VC funding into Indian startups warms up for a strong finish in 2024

The Indian startup ecosystem is going through a harsh funding winter, much like the Ice Age, which has intermittent periods of warmth. Venture capital (VC) investors believe 2024 could be that period of warmth for startups waiting for capital to flow easily.

In 2021, startups raised $35 billion in VC funding, which dropped to $24 billion in 2022 and declined to $10.8 billion in 2023. 

If one sees the data for the last six months, VC inflow into startups is showing signs of a strong revival. According to YourStory Research, monthly VC funding steadily increased from October 2023 to March 2024, and the trend is expected to strengthen further in 2024. 

In March, VC funding reached $921 million, almost close to $1 billion.

Yagnesh Sanghrajka, Co-founder and CFO, 100X.VC, says, “There is a measured approach of investing now, and it is likely there will be a significant uptick from the October quarter of this year.”

He believes the startup ecosystem today has a sense of stability, where founders and investors have a high degree of clarity on where to deploy the capital. 100X.VC is an early-stage VC fund that has invested in over 100 startups, including Knorish, GoldPe, abCoffee, etc.

Steady rise

In February this year, startups signed a total of 121 deals and raised $890 million. In contrast, March saw 86 deals at $921 million, showing that capital inflow is slowly yet steadily rising.

“We are in a sweet spot now, where the entry valuation is low, and the size of the opportunity is large,” says Vikram Chachra, General Partner of 8i Ventures. He believes today, startup valuations are almost back to the 2017-18 levels. 8i Ventures has invested across sectors in companies like Blue Tokai Coffee, Slice, and M2P Fintech.

The aspect of valuation—perhaps the most impactful reset in the Indian startup ecosystem—is at more realistic levels today. The VC community is ensuring more due diligence before investing, and gone are those days when founders could command lofty valuations. 

The poster boy of India’s edtech sector—BYJU'S—is a classic example. Once commanding the title of a “decacorn” with its $20 billion valuation, the beleaguered edtech company is now valued at $220 million. This steep fall in BYJU'S valuation is attributed to the mismatch between the expectation of the edtech company and market reality.

Similarly, others like social commerce company Meesho and social media platform ShareChat also saw their valuations declining.

Siddarth Pai, Founding Partner of 3one4 Capital, attributes this dramatic shift in VC funding trends in recent years to the interest rate hikes, especially by the US Federal Reserve. 

“This [interest hikes] has prompted investors to seek cash flow generating businesses instead of high growth-high burn businesses. Startups, thus, must rethink their entire playbook and concentrate on a path to profitability,” he added.

Early-stage VC 3one4 Capital invests across sectors, and its portfolio includes Licious, Darwinbox, and Fasal, among others.

Quality founders

Quality over quantity is imperative, and so are qualitative founders and businesses.

“Good founders were getting funded earlier and now, commanding valuations over others. There is a distinct move to higher quality founders,” says Sanghrajka.

Echoing similar views, Chachra says, “The good news among the quality Indian founders is that they were able to cut the burn pretty quickly and draw out the periods where they could stretch the money.”

The year of 2021 was a period of bliss for startups, with an oversupply of venture capital funds. Many founders who raised and conserved capital earlier used it to tide through these challenging times.

This trend has led investors to scout for businesses growing organically with lower customer acquisition costs. As one investor puts it, “There is a clear shift towards qualitative investing rather than quantitative investing.”

“The 2024 fundraising playbook tempers its growth expectations from Series A+ companies, who can demonstrate strong unit economics and operating leverage,” says Pai.

He adds, “Keeping fixed costs fixed and not overinvesting in manpower, marketing, or tech will be able to attract investments far easier than other businesses. Those who achieve this can raise capital at very attractive valuations.”

Stage-wise impact

While the sun shines for early and growth-stage startups, funding woes have not eased for late-stage companies. For instance, in the first quarter of 2024, only two startups—Shadowfax and PocketFM—raised over $100 million.

In the first quarter (January-March) of 2024, the early-stage category saw 230 deals, the growth stage saw 43 deals, and the late stage witnessed just 12 deals—a trend seen in the ecosystem for over a year.

The real impetus for the large ticket funding activity would come from late-stage deals, but VCs believe it will take some time before activity increases in this segment.

This reason: startups used to graduate from early to growth and then to the late stage, which has seen a pause recently, with the first two segments seeing the highest activity in the present funding environment.

It would probably take some time before the late-stage funding gets more attention from VCs.

Chachra says, “There is a lot of wait and watch at the late-stage funding because the market is consolidating and investors are waiting for the leaders to emerge.” 

Besides, several startups are expected to list on Indian stock markets through an initial public offering (IPO) this year. Startups like Firstcry, Ola Electric, and Mobikwik have filed their draft red herring prospectus with the market regulator SEBI.

Capital available

Fortunately, there is no dearth of capital or dry powder as VC firms continue to raise fresh capital. In an earlier interaction with YourStory, Anicut Capital CFO Veenu Mittal said investors are more focused on the economics of business, where the end goal is to build a sustainable and profitable venture.

Similarly, Kanika Mayar of Vertex Ventures, agrees that there is enough capital in the ecosystem, but the investment bar is high for the founders and investors.

Nonetheless, it is very unlikely that VC funding in 2024 will get back to the levels of 2021, which is now generally viewed as a one-off event.

According to investors, capital inflow is expected to get stronger once the new government is formed in June, followed by the Union Budget announcements. They expect funding activity to be strongest in the last quarter of 2024.

“India should see funding numbers bounce back in the third quarter of the year, as the election results and Budget should conclude by the end of June. Deals are already negotiated now, and many companies have filed or will file their IPO papers soon,” says Pai.

“We believe this year is going to be the last for the funding winter stage,” says Chachra, adding that large deals will make a comeback with some unexpected winners.

(Image and graphics by Nihar Apte)

(The copy was updated to fix a spelling error.)