Recap 2023, Marching into 2024 (Start-up funding takes backseat)

29 Dec 2023 , 11:22 AM

YEAR 2023 – WHY DID START-UP FUND SLOW IN 2023?

In terms of start-up funding, year 2023 was not too great a year. There were a number of reasons. The risk of a global slowdown was one of the main reasons why the fund flows to the start-ups largely tried up in the year 2023. However, there were other reasons too. The high interest rates meant that the hurdle rate of return expected by the VCs and the PE funds was relatively much higher. The market appetite was just not there to generate such returns in a tight market. Thirdly, the mini banking crisis in the US at the start of the year had its impact on VC funding. Many of the VCs and PE funds used to bank with these smaller banks, which paid them higher rates of interest and gave them more accommodation. 

However, the tightness made many of these smaller banks more risk-averse about doing business with the start-up ecosystem. There was also an impact of the volatility in the Indian markets as the experience of 2021 was still fresh in the memory and the start-up investors preferred to go slow on late stage funding, which is normally the bulk of the funding. Last but not the least, there was also an overall concern about the quality of start-ups available. Data shows that there is about $60 to $70 billion of start-up money waiting in the sidelines and biding time. All in all, it was a mix of demand and supply factors slowing start-ups.

HOW SERIOUS WAS THE SLOWDOWN IN 2023?

The table below captures the start-up funding scenario in India. It captures the quantum of start-up fund raised year-wise by start-ups in India.

Calendar Year	Funding ($ billion)	Number of Rounds
Year 2016	$5.3 billion	2,063 funding rounds
Year 2017	$12.8 billion	2,083 funding rounds
Year 2018	$12.1 billion	2,121 funding rounds
Year 2019	$16.8 billion	2,489 funding rounds
Year 2020	$12.9 billion	2,383 funding rounds
Year 2021	$41.6 billion	3,262 funding rounds
Year 2022	$25.0 billion	2,763 funding rounds
Year 2023	$7.8 billion	1,000 funding rounds

Data Source: Tracxn 

What stands out about this data is that it was not just the total funding amount, but even the number of funding rounds more than halved, which is perhaps the clearest indication of the falling enthusiasm of the start-up funding scene. The start-up funding round in 2023 was the lowest since 2016 and it is sharply lower by 81.3% compared to the peak of 2021 and also lower by 68.8% compared to the start-up fund raising in the year 2022.

One reason could be that the major players were absent during the year and the mega deals were not there. Year 2023 was also a year when many of the VCs and PE funds that had made losses in other markets monetized part of their holdings in India. It is very likely that the improved liquidity should eventually find its way into the Indian start-up ecosystem. It is not just the full year, but even the fourth quarter weak performance on the funding front. 

In the year 2023, there was a sharp fall in the lates stage funding and also in the number of deals funded. For instance, it is normally the late stage funding that attracts the big money. However, the latest stage funding is also contingent on the ability of the start-up to be able to monetize the holdings through a public listing. The experience of listing start-ups in India has not been too good in the last 3 years and that could be one reason for this slowdown. While the late stage funding fell by 70% yoy, it was the number of funding rounds falling by more than 60% that presents the real challenge to the start-up ecosystem in India.

WHICH SECTORS ATTRACTED START-UP FUNDING IN 2023?

While there were funding cuts across stages, there were also funding cuts across sectors. However, some of the technology enabled sectors continued to attract a lot of start-up funding interest. The table below captures the best sectoral start-up funding stories of 2023.

Sectoral Bias	Start-up Funding in 2023
Electrical Vehicles	$1.01 billion
Payments and Payment systems	$867 million
Alternative Lending	$808 million
Fashion Tech	$753 million
Online Grocery stores	$498 million

Data Source: Tracxn

Actually, if you look at the above table, payments and alternative lending should ideally come under the fintech banner, in which case fintech would be the single mega class for start-up funding in 2023. Fintech has attracted funding due to several enabling reasons in India. For example, the government of India has been aggressively pushing for cashless transactions, there has been tremendous smartphone penetration in India, 5G is spreading and smaller towns and even villages are connected; and the list can go on. The fintech sector saw funding at $2.1 billion in the year, but that was still sharply lower yoy compared to the previous year which saw $5.3 billion of funding moving towards fintech players. However, this slowdown in start-up funding is not just a domestic phenomenon but it is a global challenge at this point of time.

BIG NAMES STILL GOT THE FUNDING THEY NEEDED

While the market was still tight for the newbies, the established start-up names in India still managed to strike gold in the funding market in 2023. The table below captures the major funding deals of 2023, in terms of size of the funding round.

Name of company	Start-up Funding Raised	Funding Series
Lenskart	$500 million	Series J
Phone Pe	$350 million	Series D
Perfios	$229 million	Series D
Zepto	$200 million	Series E
Phone Pe	$200 million	Series D

Data Source: Tracxn

If you look at funds raised by a company, then Phone Pe would lead as it raised $550 million during the year. However, the number that is material is that in the full year 2023, India only saw a total of 17 deals that were more than $100 million per round. This is in contrast to 55 deals meeting that criteria of $100 million or more in the year 2022. The table below captures the PE / VC funds that were the most active in India during various stages of start-up funding.

Stage of funding	VC / PE funds active
Seed Funding Stage	Venture Catalysts, Y Combinator
Early Stage Funding	Accel, Peak XV Partners, Elevation
Late Stage Funding	Singularity Ventures, Avataar Ventures, Filter Capital

Data Source: Tracxn

The virtual drought of start-up funding is also evident from the fact that only 2 companies viz., InCred and Zepto emerged as the Unicorns during the year. A unicorn is a company that raises funding at an enterprise valuation of $1 billion plus.

TOP START-UP FUNDING LOCATIONS AND THE ECOSYSTEM EFFECT

Finally, let us look at which are the cities that were instrumental or which catalysed the maximum start-up funding in the year 2023. No prizes for guessing. Bengaluru led the way at $2 billion, while Mumbai chipped in with $1.3 billion and Gurgaon with $953 million. Lower still were Delhi and Pune, which constituted the top 5 locations in terms of catalysing of start-up funding. That brings us to how PSUs have catalysed the start-up ecosystem in two places in India.

In the case of Bengaluru, it was the early presence of technology savvy institutions like DRDO, ISRO, HAL, IISC and others that catalysed the technology culture in Bengaluru. It first led to the technology and later to the start-up boom. The early presence of such institutions ensured the right education and training system, the availability of right manpower and also the requisite project management skills. A similar seen in the development of the biotech and pharma ecosystem in Hyderabad and that can be largely attributed to the early start that IDPL gave to this sector in Hyderabad. It created an ecosystem of trained manpower, dealers, bulk drug manufacturers etc. That should what the government should be seriously thinking about.

As we embark on 2024, it should hopefully be a better year for the Indian start-up scenario. The good news is that year 2023 has been good for IPOs, although Honasa (Mamaearth) would go down as the only major start-up to have come out with an IPO. Hopefully, year 2024 wills see many more start-ups reviving their IPO plans and that should have a direct impact on the late stage funding for start-ups. Hopefully 2024 should be a lot better for the start-up ecosystem in India.