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India’s tech funding winter will be deep and long

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Indian stock markets have been testing new highs recently. The good cheer, however, largely hasn’t extended to the tech sector.

In fact, while the long-term outlook remains bright, the toughest stretch of this down cycle for India’s ambitious young tech startups may be yet to come.

As the tech funding winter stretches into 2023, “down rounds”—meaning fundraising rounds that value startups lower than previously—or layoffs may become more common, especially if the U.S. slips into a recession. Many large, loss-making startups raised money during 2021 at very high valuations and still had enough cash this year to stay afloat by cutting staff and abandoning moonshot projects. But small snips around the edges may not be enough in 2023.

Indian startups have raised $25.5 billion so far in 2022 compared with $41.3 billion last year, according to Tracxn Technologies data. The drop in funding for relatively mature, “late stage” startups has been particularly sharp. However, the pace of the fall seems to have slowed. Tracxn’s data for the December quarter shows that private tech firms have already raised $2.9 billion, versus $3.2 billion in the September quarter as a whole.

Ritesh Banglani, Partner at Stellaris Venture Partners, says that funds targeting late stage startups are more vulnerable because they usually have shorter cash deployment cycles of around 18 to 24 months, compared with three to four years for funds targeting earlier stage tech companies. A late stage fund that raised money in early 2021 may have already exhausted its investable capital—and will find it harder to raise more cash in the current environment.

Top emerging-market-focused venture capital investors like Prosus and SoftBank have also signaled a retreat from their aggressive 2021 investment strategies, and a stronger focus on returns.

Meanwhile, across the Pacific, the Federal Reserve faces difficult questions on how high to raise rates, and how long to hold them up. If rates go much higher or a U.S. recession triggers another deep market downturn, severe pain will follow for those Indian startups low on cash. They will have to cut back on operations or raise funds at much lower implied valuations than previous funding rounds. Publicly listed Indian tech firms have been hammered this year: Paytm shares, for example, are down 66% from their 52-week high, while Zomato shares are off 55%.

The longer term outlook, however, remains reasonably bright. Once global economic conditions improve and U.S. tech stocks finally stage a real recovery, India is likely to emerge again as a top destination for venture capital money. That is especially true given how far out of favor China and Russia have fallen, due to geopolitical turbulence and domestic political uncertainties. Pankaj Makkar, managing director at venture capital fund Bertelsmann India Investments, remains relatively sanguine on the long run: He notes that a couple of profitable tech firms successfully going public—or listed loss-making firms turning profitable—can go a long way to turning sentiment around.

That day will come eventually. But for now, the light at the end of the tunnel is still faint and far off. Indian stocks broadly speaking could do well next year if oil prices keep falling—but it probably makes sense to keep steering clear of once-fashionable tech stocks for now.

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