What Is Funding Winter & How Is It Affecting Indian Startups?

Funding winter has become a new threat to our startup industry. How? Recall some recent tragic news stories about the startup industry. Some of the prominent themes were- layoffs, delayed capital infusion decisions of investors, lowering the expenditure in marketing and promotion, devaluation of startups, and the list goes on…

Have you ever wondered the prime reason for this? Non-profitable businesses… you may say. But you can’t always expect a startup to be profitable as soon as it gets launched.

Then who is responsible for such a tragedy of startups?

Funding Winter!

Yes, the prime cause for this is the dried capital inflows commonly called funding winter. What is it exactly and how is it affecting our startups? Let’s break down the whole scenario and see what can be done to prevent funding winter.

Stay tuned!

(A) Synopsis of Funding Winter in India

Back in November, funding for Indian startups took a nosedive, hitting a low that hadn’t been seen in six years. The numbers tumbled by a whopping 66 percent from the previous month, landing at $223 million in 35 deals.

Is it true?

Unfortunately, yes! 

This nugget of wisdom comes straight from the data gurus at Venture Intelligence, who spilled the beans on December 1.

This wasn’t just a one-time thing; it was part of a bigger trend affecting the overall funding scene for 2023. By November, Indian startups had managed to secure only $7.05 billion, which is a massive 71 percent drop from the previous year’s hefty $24.36 billion.

Investors, usually throwing caution to the wind, suddenly got all careful, meticulously weighing their options before diving into new ventures. Mitesh Shah, the brains behind VC firm IPV, summed it up perfectly, saying, “Now people were weighing all the options before committing to anything.”

Late-stage funding rounds pulled a disappearing act in the last two months, keeping up a trend from earlier in the year. In 2023, startups only scored 45 late-stage funding deals, bringing in a total of $1.9 billion. Compare that to the previous year’s 77 deals raking in a cool $6.8 billion – quite a dip.

But, hold on – it’s not all doom and gloom… 

Early-stage funding showed signs of life, with the big deals in November ranging from seed to series B. Investors started placing bets on a better deal flow in 2024, with late-stage deals eyeing a potential comeback in the latter half of the year. 

Anirudh Damani, the big shot at Artha Venture Fund, was optimistic, saying, “I believe the numbers were trailing the actual sentiment. There’s a lot more positivity and excitement going into the final calendar month of 2023.”

Damani foresaw a solid year for investing in 2024, predicting a flurry of activity in the next two quarters, especially after the 2024 elections. Despite the hurdles, there was confidence in the recovery of the private markets, mirroring the record highs of the equity markets.

Let’s talk about the MVPs – the most active VCs. Peak XV Partners (formerly Sequoia India) took the lead with a whopping 39 deals. Right on their tail were Blume Ventures and Accel India, notching up 26 and 20 deals, respectively. Rainmatter Capital and Nexus Venture Partners also flexed their muscles, making investments in 16 and 13 companies this year. That’s the lowdown from the funding rollercoaster – buckle up!

(B) What is Funding Winter?

Now, let’s deep dive into the concept.

“Funding winter” refers to an extended period during which startups experience reduced capital inflows, making it challenging for them to secure funding from investors. This phenomenon often involves a decline in the overall availability of funds in the investment landscape.

For instance, consider the scenario of an Indian startup ecosystem, the third largest in the world. The effects of funding winter are reflected in the capital flows to Indian startups. According to a PwC report, there was a notable 33% drop in funding for Indian startups in 2022 compared to the previous year (2021).

The impact of funding winter tends to be more pronounced on late-stage funding, where startups in advanced development phases face challenges in securing financial support. On the flip side, early-stage funding and emerging sectors manage to continue attracting capital during this period.

To illustrate, let’s say there’s a tech startup named XYZ Tech in India. Before the funding winter, XYZ Tech might have experienced a smooth journey of raising funds at increasing valuations.

However, when the funding winter hits, investors become more cautious, leading to difficulties for XYZ Tech in securing funds at the same ease or facing potential adjustments in valuation. This dynamic exemplifies how funding winter affects different stages of funding for startups.

In summary, funding winter is a market condition where startups encounter reduced access to capital, influencing their ability to secure funding.

(C) Root Causes of Funding Winter

Let’s look at the main reasons for the occurrence of funding winter. See, if you see funding winter in India, the events all around the globe play an important role too! How? Go through the following table and you will find out-

Here are the details-

(C.1) Economic Inflation Pressures

Soaring costs in essential areas like food, energy, and commodities have heightened inflationary pressures on businesses. This economic strain contributes to the funding winter as startups grapple with increased operational expenses, leading to a more cautious investor climate.

