According to the consulting firms’ analysis, while late-stage startups brace for a tough winter, early-stage deals are expected to remain “material” with innovation in emergent sectors.
Software-as-a-service and fintech will continue to be significant segments for investors, it said. The two sectors together contributed roughly 35% and 25% to the overall funds that came to Indian startups in 2022 and 2021, respectively.
This week, Silicon Valley startup accelerator Y Combinator announced that it will wind down its late-stage investment fund, calling it a “distraction” from its “core mission”.
As venture capitalists continue to closely evaluate the overall macro environment, private equity funds and family offices are expected to look at actively investing, as valuations and pricing correct, after a funding spree in 2021.
According to the ‘India Venture Capital Report 2023’, the year 2022 signalled a recalibration for venture capital (VC) investments globally after a record capital influx the previous few years.
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“Increasing macroeconomic uncertainty and recessionary fears drove caution in investing momentum globally … Funding momentum in India similarly softened in line with the global slowdown as total deal value saw a compression from $38.5 billion to $25.7 billion from 2021 to 2022. However, India continued to demonstrate resilience to global headwinds as structural enablers drove a positive economic outlook,” the report said.The report highlighted post-pandemic tightening of monetary policy, intensifying geopolitical tensions leading to global supply chain shocks and surfacing of irregularities in corporate governance across the tech ecosystem globally as key reasons for the drop in investment momentum globally.
The decline in funding mostly took place over the second half of 2022 as global macro headwinds intensified, the report added.
“In fact, investments grew 1.4x over the first half of 2021–2022 but saw a 70% decline in the second half of 2022 compared to the second half of 2021,” said the report.
Last year, India accounted for roughly 5% of global venture capital funding in line with 2021 and continued to outpace China in terms of the number of new unicorns (startups with a valuation of $1 billion or more) formed, it said.
In terms of sectors, consumer technology deals across edtech, food delivery and direct-to-consumer (D2C) brands invited a cautious outlook from investors due to the capital-intensive nature of the segment. Investments in these sectors declined from $20 billion in 2021 to less than $10 billion in 2022.
Sectors such as electric vehicle, agritech and deep-tech continued to attract investor interest.
Early-stage funding
With shares of technology companies globally facing a rout due to recessionary pressures, blue-chip venture capital firms have turned to early-stage investing in the country.
“Concentration of investments by large investors decreased to less than 20% from ~25% in 2021 as investment activity by global hedge funds and crossover funds slowed down. While most leading VCs saw a compression in the deal activity, salience of early-stage investments by these funds within respective portfolios increased (e.g., more than 80% of deals for top funds, including Sequoia, Accel, and Lightspeed, were early-stage in 2022),” said the report.
Even though the average deal size shrank to $16 million in 2022 from $25 million the year before and the number of $100-million-plus funding rounds fell to 48 from 92, the average funding value in early-stage startups increased.
For instance, Series-A deals maintained an average deal size of about $11 million, compared with $10 million in 2021.