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Money is still flowing into India’s startup ecosystem—just not where it used to. In a marked shift from recent years, investors are now focusing more on established ventures with proven business models, making the path harder for early-stage innovators.

Early-stage funding, which includes seed, angel and Series A, has almost halved from its peak activity in 2021-2022. While funding activity, which includes the total number of deals and funding amount, has seen an uptick in growth- and late-stage investments this year, data shows that softening in early-stage funding activity is tugging down the overall funding in the ecosystem today—both in terms of funding and deal-making. 

The numbers tell the complete story: early-stage funding has softened to $3 billion across 1,533 deals through November 2024, down from $4 billion spread across 2,137 deals in the same period last year, according to YourStory’s analysis of Tracxn data. This has pulled total startup investments down to $15.9 billion from $16.5 billion year-on-year, even as growth- and late-stage funding rose to $13 billion in 2024 from $12.4 billion in 2023.

Recent deals highlight this shift toward later-stage investments: quick commerce platform Zepto secured $665 million in Series F funding in June, while ride-hailing platform Rapido raised $200 million in its Series E round in September. These companies are among several eyeing potential IPOs in the near future.

The Early-Stage Slowdown

The current dip in early-stage funding is a trickle-down effect of the past two years’ market trends. “Not enough companies got funded over the last two years. So, seeing enough two- to four-year-old businesses in itself is a little tricky because we don’t have the supply,” says Anurag Ramdasan, Partner at early-stage investment firm 3one4 Capital.

This bottleneck stems from the funding winter that began in late 2022 and lasted through 2023, resulting in fewer Series A-ready startups today. While pre-seed and seed funding remains “fairly decent,” according to Ramdasan, “Series A and Series B funding is where really the slowdown has happened,” though it has started picking up in recent quarters.

The funding surge in 2021 and 2022 saw investors, post-pandemic, backing multiple startups across sectors. Today, they’re taking a more measured approach, waiting to see how these funded startups perform before backing new companies in the same ecosystem.

Global Factors at Play

The investment landscape in India cannot be viewed in isolation, especially when over 85% of startup funding comes from foreign sources. “The dollar capital is still not coming back in a big way for investing in startups,” notes Vikram Gupta, Founder and Managing Partner of IvyCap Ventures.

The flow of dollars remains cautious, influenced by various global factors. Gupta points to exchange rate fluctuations as a significant factor affecting foreign capital flow. “People haven’t yet seen India as a complete replacement for China; so there are lots of areas where people look at India as a longer-term opportunity as against the China plus one strategy. Therefore, dollar capital is still not moving to India in a big way, as was expected earlier.”

Growth-Stage Revival

Despite these challenges, growth-stage investments, which include those for Series B and C, have seen an uptick, touching $3.5 billion across 209 deals in the first 11 months of 2024, compared with $3.4 billion across 225 deals in the previous year. This signals strong investor confidence in startups that have an established product and customer base, amid a trend of venture-backed startups going public at more modest valuations.

For instance, electric vehicle manufacturer Ola Electric priced its IPO at a discount of about 22% from its last valuation of $4.3 billion, while retailer FirstCry kept its valuation flat at about $3 billion for its IPO.

“Investors feel that any late-stage investment could technically be for a company that could reach the IPO stage in the next two to three years. So, that is what is driving the enthusiasm,” says Ashish Kumar, Co-founder and General Partner at Fundamentum, a growth-stage investment firm. He adds that the general health of the companies in the late stage has improved in terms of their profitability profile.

“This is now percolating down to the growth stage as well.”

Investors are now increasingly moving away from being sector-focused when it comes to funding, leaving new startups coming up in maturing sectors hunting for capital. For instance, there might have been seven or eight early-stage companies from a certain sector that received funding in the past few years leading to increased competition and overfunding in a certain industry.

According to Kumar, venture capitalists are waiting to observe the growth and performance of these startups and see how the competition plays out between them to figure out which startup to fund at a later stage. As a result, funding is now focused on companies at the growth and late stages compared to those in the early stage.