(C.2) Geopolitical Instability

The conflict between Russia and Ukraine has unleashed geopolitical uncertainty globally. Investors, wary of unpredictable international relations, adopt a more hesitant approach, impacting their willingness to inject capital into startups. Geopolitical instability amplifies the funding winter by introducing an element of unpredictability.

(C.3) Market Slowdown and Economic Volatility

Prevailing macroeconomic conditions have induced a broader market slowdown and increased economic volatility. This slowdown affects various sectors, prompting businesses to reassess growth strategies. Investors, responding to the uncertain market environment, become more cautious, contributing to a reduction in overall capital flow to startups.

(C.4) Recessionary Trends Forecast for 2023

Anticipated recessionary trends for 2023 create a challenging landscape for businesses. Investors, navigating economic uncertainties, tend to adopt a risk-averse stance, impacting their willingness to invest in new ventures. The expectation of a recession amplifies the funding winter by influencing investor confidence and decision-making.

(C.5) Rising Cost of Capital

The increasing cost of capital, factoring in various risk elements, presents a hurdle for startups seeking funding. Investors carefully evaluate potential returns and risks, contributing to a funding slowdown. The rising cost of capital is a key factor shaping the cautious investor landscape during the funding winter.

(C.6) Decrease in the Number of Unicorns in India

The significant drop from 44 to 23 in the number of unicorns (startups with valuations of $1 billion or more) reflects the challenges startups face in achieving and maintaining high valuations. This decline signals a cautious investor sentiment and the overall difficulty in securing substantial funding during the funding winter.

(C.7) Global Decline in Startups achieving Unicorn Status

The worldwide trend of a 55% drop in startups attaining unicorn status underscores the global nature of the funding winter. Investors globally are becoming discerning, prioritising ventures with clear paths to profitability. This decline reflects a more conservative investment climate on a global scale.

Thus, the funding winter in India is a result of a combination of economic, geopolitical, and market-specific challenges, coupled with a cautious investor approach and a growing emphasis on profitability. The decrease in the number of unicorns both in India and globally further reflects the impact of these factors on the startup ecosystem.

(D) Impact of Funding Winter in the Indian Startup Ecosystem

The Indian tech startup scene is feeling the chill of a prolonged funding winter, and here’s the scoop – a recent report spilled the beans on the tough times. In 2023, the funding game hit a five-year low, plummeting by a whopping 72 percent. 

That’s right, just $7 billion made its way to Indian startups this year, compared to a hefty $25 billion the year before, according to the ‘Annual Report: India Tech 2023‘ by Tracxn. Now, brace yourself for the details – funding took a hit across the board. Late-stage funding felt the pinch the most, dropping over 73 percent. Early-stage funding wasn’t far behind, with a 70 percent dip, and even seed-stage funding took a 60 percent nosedive. 

To add a bit of global context, India slipped a spot to the 5th position among the highest-funded tech hubs worldwide in 2023. The struggle is way too real…

Hold on tight for this kicker – the last quarter (Q4) of the year saw the lowest funding yet, scraping by with a mere $957 million. 

That’s the lowest-funded quarter since Q3 2016, as per the report. The funding winter is hitting hard, but who knows, brighter days might be on the horizon for the Indian startup heroes!

(E) How Funding Winter is affecting Indian Startups?

Here, we will navigate how the funding winter is affecting our startups-

(E.1) Biggest Drop in Late-Stage Funding

The funding winter has hit Indian startups hard, and the biggest blow comes from late-stage funding, dropping by over 73 percent to $4.2 billion in 2023 from $15.6 billion in 2022. The report reveals that $100 million+ funding rounds decreased by 69 percent this year. 

FinTech, driven by smartphone penetration and government cashless initiatives, saw a dip from $5.8 billion last year to $2.1 billion this year. Notably, PhonePe topped the funding charts in this sector with $750 million, making up 38 percent of the total funding.

(E.2) Retail Sector faces the blow too

The retail sector took a hit, receiving $1.9 billion in funding, a substantial 67 percent drop from 2022. Lenskart, the Gurugram-based eyewear retail chain, emerged as the sector leader, securing the highest funding at $600 million.

(E.3) Enterprise Applications’ Funding Decline

Despite being the third-highest funded sector in 2023, Enterprise Applications faced a significant 78 percent funding decrease compared to 2022, securing a total of $1.56 billion, as noted in the report.

(E.4) Silver Lining: Focus on Environment and Space Tech

Amidst the challenges, the report points out a silver lining with investors shifting attention towards environment technology and space technology sectors. These sectors received $1.2 billion and witnessed a 6 percent increase with $122 million raised in 2023, driven by government initiatives aligning with sustainable development goals and economic growth.

(E.5) Only two unicorns in 2023

A noteworthy setback for the sector is the presence of only two unicorns (startups valued over $1 billion) in 2023 – Incred and Zepto, a significant drop from 23 in the previous year. This trend highlights the ongoing challenges companies face in achieving substantial valuation and growth trajectories. However, experts remain optimistic about India’s potential for success, citing favorable government policies and a growing economy.

