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The year 2021 was a watershed moment for the Indian startup ecosystem in terms of funding, with startups raising $42 Bn across 1,584 funding deals. As such, the cumulative funding raised by Indian startups is expected to reach $180 Bn by the end of 2023, according to Inc42’s ‘The State of Indian Startup Ecosystem Report, 2022’.

The startup funding is expected to remain healthy in 2022 and 2023 amid the government’s push to regulate startup sectors and efforts to stabilise the Indian economy amid a global economic slowdown triggered by the Russian invasion of Ukraine.

As per the report, Indian startups are expected to raise $33 Bn in 2022 and $35 Bn in 2023 across 1,692 and 1,527 deals, respectively. Indian startups have raised $20.84 Bn in 2022 in 1,129 funding deals, as of August 31, 2022.

The year 2021 saw a paradigm shift in terms of startup funding. To put that in perspective, the current startup funding environment is being called a ‘downturn’ and a ‘winter’.

However, just two years ago, Indian startups only managed to raise $12 Bn in 2020, almost half of what Indian startups have raised in 2022 so far.

Even as 2022 and 2023 are expected to see a 21% and a 17% fall in startup funding, respectively, as compared to 2021, it will far exceed what the status quo was just a few years ago. The trend marks the graduation of the Indian startup ecosystem from the early stage to the growth stage.

https://inc42.com/reports/the-state-of-indian-startup-ecosystem-report-2022/

Overall Funding Ticket Size To Be Impacted

The increase in startup funding in 2021 was attributed to the COVID-19 pandemic and the push provided by it to digitisation in India. With the demand for innovative products and services increasing, Indian startups saw unprecedented funding activity.

The pandemic is quickly becoming a thing of the past and new global macroeconomic factors are dictating the mood of the public and private equity markets.

Multiple nations imposed sanctions on Russia following its invasion of Ukraine. However, that resulted in the strengthening of the US dollar (which achieved parity with the Euro a few weeks ago) and created a global sell-off pressure. 

Further, hikes in interest rates by the US Federal Reserve and other central banks to control inflation have made credit more expensive, prompting investors to tighten their purse strings. As such, analysts have predicted a funding slowdown of 18-24 months, the signs of which are already visible in startup funding. 

In terms of funding, July 2022 was the worst month since January 2021, with Indian startups only raising $1.1 Bn. While funding declined 90% on a year-on-year (YoY). basis in July, August also saw a marginal 0.98% YoY fall in funding. Essentially, the funding remained flat over the two months.

However, the number of deals did not decline in line with the funding. Therefore, it is clear that investors are making cautious bets, with seed stage funding increasing during July and August. This is also seen in the nature of the fund launches by marquee investors in the country.

According to Inc42 data, investment firms launched or announced 78 funds worth $12.3 Bn in the first half of 2022. Out of the 57 funds launched in H1 2022, 37 were for investments in early-stage startups. Some of the largest funds launched in India are the $2 Bn Sequoia India & SEA fund and $670 Mn Elevation Capital Fund VII, among others. 

Factors Levelling The Playing Field For Indian Startups

India’s internet ecosystem is poised to grow significantly over the years as the country is preparing to roll out 5G services. The number of 5G users is expected to reach 500 Mn by 2027. 

The Big Three of the Indian telecom industry – Reliance Jio, Vodafone Idea and Bharti Airtel – participated in the 5G spectrum auction and have formulated rollout plans. For Jio users, 5G might come as early as Diwali as Reliance Industries Chairman Mukesh Ambani announced the rollout in key cities at the conglomerate’s 45th AGM. 

While others have not detailed their plans, it is expected that India will have a ubiquitous 5G network by the end of 2023, opening horizons hitherto unexplored. The Web3 ecosystem and Industry 4.0 use cases will benefit significantly from the increased data speed and device capacity of telecom networks in the country.

In a country expected to have 1.3 Bn internet users by 2030 with the lowest data rates in the world, the tech startups are set for another graduation. As focus shifts from ‘growth at all costs’ to profitability, Indian startups will continue to see healthy funding activity, with the idea of what’s normal changing over the years.