 2019, and around $47.5 billion in 2020, according to EY data, it surged to $77 billion in 2021 with the emergence of 44 unicorns, or startups valued at $1 billion at least. However, despite the slow start to 2022, 20 startups have joined the coveted $1 billion club, and according to Vivek Soni, a partner for private equity services at EY India, it is likely to end with private equity (PE)- and venture capital (VC) investments of $53 billion-$55 billion.

“In 2022, we haven’t had a material reduction in the number of deals, though the cumulative investment value is around 30% lower than 2021. Despite this reduction, 2022 would be our second-best year for PE- and VC-driven investment activity,” Soni added.

The dip in deal value was largely because some tech-focused funds such as Tiger Global and Softbank Group have paused fresh investments, while several crossover funds stayed away due to the global tech rout.

Most investors, however, said that despite the global liquidity crunch, rising interest rates and policy-related risks linked to China have helped India emerge as a bright spot for global investors looking to deploy money.

“Among all emerging markets, India has stood out with its continued growth, backed by robust domestic demand. Despite the recent funding slowdown in the startup space, companies with strong management teams, strong balance sheets and compelling offerings, as well as the ones that are already profitable or showed a demonstrable path to profitability will be attractive to investors. We expect to see startup funding pick up pace, especially for companies with sound fundamentals,” Ravi Lambah, head of investment group, and head of India at Singapore state investor Temasek Holdings, said.

Temasek backed several of its portfolio companies in 2022 such as Lenskart, Shiprocket and upGrad, supporting them with new acquisitions in 2022. Temasek’s India exposure also hit a record high of $16 billion, Mint reported in July.

Lambah, however, said companies should increase their focus on profitability and will need to adapt their business models and innovate.

This meant “increasing revenues and managing costs to fund operations with their own cash flow to gain better access to capital markets for growth and expansion.”

The other reason why India is expected to see a better funding environment next year is because of the amount of dry powder that is waiting to be deployed.

With many domestic and global investors having raised local or Southeast Asia-focused funds in 2021, and early 2022, there is a sizeable pool available for Indian companies.

Earlier this month, Blume Ventures closed its largest India-dedicated fund at $250 million. Sequoia Capital announced a $2.85 billion fund for India and Southeast Asia in 2022. Other VCs such as Lightspeed Venture Partners, Accel Partners, and Elevation Capital also raised funds this year. Private equity firms such as KKR, Blackstone, Carlyle, Advent International, and Apollo Global, are also sitting on large global as well as regional funds, which have increased their allocations for India in recent years.

“The ‘cheap capital’ of 2020-2021 is not coming back anytime soon,” said Vaibhav Agarwal, partner, Lightspeed India.

However, India is perfectly poised to see an “innovation frenzy”.

“This is because artificial intelligence is at an inflection point, web3 has lost trust, public companies like Meta and Netflix are under immense pressure from changing consumer behaviour, China-plus-1 manufacturing and supply chain evolution is under way,” he added.

Furthermore, regulators are exerting an “ever larger influence on tech”, while founders are getting drawn to increasingly tough problems like climate change, Agarwal said.

While early-stage deals still found takers, the liquidity squeeze was pronounced for late-stage deals.

“I expect the first half of 2023 to be painful—Series B and beyond companies that lack quality product market fit or business model—will not find additional growth capital,” he added.

However, Agarwal believes that early-stage companies will simultaneously “be able to raise financing throughout the year”, and the fittest will survive and be able to raise capital.

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