Why funding for startups will remain low till the year end?

Last week, Tracxn, a market intelligence platform, unveiled its Geo Quarterly Report India Tech - Q3, 2023. According to the report, India's tech space is seeing a decline in funding every quarter, with a third consecutive drop in funding in Q3 of 2023, making it the least funded quarter in 2023 and the least funded quarter in the last five years. Q3 of 2023 saw a significant drop in funding, with a total of $1.5 billion raised, marking a 29 per cent decrease from the previous quarter and a staggering 54 per cent decline compared to Q3 2022.

Experts with whom THE WEEK spoke feel that the present situation is likely to continue over the next couple of quarters. “The last quarter particularly faced significant challenges in funding. Looking ahead, the next two to three months are expected to continue at a similar pace. However, a turning point is anticipated around December and January, indicating a positive shift. The crucial aspect here is that liquidity is not a problem. Startups primarily face two challenges: a confidence dip and a liquidity crunch. Fortunately, liquidity is not an issue currently. The focus is now on boosting confidence, a challenge we believe will improve through various initiatives. Notably, major venture capital firms and significant funds are well-equipped with ample capital. They are strategically waiting for the opportune moment, which we foresee happening from January onwards, sparking an upturn in the funding landscape,” Gaurav V.K. Singhvi, co-founder of We Founder Circle told THE WEEK.

Many experts feel that while the funding has recently been at its lowest, the future is bright. “The flow of funds from both within the Indian ecosystem and abroad is expected to increase as family offices and LPs increasingly engage in direct startup investments, rather than solely relying on early-stage VCs. While funding levels were low not only in India but also in other regions, the numbers, when compared to Western counterparts, remain significantly more favorable,” pointed out Vittal Ramakrishna, founder and CEO, POD World.

As per the Tracxn report, Q3 2023 witnessed five funding rounds exceeding $100 million, including for companies such as Perfios, Zepto, Ola Electric, Ather Energy, and Zyber 365, with Perfios leading the way with a Series D round of $229 million. “Despite the decline in funding, India remains among the top-performing tech ecosystems globally. A promising sign in the report is the month-on-month funding growth, with an impressive 91 per cent increase from $376 million in August 2023 to $720 million in September 2023,” observed Abhishek Goyal, co-founder, Tracxn.

The report had also observed that tech was among the top-performing sectors in Q3 2023. Enterprise applications funding rose by 51 per cent compared to the previous quarter, fintech received $436 million in funding, marking a 68 per cent growth, and transportation and logistics technology garnered $375 million, showing a drop of 72 per cent. The investment growth in the fintech sector is propelled due to the rapid growth seen in the adoption of UPI both in the domestic market and international markets like Bhutan, France, UAE, Saudi Arabia, Bahrain, and Singapore. Over 10 billion monthly UPI transactions were reported in August 2023 as per reports from NPCI and digital payments.

Experts point out that the startups are here to stay. We have seen enough number of startups making it big, be it a Flipkart, Razorpay, Zomato etc. Some of them have gone public, some have got excellent exits and some mergers and acquisitions have also happened. So, there is a clear road ahead which has been shown. People have been seeing good things happening in this sector.

“There is a group of Limited Partners (LP) (a partner who has purchased shares in the partnership as an investment but is not involved in its day-to-day business) who give money to General Partners (GPs) (responsible for the private equity fund's administration, management, and operation). The General Partners invest in companies that they believe will be high-growth companies. They back them and help them grow and in the meantime make returns on their investment. However, if there are too many startups failing, the GP cannot do too much and the LP will not get his return as well. So, what does the LP do then, can he invest elsewhere. Yes, of course he can. However, no asset class can give this return when everything is going well. Now, with the capital markets doing well and liquidity being there, it is pulling more money than the private or the startup market. I believe this is a phenomenon which is temporary. There is still good amount of money which is backing startups and it will continue. The transitionary phase will end soon. We still see funds raising good amounts of money. India is a growing market and people will have to look at us to invest in,” explained Sathya Pramod, CEO, Kayess Square Consulting Private Limited and former CFO of Tally Solutions.