(E.6) Robust IPO Momentum

Despite the funding challenges, the report emphasizes a robust initial public offering (IPO) momentum. IPO numbers remained steady, with 18 tech companies going public in 2023 compared to 19 in 2022. Notable tech IPOs this year include Ideaforge, Yatra, and IKIO Lighting.

(E.7) Regional Hotspots and Top Investors

Bengaluru, Mumbai, and Delhi-NCR continue to be favored destinations, attracting significant funding. LetsVenture, Accel, and Blume Ventures are acknowledged among the top investors supporting the growth of the technology space in India, according to the report.

(F) Unlocking the Funding Puzzle: Why Global Capital Matters?

Most of us wonder why the global capital is so important for the Indian Startup ecosystem. Go through the following points and you will understand it-

(F.1) Diverse Funding Sources for Startups

When it comes to funding startups, there’s a treasure trove of sources to explore. Founders can dip into their own savings, seek support from Angel Investors, tap into Venture Capitalists, connect with Private Equity Funds, cozy up with Strategic Investors, or even consider Debt funds from Banks and other financial institutions. The choice of source depends on the startup’s size and the stage it’s navigating.

(F.2) Government’s Startup Boost

The Indian government stepped in to boost startups. In 2016, they launched the Startup India program, and guess what? January 16 is celebrated as the national startup day. This initiative wears many hats, and one of its key roles is supporting startup funding. Seed funding and Fund of Funds programs are the superheroes here, swooping in to back eligible startups, especially those at an early stage. 

And here’s the kicker – this initiative dances alongside funding programs from Indian financial institutions, many of which roll out special schemes just for startups. To sweeten the deal for global players, the Indian government has loosened Foreign Direct Investment (FDI) norms across various sectors.

(F.3) Global Influence of Capital

Now, despite India sprouting a friendly ecosystem for startups, a chunk of their funding dance comes from global partners – the VC/PE funding champs. 

Why? Well, this type of capital is like a superhero cape for early and mid-stage growth, and it’s a bit rebellious – unsecured in nature. 

Despite India’s own risk capital and institutional funding playing their part, they aren’t quite superhero material yet to shield startups from the global investment vibes. It’s like a global funding fiesta, and Indian startups are eager ones in the feast!

(G) How to survive funding winter?

Let’s discuss the survival guide that will help you to navigate through the funding winter-

(G.1) Balancing Growth and Profitability

Alright, so you’re in the midst of the funding winter, and the first strategy to ace is finding that sweet spot between growth and profitability. Investors are on the lookout for startups that can flaunt a balanced focus on both. Show them the money, literally – demonstrate profitability in the mature parts of your business while taking a measured approach to growth investments. It’s like doing the money dance with strategy.

(G.2) Market Fitness of your Product

Here’s the inside scoop – being the early bird isn’t the golden ticket anymore. What matters more is the market fitness of your product. Stay agile, listen to your customers like a pro, and adapt to the ever-changing market conditions. It’s a survival dance where being in sync with the market rhythm is your winning move.

(G.3) Cash Optimization

Cash is king, especially during the funding winter. Time to target cash optimization in your business processes. How? Well, efficient working capital management is your secret weapon. Stick to those tried and tested marketing strategies, and keep your experimentation periods for new ideas short and sweet. It’s all about being a financial ninja.

(G.4) Extending the Cash Runway

If you managed to snag some cash in the past year, kudos! Now, it’s time to play the smart game. Adopt strategies that stretch that cash runway – delay those big capital commitments, renegotiate debt repayment commitments, and essentially, make that cash last longer. It’s a financial jigsaw puzzle, and you’re putting the pieces together strategically.

All you need is to balance, adapt, optimize, and extend your cash involved in your business. However, you must note that these are the tried and tested strategies suggested by experts and analysts. So, there you have it – your survival guide for navigating the funding winter like a boss!

Note: Have you ever wondered what happened to Indian Startup IPOs in 2023? Read the article where we have decoded the roadblock in the Indian startup ecosystem.

(H) Summing up the concept and effects of Funding Winter

In conclusion, the funding winter has cast a chilly spell on Indian startups, witnessing a substantial 72-75% drop in investment. The struggle is real – scaling up, innovating, and retaining talent have become uphill battles. Employees feel the pinch with perks taking a hit, creating a tougher work environment. 

The core challenge lies in securing capital for growth, making each step forward a strategic move. Navigating this financial frost requires resilience, adaptive strategies, and a keen eye on maintaining stability. 

As the funding winter persists, Indian startups are learning to weather the storm, holding onto hope for brighter days in the entrepreneurial landscape.